I wrote in November about the likelihood that Unilever would use acquisitions to boost its growth. So the weekend news that the company had made three unsuccessful bids for GlaxoSmithKline’s consumer health business was not surprising, but the scale of ambition in pursuing the whole of Glaxo’s consumer health division is.
The last rejected offer of £50bn is more than half of Unilever’s current market cap. To fund it the company would not only have needed to issue stock but also more than triple their net debt position. Both the financials and the strategy of the bid also point to a significant ‘rationalisation’ of Unilever’s food business, which now must include the prospect of an outright sale.
Unilever’s shares fell 6% on the news.
Mega deals like this may seem straightforward on paper – slot in this division, flick out that one. But they rarely pan out that way. Just ask shareholders in AB Inbev, who acquired SAB Miller for £79bn in 2016. Its share price is half what it was before the deal, and it has had to sell a third of the SAB Miller assets, brands including Peroni, to only pay down half the debt it raised to finance it.
Unilever has taken heed of the market’s distaste and said it will not raise its offer – but who else might?
Unlike Unilever, Reckitt and Procter & Gamble already have consumer health divisions. Reckitt has shown interest in Glaxo’s brands in the past, but the price tag is more than Reckitt’s entire market cap, so it is unlikely to be able to go it alone. P&G could more easily afford it, but whether they need it is another question. And cash-rich private equity houses are also circling.
Glaxo’s consumer health business is already due to be spun off into a standalone company later this year. This, or a private equity buyout, may provide an opportunity for Reckitt or P&G to acquire brands that complement their existing businesses without too much disruption. As investors in both, we would support such an approach.
One further question remains. What does it say about Unilever’s current outlook that management felt they needed such a large, transformative acquisition to improve it? The company was itself the target of a private equity-backed bid from Kraft-Heinz in 2017.
After this episode, they could well become one again.
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