GlaxoSmithKline’s consumer health unit won’t be bought out—at least not by Unilever.
Unilever won’t raise its buyout offer for the GSK and Pfizer consumer health joint venture above 50 billion pounds ($68 billion), the British consumer goods giant said Wednesday, merely two days after hailing the franchise as a “strong strategic fit.”
A potential deal is practically dead at this point, given that GSK has publicly stated—to investors’ agreement—that the $68 billion price “fundamentally undervalued” the consumer business. But there are questions left for both companies.
Unilever’s withdrawal leaves GSK with its original plan for a spinoff by mid-2022. The GSK unit is one of the world’s largest consumer health players, with popular brands such as pain reliever Advil and Aquafresh toothpastes. The business reeled in 9.6 billion pounds ($13.1 billion) in 2021 sales, and GSK expects it could grow 4% to 6% a year.
Of all the paths GSK could take to exit the consumer unit, the British pharma has been gunning for a spinoff so GSK investors can still own the standalone business. But the company also promised to consider any buyout offer.
To reach $68 billion, GSK had pushed Unilever to improve its offer twice. But even that latest number represented only a 10% premium over the business’s current value. A bid above 60 billion pounds ($81.8 billion)—or about a 25% premium—would deserve more serious consideration, one person close to GSK’s partner Pfizer told the Financial Times.
While the latest buyout episode may be a small distraction for GSK, it’s a big embarrassment for Unilever. Monday, Unilever seemed all but prepared to up its offer again, with a statement elaborating just how the acquisition would be an “attractive and synergistic combination.” A Bloomberg report also said the company had talked to banks about additional financing.
But Unilever investors quickly rallied against the deal, as evidenced by a sharp 10% stock price decline as news of the buyout attempt broke. RBC Capital Markets analyst James Edwardes Jones blasted the pursuit as having “little justification … strategically, operationally or financially.” A call Bernstein convened with Unilever shareholders Tuesday featured “a torrent of criticism along the lines of: ‘What on earth are they thinking?’” Bernstein analyst Bruno Monteyne told the Financial Times.
Now that Unilever has walked away from GSK, two burning questions remain: Will GSK consider another bid from another buyer? And will Unilever make another move in consumer health?
GSK has repeatedly said that it’s focused on a spinoff, given investors’ preference for continued ownership in the franchise. After speaking with GSK Chief Financial Officer Iain Mackay, Edwardes Jones said in a Wednesday note that any potential buyer “would need to make a seriously compelling offer to knock the planned demerger off track.”
The British drugmaker has set the bidding floor at $68 billion-plus, which would be difficult to pull off for any company. Large corporations that have the firepower seem uninterested.
Market leader Johnson & Johnson is itself in the process of spinning off its consumer health business. Unilever archrival Procter & Gamble doesn’t need large M&A to deliver on its financial targets, CEO Jon Moeller said during a conference call Wednesday. Plus, “no one from Reckitt Benckiser has picked up the phone,” GSK’s Mackay said, as quoted by RBC.
A group of private equity investors reportedly circled the GSK consumer body for a takeover, but no deal has emerged since the Bloomberg report in October.
As for Unilever, in a new direction laid out Monday, the company said it aims to “materially” expand its presence in health, beauty and hygiene while accelerating divestment of lower-growth brands and businesses, as reflected in its recent sale of the Lipton tea business. As part of that plan, consumer health in general was labeled as a “highly complementary category” for Unilever.
While Unilever appears determined to make a move in consumer health, it could be difficult to find a proper target. J&J's consumer health separation process will take at least 18 months. Not to mention, with expected 2021 revenue of $15 billion, the unit would be much pricier than GSK’s.
Sanofi also has a consumer health portfolio but would offer Unilever even less cost savings, Edwardes Jones pointed out in a Monday note. As for Bayer, CEO Werner Baumann has said the German conglomerate aims to build consumer health alongside pharmaceuticals and crop science as the company's three pillars. Ipsen is also conducting a strategic review of its consumer health arm, but with a reported value of $500 million, it would be too small for Unilever.