Is Unilever's £50 billion bid for GSK's healthcare arm worth the risk?

The Unilever (LON: ULVR) share price is down 7% today to 3,654p, as investors process its multiple failed bids to acquire the healthcare arm of rival GlaxoSmithKline (GSK).

And this fall is just the latest in a series of disappointments for long-term investors. Unilever shares are volatile, peaking at 5,190p in September 2019 and crashing to 3,733p by February 2021. With many peaks and troughs in-between, there have been plenty of opportunities for day traders to profit. But right now, Unilever shares are worth the same as in February 2017, nearly five years ago.

Unilever share price: GSK healthcare offer

On Saturday, GSK announced it had received three proposals from Unilever to acquire its healthcare arm, a joint venture with 32% owner Pfizer.

In its most recent offer, Unilever offered £50 billion, split between £41.7 billion in cash and £8.3 billion in shares. It believes the takeover ‘would be a strong strategic fit as Unilever continues to reshape its portfolio.’ And encouragingly, the healthcare arm’s Chair, Dave Lewis, was appointed to run the business on 20 December, the same day as Unilever’s most recent bid. Moreover, Lewis previously worked in a senior role at Unilever and has worked with Unilever’s CEO Alan Jope in the past.

However, GSK has rejected all three proposals, declaring the latest offer ‘fundamentally undervalued the consumer healthcare business and its future prospects.’ It further believes the arm is ‘a leading global consumer healthcare business (and an) exceptional portfolio of world-class, category leading brands.’ Moreover, it expects ‘sustainably deliver annual organic sales growth in the range of 4-6% (CER) over the medium term,’ to grow its £9.6 billion annual revenue.

GSK plans to demerge the consumer healthcare business by mid-2022 — it’s not ideologically opposed to selling the business. And by releasing this news ahead of its Capital Markets Day next month, it may be giving Unilever investors time to come up with additional funds, and even attempting to start up a bidding war.

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The true value of healthcare

Both Barclays and Goldman Sachs have valued GSK’s healthcare arm at Unilever’s bid price of around £50 billion. However, GSK CEO Emma Walmsley believes that its future value could be much higher, due to potential cost savings and higher sales growth. Moreover, the repeated bids may have emboldened Walmsley to ask for more. 30% premiums are not uncommon.

Major GSK shareholder Elliott has already repeatedly argued for a sale of its healthcare arm. And fellow stakeholder Bluebell Capital Partners agrees, arguing that Unilever’s bid is ‘proof that such a high-quality business has the potential to attract interest by strategic and financial buyers.’

With Unilever’s bid now public, Jefferies analyst Martin Deboo believes competitors like Procter and Gamble, Reckitt Benckiser, and Nestle may offer their own bids. This would push the price beyond Unilever’s reach, as increasing its bid to £55 million would indebt Unilever by a ‘prohibitive amount.’ The company would have to raise £14 billion from investors or sell assets to avoid becoming overly exposed.

But fellow Jefferies analyst Peter Welford believes ‘there will be standalone costs that depress returns, but also greater freedom to allocate capital which could boost future growth prospects.’ And he’s not wrong. The combined group would control the lion’s share of consumer healthcare in the UK.

On the other hand, RBC Capital Markets analyst James Edwardes Jones argues ‘we can't imagine many things that would unnerve us more about Unilever than acquiring GSK consumer health.’ He further declared that Unilever would be left ‘heavily indebted,’ and ‘even seriously contemplating such a bid raises questions in our mind about management's confidence in the current business.’ His lack of confidence in management echoes top-10 shareholder Terry Smith, founder of £29 billion Fundsmith, who believes management has ‘clearly lost the plot.’

But GSK’s current market cap is £85 billion. If its consumer healthcare business is worth more than £50 billion, that means its pharmaceuticals division is worth less than £35 billion. But in Q3 results, its pharmaceutical business generated £4.4 billion in revenue, while consumer healthcare made only £2.5 billion. And its pharmaceuticals arm consistently outperforms its consumer healthcare business.

This means one of two things. Either the entire company is grossly undervalued, and an increased bid is justified. Or Unilever is offering far too much already. Either way, more volatility seems inevitable.

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