What’s going on with the Unilever and GlaxoSmithKline share prices?

Why did Unilever’s share price fall and GlaxoSmithKline’s rise after news of a rejected £50bn takeover bid for the latter’s consumer healthcare unit came to light?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »