Unilever's offer for GSK's consumer health raises doubts, questions over strategy

By Siddharth Cavale

Jan 17 (Reuters) - Unilever faces a dilemma after
its 50 billion pound ($68 billion) offer for GlaxoSmithKline's
consumer healthcare assets was rejected -- should it
raise the bid and risk overpaying or seek another route to
expand in healthcare?

The bid for GSK's assets, including Sensodyne toothpaste and
Advil painkillers, comes as Unilever is dealing with steep
inflation and sluggish growth in emerging markets, where it
derives 60% of its revenues.

Chief Executive Alan Jope, in the role since 2019, is also
facing shareholder pressure over a languishing stock price,
which fell as much as 8% on Monday after its bid became public.

Analysts said digesting GSK's consumer health assets at a
price of over 50 billion pounds in cash and stock, would nearly
triple Unilever's leverage towards 5.6 times in the first year
from 2 times net debt to EBITDA currently.

"The leverage implied by such a deal would make it less
likely they turn around their core business," Bernstein analyst
Bruno Monteyne said, pointing to Unilever's added balance sheet
pressure and limited ability to invest behind brands.

FOOD TO GO?

Unilever on Monday also announced plans to focus more on
health, beauty and hygiene products, after an extensive review
of its businesses.

This points to a potential spin off or disposal of its Foods
business, at least three brokerages said. However, letting go of
a cash-generative business could be detrimental at this time,
they said, and it would be difficult for Unilever to sell the
entire business to a single buyer.

HSBC analysts said the GSK move added to uncertainty over
where Unilever was heading.

"Unilever's approach is likely to raise a number of
questions over what it might do next from both an M&A standpoint
and in terms of the structure of its own business," HSBC analyst
Jeremy Fialko said in a note.

PREVIOUS EXPERIENCE

Analysts expressed concerns about Unilever's track record
with acquisitions, highlighting its purchase Dollar Shave Club
for 1 billion in 2016 which they said had failed to make a major
mark on its fortunes.

HSBC pointed to the company's last big acquisition -
Bestfoods for $25 billion in 2000 - which saddled it with slow
growth, middle of the aisle food brands, which Unilever has
trimmed via the sale of tea and spreads businesses.

"The patchy historical track record of large transactions in
the sector - and indeed Unilever's last really big acquisition,
Bestfoods - is also likely to be at the forefront of investors'
minds," HSBC said.

Bernstein's Monteyne said big consumer goods deals do not
pay out as it is "impossible" to eke out very high growth rates
on such large businesses, pointing to Reckitt Beckiser's
Mead Johnson deal and Danone's Whitewave foods
acquisition.

MARGIN IMPACT

Analysts also said a GSK deal could significantly erode
Unilever's stable operating margins of 18-19%, a big draw for
long term investors, saying it offers only a mid-single digit
return on investment, when accounting for cost savings and
revenue synergies.

Berenberg analyst James Targett said he doubted the deal
would provide Unilever the organic growth lift it is seeking,
pointing to GSK's Consumer Health business's 1% average growth
over the past 20 quarters, compared with 3% for Unilever.

UNCHARTED WATERS

While GSK's consumer assets would bolster Unilever's
presence in the oral care and vitamins and supplements category,
it would also bring over-the-counter drugs, such as Panadol and
Advil, to its roster.

RBC Capital Markets said GSK's large portfolio of products
with clinical/medical characteristics and consequently
regulatory obstacles could restrict Unilever's ability to roll
the acquired brands into new markets as it does with consumer
brands.

"We can't imagine many things that would unnerve us more
about Unilever than acquiring GSK consumer health," RBC's James
Targett wrote.

"We see little justification for such a deal strategically,
operationally or financially."
($1 = 0.7331 pounds)

(Reporting by Siddharth Cavale in Bengaluru
Editing by Keith Weir and Jane Merriman)