Unilever has pledged to grow its health, beauty and hygiene business and sell slower-growing operations as investors dumped its shares after its failed £50bn approach for GlaxoSmithKline’s consumer products arm.
GSK rejected three Unilever bids for the consumer products arm it is seeking to spin off, the last of which was worth £50bn. The pharmaceutical company on Saturday said that the offer “fundamentally undervalued” the business, which owns brands including Panadol pain relief and Sensodyne toothpaste.
Unilever shares dropped by 7% on Monday morning, making it the biggest faller on the FTSE 100. GSK shares rose by as much as 5%, putting it among the biggest UK blue-chip gainers as investors appeared to bet that a higher bid would materialise.
Unilever, the owner of brands ranging from Dove soap to Marmite, has been under pressure in recent months under the leadership of the chief executive, Alan Jope. Its share price was almost a quarter below its record 2019 high before the bids were revealed.
GSK plans to demerge the consumer healthcare business by the middle of the year, and the former Tesco boss Sir Dave Lewis has been lined up to chair it. Some analysts have estimated GSK may be looking for as much as £60bn for a takeover.
GSK Consumer Healthcare would be a “strong strategic fit”, Unilever said on Monday. Unilever highlighted GSK’s oral care brands, which include Aquafresh toothpaste, as well as its vitamins, minerals and supplements brands such as Centrum and over-the-counter medicines.
Jope said the company would be “a very attractive option” for Unilever but added “it’s not the only option”.
He emphasised that Unilever would fund the health, beauty and hygiene push by selling slower-growing businesses rather than relying on taking on more debt. The company said it would return to current levels of debt relative to its size “over the short to medium term”.
Asked about prominent food brands such as Hellmann’s and Marmite, Jope highlighted the fast growth of some products, including the mayonnaise and Ben & Jerry’s ice-cream, but confirmed the company was considering its options for some products.
“This is about portfolio rotation, not just scale through acquisition,” Jope told reporters on Monday. An acquisition would not be a “defensive” option to make Unilever itself an unpalatable takeover target, he added.
“This is improving the quality of Unilever, not necessarily the size of Unilever,” he added.
Jope’s comments came as Unilever rushed out a strategy update focused on investment in “sustainable market growth” and using its already strong presence in emerging markets, which are expected to use more consumer products as citizens become richer.
Later this month it plans to update investors on a new operating structure that it hopes will improve its performance. However, Jope insisted these changes would be focused on making the company easier to manage, rather than cutting costs via job losses.
Jope also defended the company’s focus on sustainability issues, following criticism from the prominent asset manager Terry Smith that it was “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”. Jope said sustainability credentials were an “important filter” on potential acquisition targets, and the company believed they would perform better in the long term.
Maryam Ali, an analyst at Creditsights, a debt rating agency, said in a note to clients that while she could see Unilever’s rationale for the GSK consumer products bid, a debt-funded deal would probably be accompanied by rating agency downgrades, although that could be mitigated by selling other parts of the business.
“Ever since the aborted Kraft-Heinz takeover attempt in 2017, it always seemed like a matter of ‘when’ rather than ‘if’ that the company would carry out a big deal of its own to protect its long-term future,” Ali wrote.
However, she added that “there may be a feeling that Unilever is looking to bite off more than it can chew given the company’s underperformance in recent years”.
