As Christmas approaches, Unilever CEO Alan Jope hoped to give investors something to celebrate: the company’s biggest acquisition to date.
In early November, he made an offer to open GlaxoSmithKline and Pfizer’s consumer health department, hoping to grab the business before it goes public. This failed to bring them to the discussion table, and on December 20, Joop made a move he was sure would tempt them: a third, mostly cash offer of £ 50 billion.
But that also failed, with pharmaceutical partners rejecting his offer just before the new year. GSK and Pfizer had different interests – with Pfizer’s involvement being purely financial – but they both agreed that £ 50 billion was too low.
This week, after news of the talks surfaced, investors dealt the final blow to every deal opportunity.
During talks with management, they expressed confusion, skepticism and outright opposition, according to several shareholders. Unilever’s share price fell as much as 11% before the company, which people familiar with the situation said it was never ready to offer a much higher bid, said it would not make a new offer.
The response to the offer has thrown the FTSE 100 consumer goods group into its biggest crisis since battling Kraft Heinz’s hostile approach five years ago, questioning Jope’s leadership and sparking a debate over how Unilever, which employs nearly 150,000 people, can increase your slow productivity.
“Unilever should certainly pay attention to the fact that five years later the share price is only at this level [Kraft Heinz] is bidding, “said Terry Smith, a top 15 shareholder, in a letter to investors on Thursday. “Then why should we trust this management and the board while preserving shareholder value?”
The indignation of the shareholders
Dissatisfaction is already building up with more than 90-year-old ice cream maker Magnum, bleach Domestos and Pot Noodle, whose sales results lag behind competitors despite Jope’s promises to focus more on high-growth areas.
The acquisition of GSK was intended to accelerate sales growth by applying Unilever’s marketing and distribution machine to healthcare brands including Advil painkillers, Centrum vitamins and over-the-counter drugs such as Theraflu. But instead it caused outrage.
Investors feared the scale of the potential deal, which could increase Unilever’s debt to 4.5 or five times the profit. But not everyone was against his general direction, said Bruno Montaine, an analyst at Bernstein.
Bert Flossbach, founder and CEO of Flossbach von Storch, a Cologne-based asset manager worth € 80 billion and one of Unilever’s top 10 shareholders, said: “Jope is in a difficult position because Unilever is lame duck for a long time. But if you have nothing to buy at a reasonable price, then don’t buy anything. “
Joop tried to update Unilever’s strategy a year ago by expanding its range of beauty products and supplements and attracting younger customers – but this was not met with enthusiasm by the market.
GSK’s offer has further shaken confidence in the ability of CEO and CEO Graham Pitkeli to bring about change. “They showed their hand: they obviously don’t trust the existing business, otherwise they wouldn’t have considered it,” said an investor who asked not to be named.
After taking office in early 2019, Unilever veteran Jope first supported and then abandoned the difficult goal of reaching a 20% profit margin by 2020, which was set by his predecessor Paul Polman following the proposal of Kraft Heinz.
But continued pressure to increase profitability, according to some investors and analysts, has led to underinvestment in Unilever brands, which range from Knorr cubes to Dove soap and have a particularly strong presence in emerging markets such as India.
One person who monitors Unilever closely said that some of his problems are related to the categories in which he works. “Even Superman could not stimulate the growth of Knorr or Hellmann’s to keep up with the growth of L’Oréal or Estée Lauder.”
Most analysts agree that Unilever needs to transfer its portfolio more quickly to high-growth areas such as plant foods and vitamins, emulating Nestlé’s competitor, but they differ in the scale of potential acquisitions and discards.
One of the top 15 shareholders said: “I don’t think they’ve run the business badly, but I wonder if they’re too attached to Unilever being the huge corporate giant it is today.
“If they … reduce the portfolio by selling some of the former businesses in growth, it could actually crystallize some value.
Martin Debu, an analyst at Jefferies, wants Unilever to further reduce its food and soft drink division, which has shrunk compared to its larger household and personal care business. The company agreed to a 4.5 billion-euro deal to sell its tea unit last year.
“The market believes that the problem with Unilever’s growth is rooted in a lack of investment. We believe this is due to a structurally challenged food business, where we would like to see a faster rate of disposal, “he said.
Smith and others also criticized Unilever’s focus on its sustainability qualifications; Last week, Smith mocked the company for talking about “targeted” Hellman mayonnaise.
The consumer group intended to sell some of its food divisions to fund the acquisition of GSK, which meant that Smith’s comments on mayonnaise “could not have come at a worse time in terms of Allen’s support or a more ironic moment.” “Given what Allen is doing behind the scenes,” said the man, who is closely following Unilever.
Smith acknowledged that communication with shareholders has improved since Polman’s days. He noted that he had been consulted on GSK’s offer, although the attempt to get a return on capital expected from the GSK deal “is like a dentist pulling a back tooth”.
But the anonymous investor accused the company of “arrogance” in communicating with shareholders, for example, by not signaling that it was considering major acquisitions. “There were cultural issues with the previous CEO and I don’t think anything has changed at Jope,” the investor said.
They warned that their holding in Unilever was a “treacherous step” and could be sold in a few years, much based on the company’s planned announcements to accompany the annual results on February 10.
Prospects for mergers and acquisitions are fading
Unilever said this week it will be open to other major consumer health deals, which could include Johnson & Johnson’s consumer business – set to unbundle over the next 18 months – or Sanofi’s, which is also scheduled to be unbundled. from the parent trading company.
Analysts also pointed to the possibility of a deal between Unilever and Reckitt Benckiser, maker of Durex condoms and Strepsils cold medicines.
But analysts and rating agencies have downplayed the prospect of a merger or acquisition on a GSK scale following poor results from other recent major consumer deals. Reckitt’s acquisition of £ 13 billion from baby adapter maker Mead Johnson in 2017 led to write-offs of £ 8 billion. A significant recent acquisition of Unilever, the $ 1 billion purchase of Dollar Shave Club in 2016, “rests in an unmarked grave,” according to Smith.
GSK insists on its preparations to separate the consumer division, including courting corner investors, so that both it and Pfizer can smoothly sell their reserved shares.
The most obvious other potential bidder, Procter & Gamble, virtually ruled out, announcing this week that it has no plans for major M&A. Private equity buyers are likely to struggle to beat Unilever’s bid, given that they will not take advantage of any synergies.
For Jope and the Unilever board, the alternative is to convince shareholders that management needs to be given time to turn the business around. “The main question now is how much damage has been done to the trust in the board and management,” Montaine said.
“The problem with Allen [Jope] is he so decent and he wants to help people. That’s why investors are asking him difficult questions and he is trying to help. . . But you have to be a steel bastard and tell people what they don’t want to hear, “said the Unilever follower.
Jopp promised to present a “major performance improvement initiative” this month, consisting of a new organizational structure. Unilever said it will strive to grow in health, beauty and hygiene.
Some investors are optimistic. Hugh Yarrow, portfolio manager at shareholder Evenlode Investment, said in a letter to investors that it was a “reasonable decision” not to pursue the GSK deal.
“These events and subsequent talks with shareholders may ultimately be a useful catalyst for progress at Unilever,” Yarrow wrote.