‘Please don’t:’ analysts scorn Unilever’s takeover ambitions

(Jan 17): Analysts are denouncing Unilever Plc's 50 billion pound (US$68 billion) offer for GlaxoSmithKline Plc's consumer health business in unusually strong words.

In a barrage of Monday morning notes, analysts criticized Unilever for pursuing the deal, saying it doesn't make sense and would come at an eye-watering valuation. Consumer health isn't a high-growth industry and Unilever has a bad track record for big deals, said Bruno Monteyne at Bernstein.

"We can't imagine many things that would unnerve us more about Unilever than acquiring GSK consumer health," wrote James Edwardes Jones at RBC Capital Markets in a note titled "Please Don't."

Unilever has no overlap with two-thirds of Glaxo's consumer health business and little experience in regulatory issues for medical and clinical products, said Edwardes Jones at RBC. "We had been considering whether the time was ripe to abandon our underperform rating," he added. "We're not any more."

Investors responded by dumping Unilever shares, sending the stock price down as much 7.3%, the biggest drop in almost two years. Glaxo shares gained 3.7% in London.

Glaxo in a statement Saturday said that it had received three unsolicited offers from Unilever for its consumer healthcare division, the final one on Dec. 20 for 41.7 billion pounds in cash and 8.3 billion pounds in Unilever shares. Glaxo said it rejected the proposals because they undervalue the business.

Unilever is still interested and could return with a fresh bid, though no final decision has been made, people familiar with the bid told Bloomberg. Glaxo's board still prefers the planned spin-off of a business that includes brands such as Sensodyne toothpaste and Advil painkillers.

Analysts said Unilever would have to significantly increase its bid to tempt Glaxo away from the spin-off plan. If a deal emerges at 55 billion pounds, "we think Unilever is paying at least 10 billion pounds more than they should pay for the growth they get," said Bernstein's Monteyne. "This is a very bad deal."

The positive is that Unilever would become a world leader in consumer health and gain iconic brands that it could expand in emerging markets, wrote Warren Ackerman at Barclays Plc.

But it would come at a high price. Barclays estimated that based on the latest offer and consensus forecasts for Glaxo's consumer business, the valuation multiple is 20 times Ebitda. Very few deals at that high of a multiple have created value, Ackerman said.

"With management credibility already an issue, this deal will be hard to stomach even given the many positives that we also see," he added.