At first, blush looks like a bit of an overreaction. Investor Terry Smith ridicule Unilever is socially conscious for defining the “purpose” of Hellmann mayonnaise amid disappointing stock prices. A few days later, the consumer products group listed in the UK confirmed that they have The £50 Billion Approach for a rival company under GSK.
Unilever will probably have to go higher to win, settle the accumulated debt. Shareholders who fear the company lacks ambition may worry that it has too much fire in its stomach.
Of course, Unilever had been planning to reach GSK’s consumer products division long before Smith’s comments were made public. The pharmaceutical group, under pressure from its own shareholders, has been planning to delist the unit through a private listing. Last month, the company appointed former Tesco boss Dave Lewis as company president.
The contractor, which owns brands like Marmite and Domestos, has a good chance of derailment. Pfizer owns 32% of GSK’s consumer products. The US pharmaceutical corporation won as the vaccine maker. It is almost impossible to put hope on the GSK business that owns Aquafresh toothpaste. Active investor Elliott likely also prefers cash to promises.
The bottom line will be how much money Unilever and its own investors are willing to spend. Its most recent £50billion approach is about four-fifths of cash with the balance in stock. Lex values the consumer division at £43bn – £45bn, assuming multiples of some 16x forward ebitda typical in the sector.
The hard point is that the £5-7 billion control premium offered by Unilever on it looks slim. GSK – which has released upgraded sales growth figures – is right to complain about undervaluation.
An increase of at least 25% is considered normal in the UK lagging market. That would be around £11 billion at the top end, bringing Unilever to a total price of £55 billion for the GSK unit. Cost savings and other benefits could have a relative value of around £8 billion, taxed and capitalized.
Unilever’s expansion can cover medium-term debt of up to £35 billion. But that would make its leverage double to four times its net debt on ebitda, which is steep for an FTSE-100 company. To reach £55 billion, it may need to take out additional short-term loans, which can be repaid with proceeds from liquidation. Unilever may also have to provide additional equity.
Unilever’s CEO, Alan Jope, will bet big that he can get more profit from GSK’s consumer brands. This will depend on his success in getting them into developing markets where his company is better represented.
By contrast, scooping up top dollar from Unilever would put most of the weight on Emma Walmsley, GSK director. Critics have questioned her pharmaceutical expertise. There is no doubt that she is a wise deal maker. She should seize this opportunity.
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