Unilever’s (ULVR) chief executive, Paul Polman, may be set to retire in the new year, but he’s not taking a back-seat approach to dealmaking just yet. The consumer goods giant has agreed to buy GlaxoSmithKline’s (GSK) health food drinks portfolio in India, Bangladesh and 20 other predominantly Asian markets for €3.3bn (£2.94bn) via a cash and shares deal with its Indian subsidiary. The transaction should increase Unilever’s emerging markets footprint and expand its portfolio of health food products.
The acquisition is structured in three parts – first, the consumer goods giant’s Indian subsidiary, Hindustan Unilever, will undergo an all-equity merger with GSK’s publicly-listed consumer healthcare business. Second, Unilever will acquire an 82 per cent stake in GSK Bangladesh Limited. Finally, it will buy certain other commercial operations and assets outside India. Unilever expects the deal to be earnings accretive immediately, and deliver returns well above the cost of capital by the fourth year of ownership.
The “significant” synergies Unilever expects should push the deal valuation multiple below 20 times cash profits. Analysts at Liberum called the acquisition “pricey”, but said that it adds “needed growth” for Unilever. They expect India will make up around 9 per cent of Unilever group sales, a 100 basis point increase, following completion.
While Horlicks may have a mixed reputation in the UK, the malted milk drink is popular in India. In 2018, the GSK health food drinks portfolio reported sales of around €550m (£491m), primarily from the Horlicks and Boost nutritional drink brands, with almost 90 per cent of these sales coming from India. Both this portfolio and the category it operates in have grown sales by double digits in percentage terms during the past 15 years. Nitin Paranjpe, president of the food and refreshment business at Unilever, called the acquisition “transformative” for the food and refreshment division and said it would allow better access to the health foods category.
Interestingly, how GSK plans to use its cash windfall from the deal seems to be immediately clear. The group’s shares fell sharply on news of an acquisition of Massachusetts-based oncology specialist Tesaro for $5.1bn (£4bn). The deal marks chief executive Emma Walmsley’s first since taking the top job in April 2017, and one that could improve the pharma giant’s future drugs pipeline after investors raised concerns about GSK’s heavy focus on consumer health products.
Typically, growth is stronger across pharmaceuticals and vaccines – the latter of which grew revenues by 17 per cent during the third quarter. That said, the pharma division disappointed at the last update, as sales growth from newer respiratory medicines was slower than expected.
The good news is that free cash flow has improved significantly of late, while the divestment of the health food drinks portfolio to Unilever should top up the coffers. And it seems pursuing new, more innovative acquisitions is top of the agenda when it comes to deploying surplus funds.
Tesaro is a biopharmaceutical company whose main product, Zejula, is currently approved in the US and Europe for use in ovarian cancer patients. At present, patients must show a response to platinum-based chemotherapy to qualify for the drug, although clinical trials are under way to expand the drug’s use in other forms of cancer, or at different stages of ovarian cancer. Zejula belongs to a class of drugs known as PARP inhibitors, which GSK says “offer significant opportunities for use in the treatment of multiple cancer types”.
Ms Walmsley said the deal would “accelerate” GSK’s oncology pipeline and provide access “to new scientific capabilities”. The acquisition price of $75 per share represents a 110 per cent premium to Tesaro's 30-day volume weighted average price of $35.67, and is expected to impact GSK’s adjusted EPS for the first two years before turning accretive by 2022.
