Unilever has been warned that buying GlaxoSmithKline’s consumer products arm is likely to substantially swell its debt pile and could trigger a “multi-notch downgrade” to its credit rating.
Ratings agency Fitch said Unilever would not be able to keep hold of its current A rating with a stable outlook beyond 2024-2025, and would be cut to BBB, if it were to acquire GSK’s consumer products division or another large business.
Shares in Unilever, which owns brands including Dove soap, Marmite and Ben and Jerry’s ice-cream, have fallen by more than 10% since news broke of the company’s failed £50bn approach for the pharmaceutical firm’s consumer products arm.
Fitch calculated that Unilever’s £50bn offer for the GSK division would have seen the company’s net debt reach levels equivalent to 4.5 or 5 times its pre-tax profit after the deal was finalised in 2022. The agency said it considers cutting a company’s rating from A once it debt rises above the threshold of 3.3 times higher than pre-tax earnings.
Unilever will need to raise its offer in order to gain GSK’s approval, according to Fitch, meaning an even higher level of debt.
However, Fitch said the extent of the downgrade to Unilever’s credit rating would depend on other action taken by the company, including the dividends offered to investors, whether it acquired other firms, and whether it sells off some of its existing business.
Unilever’s chief executive, Alan Jope, has pledged to grow the company’s health, beauty and hygiene business and said this would be funded by selling some of its slower-growing operations, such as food brands, rather than relying on taking on more debt.
GSK is planning to demerge its consumer healthcare business – which owns brands including Panadol pain relief and Sensodyne toothpaste – by the middle of this year. The spin-off will be chaired by former Tesco boss Sir Dave Lewis, and analysts have said GSK should hold out for a higher offer.
Despite its warning, Fitch said it views “GSK’s operations as complimentary to Unilever’s” and added the acquisition would give a boost to Unilever’s current profit margin.
According to Fitch’s analysis, the deal would enable Unilever to strengthen its high-growth range of vitamin products and supplements, while also allowing to start selling over-the-counter medicine through GSK’s range of products for pain-relief and dealing with digestive and respiratory problems.
Fitch said any deal between the consumer goods firm and GSK “carries high integration risk”, as the Marmite-owner would have to learn how to distribute over-the-counter medicine.
