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“If Unilever were to ultimately succeed with an offering, an acquisition of this business would be in line with its stated strategy: to increase exposure to high-growth, higher-margin health, beauty and hygiene products. GSK’s consumer business currently has strong positions in the toothpaste and vitamin markets, so there is certainly a place for Unilever.

“However, if the acquisition was financed with approximately 80% debt and 20% equity, this would be a concern as the company’s debt would start to accumulate. In the short term, the acquisition would be much less rewarding for the company than a share buyback of a similar magnitude. Unilever could control this debt by making a subsequent sale of its remaining food business. It would be good strategically but materially dilutive.

“The initial investor reaction demonstrates the lack of credibility of Unilever’s management. Unilever management has not demonstrated the ability to consistently increase both sales and margins and as such is now looking to inorganic large-scale growth to achieve this. However, there’s not much confidence that they’ll be able to do that with a wider and more diverse product line. Given the high level of investor concern lately and the reaction to Unilever’s share price this morning, this could prevent a higher bid from materializing.

“Unilever is not an expensive stock trading at 16.5 times this year’s expected earnings – a substantial discount to the broader consumer staples category. However, pressure on input costs and falling disposable income in many markets will make 2022 a tough year for the company, with GSK’s consumer business or not.

About Darnell Yu

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