Writing last autumn about booming merger and acquisition (M&A) activity in the UK, I noted that City M&A specialists were forecasting there could be mega-deals to come.
And, in my last column of the year, highlighting seven FTSE 100 stocks to consider for 2022, I wrote of pharma giant GlaxoSmithKline: “I’ve long felt a break-up of GSK would unlock value for shareholders.”
These themes have come into sharp focus after a report in last weekend’s Sunday Times under the headline: ‘Unilever pursues £50bn bid for Glaxo’s consumer empire after rejection’.
What the companies said
In a weekend press release, Unilever confirmed it had made an approach, but added “there can be no certainty that any agreement will be reached.”
GSK said it rejected the proposal, because it “fundamentally undervalued the Consumer Healthcare business and its future prospects.”
CEOs under pressure
Unilever’s CEO, Alan Jope, and his counterpart at GSK, Emma Walmsley, have both been under pressure for a while from some vocal critics on their shareholder registers.
Jope has presided over a 5% decline in Unilever’s share price since he began the job in January 2019. During Walmsley’s tenure, which began in April 2017, GSK’s shares are down 2%. Both stocks have underperformed against their peer groups.
High-profile fund manager Terry Smith recently wrote: “Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”
Meanwhile, activist investors over at GSK had wanted a formal sale process for the consumer health division, as opposed to the demerger the company is planning for later this year. They’ve also questioned whether Walmsley, who has a background in consumer goods, is the best candidate to lead a pure-play pharmaceuticals business.
A deal could still happen
Given Unilever’s lacklustre performance, and desire to accelerate a repositioning of its portfolio into higher growth categories, it’s easy to understand why Jope finds the idea of getting his hands on GSK’s consumer health division attractive.
Equally, with the £50bn offer being at only a modest premium to the valuation analysts have put on the business, it’s easy to see why GSK might feel the planned demerger is a better option.
Having said that, GSK (and minority partner Pfizer) can have no fundamental objection to a sale. After all, they’re both looking to exit the business anyway, via the demerger. And with Unilever clearly still interested in acquiring it, a deal at a higher price could yet go ahead.
A typical market reaction
The market reaction on Monday was to send GSK’s shares up 4% (to a level not seen since before the pandemic) and Unilever’s down 7% (to a multi-year low).
Positive sentiment towards a potential seller of a business and negative sentiment towards a potential acquirer is quite typical. In the case of the seller, the market sees prospects of that unlocking of value for the shareholders I mentioned. In the case of the buyer, it sees the risk and uncertainty that comes with an acquisition.
Taking a view
Despite the uplift in GSK’s share price, and a strong performance on a one-year view, I remain quite bullish on the stock. I think there’s still value to be unlocked here, whether by a sale or demerger.
And, after the slide in Unilever’s share price, and a weak performance on a one-year view, I see long-term value in the stock — even with the integration risk should the acquisition go ahead.
Terry Smith told his fund holders that “a company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot.” But, nevertheless: “We continue to hold the shares because we think that its strong brands and distribution will triumph in the end.”
I don’t know if the latest turn of events will lead Smith to have a change of heart, but it’s undeniable that GSK’s consumer health brands would further enhance the strength of Unilever’s portfolio.
Foolish takeaway
I hark back to my column on booming UK M&A for a Foolish takeaway from Unilever’s approach to GSK. Trade buyers (and private equity houses) view a number of UK companies and their assets as more valuable than they’re being priced at in the market.
As such, I think this could be a great time for Foolish investors to buy in to some top UK businesses. This to reap the rewards of long-term ownership, but with an added bonus of a heightened possibility of a takeover at a premium price.
