Unilever Drops 6% On Glaxo Bid Worries – Will They Overpay?

Over the weekend the news broke that Unilever PLC (LON: ULVR) had made an approach to GlaxoSmithKline PLC (LON: GSK) to purchase the Glaxo consumer healthcare unit. As this is to be spun off into a separate unit sometime later this year and listed on its own why not make an offer?

The answer is that the market is worried that Unilever will make too high a bid for that unit. It won’t be value generative for Unilever shareholders that is. So, as the market opens this morning, Unilever's shares are down that 6% and change. What matters to us as traders is what happens next of course. This could go either way.

We’ve talked before about how Unilever has problems. As Terry Smith pointed out there seems to be a lot more woke there than actual concern for shareholder interests. Going woke in order to make Unilever shareholders richer is just fine – Unilever going woke because management wishes to be woke isn’t the point at all.

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This with Glaxo though is a different problem for Unilever. Unilever’s announcement is here. They’re saying that buying that Glaxo unit is a thoroughly good idea – of course, they are. The Sunday Times begs to differ: “But the tilt at Glaxo looks like a stretch too far” and The Times: “Unilever’s offer for GlaxoSmithKline brands ‘is short by £5bn’”.

Well, if they’re not offering enough then the deal won’t go through and there shouldn’t be any danger to the Unilever share price then. But that’s not really what the calculation is. Instead, as the Telegraph says: “Unilever will be forced to raise £14bn from investors or sell assets to fund any sweetened offer for GlaxoSmithKline’s consumer healthcare business” and that’s where the problem is.

If that Glaxo unit could be bought by Unilever on the cheap then absolutely great. But the current thinking is that even £50 billion is a very full price and one that won’t necessarily benefit Unilever shareholders. But then management, once they’ve decided upon the strategy of buying that Glaxo unit, might then go on to overpay. The auction winner’s curse is a real thing. Further, it’s not just the idea of overpaying, to do so Unilever might well need to issue more stock, or dispose of some other unit at a less than advantageous price.

Unilever’s problem here is that no one really does think that it’s managing its current portfolio all that well. So, unless it can gain the Glaxo unit at a knockdown price – not something true of even its opening offer – then it’s difficult to see how Unilever can add value to a unit that Glaxo is already managing rather well.

That’s why the 6% decline in Unilever’s share price this morning. If the bid gets dropped and the story’s over it might recover gradually. If Unilever pursues this Glaxo purchase aggressively then we could well see further declines. The more aggressively Unilever pursues the Glaxo purchase then the greater that decline could be.