On the corporate front, the weekend’s main event was Unilever’s £50bn bid for GlaxoSmithKline’s consumer healthcare business, in which it holds a 68% stake with Pfizer, which Glaxo said it rejected, presumably in the hope that Unilever would come back with a higher offer, with the sum of £60 billion being swapped according to some estimates.
CEO Emma Walmsley has for months been under pressure from activist shareholders over her ability to turn around the underperforming pharmaceuticals business. In the last business update, the company said it was setting a timeline for the sale or spin-off of the consumer business, so that the focus could be much more on its pharmaceutical business. In November, she said progress was continuing towards unlocking the company’s value, with a view to a spin-off in the middle of this year.
It seems that the story has since evolved, with Unilever confirming this morning that it had made an offer, as well as two previous ones, all of which had been rejected by Glaxo’s board.
Shareholders have for some time worried about the direction of Unilever’s share price under CEO Alan Jope, which has seen a decline of more than 10% in the past 12 months and is a far cry from the highs seen in 2019, 8 months after Jope took over.
Last week, Terry Smith of Fundsmith LLP accused management of being more interested in signaling virtue than meeting its financial performance targets, which it is currently not meeting. While some might say that’s a little harsh, it’s also true that in the case of some of its brands, it’s gotten a little too political for some shareholders’ tastes.
It’s not as if Unilever hasn’t tried to increase its profitability, by selling the underperforming parts of its portfolio over the past two years. Last year, the company finally managed to strike a deal to sell its underperforming tea business to CVC Capital partners for 4.5 billion euros, following the sale of its spreads business. previously.
The company also had to deal with steep cost increases which affected its operating margins, although some of the effects were mitigated by the company’s price increases.
This was reflected in its third quarter figures, which saw third quarter sales increase by 2.5%, while being able to increase prices by 4.1%, a decent improvement on its performance. of the first semester.
At the time, CEO Alan Jope warned that these price increases were unlikely to be one-off, warning that further increases would likely begin to be felt over the next six months to offset the problems caused by the hikes. continuing energy prices and supply chain disruptions. We should get more details on the company’s performance in the fourth quarter, when the company releases its report on February 10.
This cost increase followed a similar trend reported by industry peers Nestlé and Procter and Gamble. Unfortunately for Jope, these companies have seen their stock prices rise over the past 12 months, while Unilever’s has fallen.
It seems clear that Jope is under pressure from shareholders to deliver value, as well as a growth proposition to help lift the stock price.
A deal between GlaxoSmithKline for its consumer healthcare business would no doubt suit Unilever, and it’s a little surprising they haven’t ripped off Unilever’s £50billion arm, because that’s a decent price, the only question being whether it’s the right one. It might be for GlaxoSmithkline and Pfizer, but there’s a feeling that for Unilever it might just be too high a price.
Maybe GSK thinks it can get Unilever to present a higher bid, or maybe get a higher valuation through a spin-off?
This is by no means certain and with the sharp decline in Unilever’s share price this morning, it looks like the markets have made up their mind, with GlaxoSmithKline stock rising.
So far in his tenure as CEO, Jope has completed a number of deals since taking office, including the purchase of Glaxo’s Horlicks business in India, but they have not really added to the sum of the shares of Unilever when it comes to overall returns.
Paying £50billion for a company that sells painkillers and toothpaste seems like a gamble, and while there seems to be universal consensus that Unilever needs to shake up its business, a price of nearly £60billion to do so seems a little on the rich side.
Jope has already made a deal involving the Horlicks name, let’s hope he doesn’t make it a Horlicks.