Unilever’s $68 billion toothpaste swoop needs another squeeze

The property is a unique business with a large scale and strong brands including Panadol Pain Reliever and Sensodyne Toothpaste. Glaxo’s current plan is to close it this year, so that the company can focus on new drug discovery. Isolation will not provide a clean break: glaxo Over time, part of the business in the stock market will be left to sell. An outright sale at a good price would certainly be better, both for Glaxo and partner Pfizer Inc., which owns a minority stake.

For Unilever — currently a mix of food and personal care businesses — the acquisition will mark a shift in rapidly growing health care categories. Its core skills are marketing and global distribution, so it should be able to sell branded, over-the-counter drugs better than a science-led pharma company. There is a clear opportunity to grow some of the Glaxo brands in emerging markets.

And growing the personal care side of Unilever would make that business even more viable as a candidate for an independent company.

Glaxo’s rejection of Unilever’s offer on the basis of price is, nonetheless, justified. The proposed offer is equal to 18 times the unit’s expectation Income Before interest, tax, depreciation and amortization for 2022. This may be a modest premium to where Glaxo can do the consumer-health business when listed. The Procter & Gamble Company currently commands a similar valuation, but the US firm is on a real tear right now.

UK consumer-healthcare rival Reckitt Benckiser Group plc trades at just 15.2x, but the low valuation reflects that firm’s recent challenges. In the middle, Colgate-Palmolive is at 16.7 times. Let’s assume something similar for Glaxo’s consumer health care and it will cost around £45 billion. Glaxo on Saturday issued upbeat sales growth guidance for the business, which helped support the idea that a high-teens multiplier is appropriate.

So Unilever’s approach is not a knockout one. Its real charm is that it gives Glaxo a substantial exit through a series of piecemeal share sales at unpredictable prices, each of which would involve taking a discount.

But ultimately the crisis here isn’t going to compare with hypothetical stock-market valuations later this year, but what other buyers can pay now. The defense on behalf of P&G or on behalf of a private-equity consortium on its own or in partnership with Reckitt is laudable. As things stand, Unilever is already pulling off. The credit potential of the combination would not be sufficient to make a purely cash bid. Unilever will need to settle and still use up some of its stock.

The company can still justify a sweetener. Savings in consumer deals can be up to 10% of the acquired company’s sales. Here, this means that Glaxo Consumer Healthcare operating profit will add about £1 billion in 2025 (according to forecasts by analysts at UBS Group AG). After tax, this indicates a return of around 6% after three years at the current offer price. Not stellar, but probably good enough in such a time frame. Accepting the offer would set the payment back for a few more years – potentially a deal worth the wait for such a deal.

Unilever chief executive Alan Jopp must weigh the loss of missing this transaction and letting the rival acquire it. His proposal for Glaxo can be seen as a recognition that his current strategy is not delivering fast enough. The cost of paying a little more may be less than the cost of losing the opportunity forever.

This story has been published without modification in text from a wire agency feed. Only the title has been changed.