A £50 Billion Corporate Overhaul Linking Two Embattled Leaders

(Bloomberg) --

The leaders of two of the U.K.’s preeminent companies are finding their fortunes linked in an audacious corporate realignment, as GlaxoSmithkline Plc’s biggest disposal of assets attracts Unilever Plc, in what would be the consumer stalwart’s largest-ever takeover. 

The stakes are equally high for Glaxo Chief Executive Officer Emma Walmsley and her counterpart at Unilever, Alan Jope. The two company veterans have faced public criticism from investors unhappy with aging portfolios, slow action on deals and a share price that’s languished compared with rivals. 

Now a possible 50 billion pound ($68 billion) transaction stands to change the two companies’ trajectories and elevate the profiles of their leaders. But already, Unilever is finding itself on the defensive after talks of a purchase of Glaxo’s consumer health business -- in which Pfizer Inc. still has a stake -- surfaced. Analysts and investors implored Jope not to bid for the assets, which include Sensodyne toothpaste and Advil painkillers, after three previous unsolicited offers were turned down. 

A successful overture would come at a painfully high price -- possibly requiring a $10 billion top-up -- and Jope would need to engineer a radical breakup to rebuild Unilever around the new assets, those opposing a deal say. Whether it is all worth it is an open question, as there are few synergies between Unilever and the new brands, so the criticism goes. 

Besides, Jope has hardly introduced himself to investors as a consummate dealmaker in his three years at the helm, having only overseen relatively minor transactions. That separates him from Mark Schneider at Nestle SA, who has transformed the perennial Unilever rival with some bold purchases and disposals, warming shareholders to his credentials. 

Jope, 57, instead faces criticism of being too slow and overly preoccupied with sustainability, though he’s been eager to make bigger and bolder deals for Unilever after unifying its headquarters in London in 2020.

Slow Growth

Jope’s conundrum was on display when he sought to lay out his strategic rationale on a call on Monday. Arguing that a deal would do more than simply expand Unilever into a bigger company, the CEO sought to turn attention to what he called a “portfolio rotation” -- out with slow-growing assets like ice cream or mayonnaise, and in with higher-margin, higher growth products like painkillers and fitness supplements.

“Don’t conflate this activity with a defensive mindset,” Jope said on a call.

Investors failed to buy into his pitch. Instead, Unilever shares dropped as much as 8.5% in London, exacerbating a decline that’s made the stock one of the 10 worst performers on the Euronext 100 in the last six months. Unilever shares are trading at a lower level than in 2017, when Jope’s predecessor, Paul Polman, rejected an unsolicited $143 billion offer from Kraft Heinz Co.

That languishing returns led Terry Smith, one of Unilever’s top 15 shareholders, to blast the company in an open letter last week, saying Unilever has “lost the plot” and is obsessed with publicly displaying sustainability credentials at the expense of focusing on the business.

Such public opposition is a familiar theme for Walmsley. She’s been under pressure since activist investor Elliott Investment Management disclosed a multi-billion-dollar stake in the company last year and started demanding change. Raising the stakes, Elliott has made clear that it doesn’t believe Walmsley is necessarily the right leader to take the remaining business forward after the consumer spin-off, the preferred option for the Glaxo board over an outright disposal, which is favored by Elliott.

Rival Brands

Glaxo’s consumer business is one of the world’s largest providers of over-the-counter remedies, generating annual sales of more than 10 billion pounds last year. Drugmakers like Novartis AG have abandoned the field of consumer health to focus on higher-margin prescription drugs. Others, like Bayer AG, have doubled down by snapping up rivals’ brands.

The U.K. drugmaker declined to comment beyond its response to the Unilever interest over the weekend.

Whether Walmsley, 52, presides over a spin-off or an outright sale of the business, Unilever’s public interest and the prospect of a still-higher bid gave Glaxo a jolt. The stock rose as much as 7.8%, the most since Elliott disclosed its stake in April. 

“GSK are currently holding all the cards and Unilever’s negotiating position does not appear strong given their recent struggles,” said Duncan MacInnes, an investment director at Ruffer Investment Co.

While Jope said he has other options besides buying the Glaxo assets, a purchase would fundamentally change the makeup of both companies. Regardless of the transaction going forward, Unilever will review food businesses with lower growth prospects, though has no immediate plans to divest the food and refreshment operations in their entirety, he said. 

Investor Pressure

For Walmsley, selling Glaxo’s consumer business would go a long way to fend off pressure from Elliott and Bluebell Capital Partners, another activist fund also demanding change. The company has fallen behind rivals such as AstraZeneca Plc in developing innovative drugs, and was sidelined in the race to create Covid-19 shots despite being the world’s biggest vaccine maker.

While Unilever has now made its interest public, the consumer-goods company may not be the only suitor. Glaxo said it expects sales at the business to increase by 4% to 6% in the medium term, which is faster than the growth rate at Unilever’s personal care division. 

Such prospects might appeal to private-equity companies. Late last year, drugmaker’s advisers were informally fielding interest in the operations alongside preparations for a listing, people familiar with the deliberations said at the time. Advent International, CVC Capital Partners and KKR & Co. are among potential suitors evaluating the business, they said.

“For the CEO, it is a nice problem to have,” said Ketan Patel, a fund manager and GSK investor at EdenTree Investment Management Ltd., who said the Unilever bid is too low and that he prefers a spin-off of the business. It’s good for Walmsley to have “peers competing for GSK assets and having the option to carry on with the well advertised pathway via a spin out.”

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