Unilever’s £50 billion health check | The Economist
OUNILEVER HEN bought Bestfoods for $20.3 billion at the turn of the millennium, it was one of the largest cash acquisitions of all time. After two failed bids, the British consumer goods giant dug up another $2 billion to sweeten the deal. He divested 700 of his brands in the year that followed, but restocked his pantry with Bestfoods’ Knorr soup and Hellman mayonnaise. Now, in pursuit of another mega merger that could be four times bigger, Unilever is ready to shed the pantry entirely.
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Unilever’s newest target has been the consumer healthcare unit of GlaxoSmithKline (GSK), a British drugmaker. On January 15, it emerged that the soap soup group was offering to pay £50 billion ($68 billion) for the venture. GSK, who was keen to ditch the division to focus on more lucrative prescription drugs, refused to bite. Markets suffocate: Unilever’s share price falls 7% the next trading day. Analysts almost all agree the deal is a bad idea, arguing it poses more risk than Unilever, with a market capitalization of £94billion, can bear. Selling lagging categories like food may not be enough to fund the deal, of which nearly £42billion would be in cash. Fitch, a rating agency, has warned that Unilever could lose its A credit rating if it has taken on too much debt.
Alan Jope, who took over as chief executive three years ago, sees the future of consumer goods in health and hygiene products rather than food. Hand sanitizer and paracetamol have certainly sold well during the pandemic. In addition, Unilever has a strong presence in developing countries, which could create new markets for GSKsuch as Sensodyne toothpaste and Advil pain relievers. Yet on January 19 the company, perhaps having read all the warning labels about the deal, said it would not increase its offer above £50bn, which GSKBosses said they undervalued their division. This may end the pursuit.
That won’t end Mr. Jope’s troubles. He is under immense pressure to improve the group’s performance. The affable Scotsman has so far been unable to rekindle growth in his three years in charge. Unilever’s share price has fallen during the pandemic even as those of competitors like Swiss giant Nestlé or Procter & Gamble (P&g), American, increased by more than 20% (see graph). A career-defining deal could have set him apart from his predecessor, Paul Polman, who was known for avoiding financial engineering. If the £50billion deal goes through, it would be one of the biggest ever in Britain.
There is also a growing sense that Unilever’s zeal for purpose-driven brands, first instilled by Mr Polman, has waned. From ethically sourced tea and fighting deforestation with sustainably sourced palm oil to marketing Dove soap as a women’s self-esteem project, the company has sought to connect with buyers on their values and to attract investors interested in the environment, social issues and governance (ESG) as well as profits. Although ESG remains popular, there are signs of a backlash against him. This month, Terry Smith, an asset manager who is among Unilever’s top ten shareholders, lamented that the company had “lost ground” in pursuing sustainability medals at the expense of financial performance. A reckless pivot to a more profitable healthcare business could, if successful, allay those worries.
The deal would have been problematic, and not just because it looked like a heavyweight for Unilever. Megamergers rarely work out as advertised, and Mr. Jope’s company isn’t known for its stellar execution. In addition, the consumer healthcare market is expanding, but not the share of incumbents. Established brands have their place – people need to brush their teeth – but industry growth is increasingly coming from a new compendium of smart products and services, many with digital capabilities. Even the good years GSKThe consumer healthcare division grew at best in the single digits. The long-term growth prospects for its brands look dim. Antacids and nicotine patches have limited potential, even in emerging markets.
Unilever’s rivals have been more demanding in their acquisitions. In 2020, Nestlé acquired Aimmune, a new peanut allergy drug, and a year later it bought Nuun, a challenger in the sports drink market. Both transactions allowed the Swiss company to gain a foothold in profitable and underdeveloped niches. P&G is moving into high-end skincare, one of the fastest growing categories in the industry, with its latest acquisitions Tula Skincare and Farmacy Beauty. If Unilever ends up divesting from its food business, it could also miss out on the alternative protein boom, notes Bernstein’s Bruno Monteyne, a broker. Meat substitutes seem to be growing in popularity over time, and companies like Unilever stand to benefit, given their mix of strong research and development base and consumer-loved brands.
Unilever says it has another undisclosed initiative up its sleeve to improve performance. It would be better. Despite the onslaught of the pandemic, the overall consumer goods industry has seen slower growth over the past decade. With the exception of Nestlé, European companies are doing poorly. Unilever needs a little freshening up, but more toothpaste won’t do. ■
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This article appeared in the Business section of the print edition under the headline “Health Check”