Key points
- After news broke of GlaxoSmithKline rejecting the £50bn bid for its consumer healthcare unit from Unilever, the former’s share price rose, and the latter’s fell
- The Glaxo board stated the bid fundamentally undervalued the business, but based on an enterprise value-to-sales ratio, the offer was at a healthy premium
- The market seems to be pricing in a higher bid being accepted, which it views as good for Glaxo but not for Unilever
On Saturday, news broke that GlaxoSmithKline (LSE:GSK) declined a £50bn bid from Unilever (LSE: ULVR) for its consumer healthcare business. According to the Financial Times, the offer came in on December 20 and comprised £41.7bn in cash and £8.3bn in Unilever shares. On Monday, the market had its say: the Glaxo share price rose 4.07%. The Unilever share price, however, slid by 6.97%. What could be behind the radically different moves in the two companies share prices?
GlaxoSmithKline split
Glaxo’s board has stated that the £50bn offer “fundamentally undervalued” the consumer healthcare business, which is a joint venture with Pfizer. Glaxo plans to spin off the consumer healthcare unit in 2022. That move will create a ‘new-Glaxo’ focused on biopharma, with current shareholders getting a stake in both. Management insists it intends to go ahead with the split. Yet I’m left wondering if the offer is considered sound in principle but needs some movement on the price. After all, the board didn’t state they had no intention to sell. Also, The FT quoted a source close to Pfizer saying an offer nearer £60bn would make the board consider selling.
Judging by the share price reactions, the market seems to believe that other offers are on the way and might be accepted. However, the market also seems to think that a new, higher bid would be favourable for Glaxo but not for Unilever.
Would Unilever be overpaying?
The Glaxo board believes the consumer healthcare business is worth more than £50bn. But at that price, the unit would be priced at five times enterprise value (EV) to sales, given that it reported a little over £10bn in revenue in 2020. At £60bn, the EV-to-sales ratio would be six while Unilever as a whole trades at 2.87 EV-to-sales. Reckitt Benckiser trades at an EV-to-sales ratio of 3.9.
Now, of course, there are differences in growth rates and profitability. There are arguments for synergies and cost reductions too. But on these metrics, it’s hard to say that Glaxo’s consumer healthcare business is fundamentally undervalued. Consider that Glaxo as a whole has an enterprise value of about £111bn. The offer values the consumer healthcare business as roughly 45% of the firm’s value, despite delivering only 30% of its revenues.
Final thoughts
I feel the market is pricing in a higher bid being accepted. But I also believe it views the move as being bad for Unilever, which it sees as overpaying. There could also be concerns around stewardship and integration. The market does appear to see a sale as being good for Glaxo — and Pfizer — as a healthy premium would be paid.
