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Unilever faces £14bn hurdle to sweeten Glaxo bid

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Unilever
Unilever

Unilever will be forced to raise £14bn from investors or sell assets to fund any sweetened offer for GlaxoSmithKline’s consumer healthcare business as the City cast doubt on the Marmite maker’s surprise bid.

Analysts took aim at the strategic and financial reasoning behind Unilever’s £50bn offer, accusing its management of distraction tactics and warning that it could be left heavily indebted by a higher offer.

Unilever fired the starting pistol on a race to snap up GSK’s unit that makes Panadol painkillers and Aquafresh toothpaste with consumer goods giants Procter & Gamble and Reckitt also considered in the running for possible bids.

James Edwardes Jones, an RBC Capital Markets analyst, said: “We can't imagine many things that would unnerve us more about Unilever than acquiring GSK consumer health.”

In a scathing note, he warned the bid was likely “to compensate for, and distract attention from, a problematic prognosis for its existing business” as he warned Unilever “would be left heavily indebted” by raising its offer.

“Even seriously contemplating such a bid raises questions in our mind about management's confidence in the current business,” he added.

It was revealed on Saturday that GSK had rejected a series of bids from Unilever for the arm, a joint venture with US drugs giant Pfizer. Glaxo plans to spin off and list the division later this year.

It is understood some top GSK shareholders will examine Unilever’s rejected bids on Monday amid pressure on the FTSE 100 company’s board to consider a sale of the division rather than its planned demerger.

However, analysts warned that Unilever’s bid suffers from “already-stretching deal economics”, meaning it will need to find more money to fund a bigger bid.

Its most recent offer made on Dec 20 for the division included £41.7bn in cash and £8.3bn of Unilever shares in what would be one of the largest takeovers by a UK company.

Martin Deboo at Jefferies said boosting the offer to a £55bn all-cash bid would lift the cost and debt for Unilever to a “prohibitive amount”.

Unilever would be forced to either tap investors by raising £14bn or by borrowing and selling assets, most likely from its foods business, to fund an improved offer while keeping debt contained, he said. Jefferies said the initial bid had a “modest” premium.

“We would expect disclosure of Unilever's approach to encourage other over-the-counter participants like P&G and Reckitt to reach for their slide rules, as well as perhaps Nestle,” Mr Deboo said. “Any auction would be a test of Unilever's resolve and already-stretching deal economics.”

GSK plans to demerge and list the consumer healthcare business but is open to a sale if it can deliver better returns for shareholders.

The firm has been under intense pressure from feared US activist investor Elliott Advisors, which has urged it to explore a sale.

GSK said Unilever’s three bids “fundamentally undervalued the consumer healthcare business and its future prospects”, arguing it failed to recognise the division’s “potential”.

It added that it “remains focused on executing its proposed demerger” and the spin off “is on track to be achieved in mid-2022”.

Unilever argued the GSK consumer healthcare division is “a leader in the attractive consumer health space and would be a strong strategic fit as Unilever continues to re-shape its portfolio”.

News of the bids came just days after one of Unilever’s top investors blasted the firm for its “ludicrous” focus on sustainability.

Terry Smith, who manages the £29bn Fundsmith Equity fund, said in a letter to his investors: “A company which feels it has to define the purpose of Hellmann’s mayonnaise has, in our view, clearly lost the plot.

“The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert – salads and sandwiches).”

Unilever and GSK declined to comment.

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