We learned just last week that, before Christmas, Unilever (LSE: ULVR) had tabled three separate bids for the consumer products arm of GlaxoSmithKline (LSE: GSK). The final takeover bid of £50bn was rejected by GSK on the basis that it “fundamentally undervalued” the business.
By Wednesday, Unilever had ruled out increasing its bid, arguing that it would not overpay for a business. Shareholders and the market were increasingly uneasy over the deal, seen in the plummeting share price. Together, these sealed the fate of what would have been one of the biggest takeovers in UK corporate history.
The question is, does Unilever’s recent share price weakness provide a good entry point for a long-term investor like me?
Unilever’s shareholders revolt
Unilever, the owner of iconic brands such as Dove, Magnum, Ben & Jerry’s and Domestos, has been struggling for growth in recent years. Indeed, its share price is lower now than it was during the pandemic lows of March 2020. Little wonder that shareholder patience is beginning to run out. One prominent shareholder, Terry Smith, the outspoken fund manager of the £25bn Fundsmith equity fund, recently took a swipe. In his annual letter to shareholders, he accused management of losing “the plot”. He said it was more interested in displaying its “sustainability credentials” rather than “focusing on the fundamentals of the business”.
I believe one of the primary reasons Unilever bid for the consumer branch of GSK was to secure its own future. After all, it only recently fended off a takeover from US rival Kraft Heinz.
What I am trying to work out is whether the last few years of stagnant growth has been a mere blip or points to a deeper problem for Unilever. When Warren Buffett bought shares in struggling Coca-Cola in the 1980s, he did so believing its dominant brand and expert marketing would win through. In some respects, Unilever is in a similar position. It does, after all, own 14 of the top 50 brands by market penetration.
Alarm bells
However, when a company gives the impression that the only way it can grow is by acquiring another business, that sets off alarm bells for me. History books are littered with examples of large mergers and takeovers that failed to increase shareholder wealth. The hefty fall in Unilever’s share price following the takeover bid tells me that many shareholders doubted the deal would have been a good one.
Some analysts believed that GSK was holding out for £60bn. But the fact is that last year, GSK’s consumer business only generated revenues of £10bn. With a net-debt position of £18bn, a mostly-cash deal for GSK would have significantly swelled the debt on Unilever’s balance sheet and hastened the sale of slower-growing businesses. It is not clear at the moment how Unilever intends to grow its presence in the consumer healthcare space.
Unilever now needs to start winning back the trust of its shareholders and demonstrate that it can transform its fortunes. But just like turning a super tanker, transforming a giant takes time. For the moment, Unilever remains on my watchlist.
