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Unilever’s health kick is risky prescription

The Unilever logo is seen in Saint-Dizier, France, May 4, 2016. REUTERS/Philippe Wojazer/File Photo

LONDON (Reuters Breakingviews) - Alan Jope can no longer be accused of sitting on his hands. The Unilever boss on Monday signalled he would persevere with the attempted acquisition of GlaxoSmithKline’s consumer healthcare unit. But his rejected 50 billion pound offer was already pricey. Jope risks upsetting his grumbling investors by either overpaying or lacking a decent Plan B.

Unilever has previously acknowledged that demand for health, hygiene and beauty products is likely to grow faster than food brands like Hellmann’s mayonnaise and Pot Noodle snacks. That’s why it decided to sell its spreads and tea businesses while snapping up posh skincare line Paula’s Choice. Bidding for the GSK business, which earns 45% of its revenue from oral care, vitamins, minerals and supplements, represents a bolder shift. Jope reckons he’d also be better at coming up with ways of flogging more of GSK’s over-the-counter medicines like Tums and Advil tablets.

Unilever’s 50 billion pound offer, which GSK rebuffed, already reflects that potential, though. Analysts expect the GSK business to generate an operating profit of 2.5 billion pounds this year. Throw in a billion pounds a year of cost savings and knock off tax of 18%, and Unilever would earn a return on its investment of 6%, barely above the unit’s cost of capital. A higher offer would require Unilever to accept a lower return, aim for even higher savings, or lift the GSK unit’s historically sluggish revenue growth rate. Such a big acquisition also leaves Unilever vulnerable to its own indigestion problems, not to mention the risks and complexities of splitting off and selling food units.

There aren’t many alternatives, though. Unilever could launch a bid for 44 billion pound Reckitt Benckiser, which makes Nurofen, though that would lumber the company with a sluggish baby food business. These worries explain why Unilever shares fell 8% on Monday morning. Jope’s bold strategic vision is a riposte to investors who complain that he is prioritising sustainability over financial performance while lagging rivals like Nestlé and Procter & Gamble. But if he fails to implement it, shareholders will nonetheless sharpen their knives.

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CONTEXT NEWS

- Unilever on Jan. 17 signalled it would pursue a deal for GlaxoSmithKline’s consumer healthcare business after the pharmaceutical group rejected its 50 billion pound offer.

- The Dove maker said its future lies in materially expanding its presence in health, beauty and hygiene, suggesting it is willing to dispose of food and refreshments brands to support acquisitions in faster-growing sectors.

- Unilever shares were down 8% at 36.30 pounds by 1131 GMT on Jan. 17. GSK shares rose 4% to 17.01 pounds.

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