GlaxoSmithKline has said it would keep an open mind about how to exit the Pfizer-partnered consumer health joint venture. But a sale at $68 billion apparently isn't an option.
GSK has rejected three offers from Unilever to buy GSK’s consumer health unit, the company said Saturday. The latest offer from the fellow U.K. consumer goods giant, received Dec. 20 for a total value of 50 billion pounds ($68 billion), “fundamentally undervalued” the business and its prospects, GSK said.
That most recent bid would represent a 10% premium—based on the GSK unit’s current value and potential cost savings and control benefits—which Jefferies analyst Peter Welford labeled “modest” in a Saturday note to clients.
But while GSK says it remains focused on severing the consumer health business through its previously announced demerger, Unilever seems determined to make a deal.
GSK and Pfizer set up the joint venture in 2019, intending to exit the business so both can focus on higher-profit innovative drugs and vaccines. The unit, which includes popular brands such as the Panadol pain reliever, generated 9.6 billion pounds ($13.1 billion) in 2021 and is expected to deliver annual sales growth of 4% to 6% over the medium term, GSK said Saturday.
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Buying GSK's consumer health business would be “an attractive and synergistic combination” for Unilever shareholders, Unilever said in its own statement Monday. The Dove brand owner touted a “strong strategic fit,” noting that 45% of the GSK franchise falls in the oral care and vitamins and food supplements categories, where Unilever already has a strong presence.
As for GSK's over-the-counter drug business, Unilever believes it would represent an “attractive adjacent category” that the company can build on with its consumer and branding expertise.
“The acquisition would create scale and a growth platform for the combined portfolio in the U.S., China and India, with further opportunities in other emerging markets,” Unilever said.
Unilever has talked to banks about additional financing to potentially hike its offer, Bloomberg reports, citing people familiar with the matter.
A bid above 60 billion pounds, or a 25% premium, would deserve serious consideration from the sellers’ side, the Financial Times reports, citing one person close to Pfizer, which owns 32% of the joint venture.
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But a 10% premarket dip for Unilever stock in New York Tuesday suggests investors aren’t buying the conglomerate’s argument. In a sharply worded note headed “Please don’t” on Sunday, RBC Capital Markets analyst James Edwardes Jones argued the pursuit has “little justification … strategically, operationally or financially.” The hefty deal is a desperate move by Unilever CEO Alan Jope to distract attention from the company's problematic existing business, the analyst said.
Contrary to Unilever’s calculation of a 45% overlap between the two businesses, RBC estimated 33%. More importantly, Unilever has no experience navigating the “clinical/medical characteristics” and hence “regulatory obstacles” of the GSK products, Edwardes Jones said.
At least the door to a potential sale appears open at GSK. Last year, the company detailed a plan to spin off the consumer unit through a demerger and list it on the London Stock Exchange by mid-2022. Under pressure from activist investor Elliott Management, the company has said it would keep other split-up paths under consideration.
For GSK investors, the mid-2022 consumer health spinoff marks an opportunity to “crystallize value,” Jefferies’ Welford said. For GSK, a 50 billion pound sale would provide an additional 34 billion pounds in cash based on its 68% stake.
“In theory this war chest provides ample strategic optionality [for GSK] to rebuild a pipeline and invest in focus therapeutic areas,” Welford said, “but at least initially we expect many shareholders would fear a large acquisition and the risk of inferior returns.”
Besides Unilever, a consortium of private equity investors reportedly circled GSK consumer health previously. But as GSK reaches the late stage of the demerger process, Unilever—or whoever the suitor—would need to offer a handsome premium to persuade the drugmaker to change course.