The decision to walk away comes after a plunge in Unilever’s share price as investors questioned the rationale for a transaction that would have added brands such as Advil painkiller and Sensodyne toothpase to its range of food, personal-care and cleaning labels.
The outcome is a serious blow to Unilever Chief Executive Officer Alan Jope, who earlier this week announced a revamp of the business. The company wants to refocus around its health, beauty and hygiene operations, suggesting divestitures may involve its food operations, which include the Ben & Jerry’s and Magnum ice cream brands.
Unilever also said at the time that the Glaxo unit would be a “strong strategic fit” but that it would explore other takeover opportunities in consumer health. The company also said it would maintain financial discipline and would not overpay.
Ratings agencies warned about a possible downgrade of Unilever’s credit rating if it went ahead with a deal. Jope was already facing criticism from some shareholders for a focus on sustainability as the company’s stock price has languished.
‘Damage Limitation’
It’s “good news” that the deal won’t happen, Bernstein analyst Bruno Monteyne said, though he described the latest move as an effort at “damage limitation.”
Unilever is “trying to control the narrative,” he said in an email. “By ruling out a higher bid, it looks like they end the offer here. That is obviously not the case. Investors stopped the bid through the share price and the feedback they gave.”
Unilever’s move to abandon the pursuit also raises questions over the strategy of Glaxo CEO Emma Walmsley, who has said she favors plans to spin off the consumer division. The drugmaker has said it would consider any bids, after Elliott Investment Management LP pushed her to boost shareholder returns, and new bidders could emerge.
In response to Unilever’s earlier interest, Glaxo had said it expects the consumer unit to see sales grow 4% to 6% in the medium term, faster than the market rate. The estimate raises the bar for any other prospective buyers, amid expectations that a successful overture could require a top-up of $10 billion or so. The rationale for such growth will be set out for investors at a meeting at the end of February.
Other Bidders?
“We are strongly focused on maximizing shareholder value and are very confident in the future of the business and its potential,” a Glaxo spokesperson said. “The consumer healthcare business has an exceptional portfolio and offers existing and prospective shareholders a highly attractive financial profile supporting investment and future returns.”
Unilever’s pursuit of the unit had sparked speculation about other suitors emerging, including Procter & Gamble Co. or Nestle SA.
When analysts pressed P&G about its acquisition strategy on Wednesday, Chief Executive Officer Jon Moeller said he likes the current portfolio and will be “very disciplined” on any deals. Skin care and personal health care are the two categories that P&G considers particular focus areas for potential deals, but “we don’t need large M&A to deliver” on financial targets, he said on the call.