Unilever’s recent offer to acquire GlaxoSmithKline’s consumer health assets for 50 billion pounds ($68 billion) has sparked concerns and uncertainty regarding the company’s strategic direction. The bid encompasses popular products such as Sensodyne toothpaste and Advil painkillers, but it arrives at a difficult time for Unilever. The company is currently grappling with steep inflation and sluggish growth in emerging markets, which make up 60% of its revenues. Furthermore, Chief Executive Alan Jope is facing pressure from shareholders due to the company’s underperforming stock price, which dropped 8% after the bid was disclosed.

Analysts are particularly wary of the potential acquisition and its financial implications. If Unilever were to acquire GSK’s consumer health assets, its leverage would increase significantly, going from 2 times net debt to EBITDA to 5.6 times in the first year. This heightened debt burden could hinder Unilever’s ability to invest in its core business and restrict its capacity to grow its brands.

In response to these challenges, Unilever has announced plans to prioritize health, beauty, and hygiene products following an extensive review of its business. Some analysts speculate that this could lead to a spin-off or divestment of Unilever’s Foods division. However, relinquishing a profitable business like Foods could have a negative impact on Unilever’s financials, and selling the entire division to a single buyer may prove challenging.

Concerns about Unilever’s track record with acquisitions have also been raised. Analysts point out the company’s previous acquisition of Dollar Shave Club for $1 billion in 2016, which failed to yield significant results. They also highlight the unfavorable outcomes of Unilever’s previous major acquisition, Bestfoods, resulting in slow growth and the sale of certain businesses.

Moreover, the potential acquisition of GSK’s consumer health assets could impact Unilever’s operating margins, which currently stand at a stable 18-19%. Analysts believe that the deal would only provide a mid-single digit return on investment, taking into account cost savings and revenue synergies. Additionally, GSK’s Consumer Health business has only experienced an average growth rate of 1% over the past 20 quarters, in contrast to Unilever’s 3% growth rate.

While the acquisition would expand Unilever’s presence in oral care, vitamins, and supplements, it would also introduce over-the-counter drugs like Panadol and Advil into its portfolio. Analysts suggest that the regulatory obstacles associated with these products could restrict Unilever’s ability to introduce them into new markets, unlike their consumer brands.

Overall, doubts loom over the strategic, operational, and financial justifications for Unilever’s bid for GSK’s consumer health assets. The potential acquisition raises questions about Unilever’s future direction and whether it can effectively navigate the challenges and risks tied to such a substantial deal.

Useful links:
1. Financial Times – Unilever’s offer to acquire GSK’s consumer health assets
2. Bloomberg – Risks involved in Unilever’s bid for GSK’s consumer health assets