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      Unilever’s deal quest puts spotlight on sector’s sustainable-growth challenge
      WEDNESDAY, 19/01/2022 - Scope Ratings GmbH
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      Unilever’s deal quest puts spotlight on sector’s sustainable-growth challenge

      Unilever PLC’s struggle to convince investors of the merits of its USD 50bn bid for GSK PLC’s consumer-healthcare business shows how difficult it can be to reshuffle product portfolios in the search for better sustainability-linked growth.

      Unilever has positioned its bid as a means to boost growth through diversification through vitamins and over-the-counter painkillers which would fit with the Anglo-Dutch company’s current focus on functional nutrition, beauty, personal care and hygiene.

      But the bid comes as the company has run into criticism for sacrificing returns for a heavy-handed focus on corporate sustainability – hence the concerns that digesting a huge acquisition might not be appropriate even though it could be an opportunity for disposing of slower-growth brands and businesses.

      “From an ESG-investing perspective, companies like Unilever risk being penalised not necessarily for owning a portfolio of ‘unhealthy foods’ – Unilever is famous for its Hellman’s mayonnaise brand – but rather failing to successfully launch healthier product variants in a timely fashion within the same brand or develop and expand into healthier brands and segments,” says Eugenio Piliego, analyst at Scope.

      “Consumer food giants are increasingly challenged by local and more sustainable competitors in developed markets as consumer preferences shift towards more sustainable consumption – as France’s Danone has also discovered - with investors and regulators paying more attention to sustainability,” says Piliego.

      The GSK consumer-health portfolio would provide Unilever with blockbuster products potentially with strong future growth in emerging markets and less affected by consumers’ changing tastes in developed ones, says Barna Gáspár, analyst at Scope.

      “However, OTC products such as paracetamol and vitamin C – with no patent protection – are increasingly commoditised items which will not improve Unilever’s overall ESG standing and don’t necessarily help Unilever grapple with consumers’ changing tastes,” says Gáspár.

      Nestlé SA’s approach make a good contrast. “The Swiss company’s performance indicates a more successful reshuffle of its portfolio to focus on higher-margin food and pet-food – useful for reducing food waste, recycling - drink and nutritional supplements as well as plant-based alternatives to existing products, while reducing exposure to product lines such as bottled water,” says Gáspár.

      Unilever’s and Nestlé’s results for the nine months to end-September 2021 make an interesting comparison. The Anglo-Dutch company reported underlying sales growth of 4.4% as revenue rose 1.7% to EUR 39.3bn in contrast with its Swiss rival which reported organic sales growth of 7.6% as revenue rose 2.2% to CHF 63.3bn.

      “For Unilever, an acquisition of the size of the GSK business would have at least a near-term impact on leverage with potential implications for credit quality,” says Gáspár

      Scope rates Danone, GSK, Unilever and Nestlé on a subscription basis. To view Scope’s subscription rating and issuer report or to register, please click here.

      Access all Scope rating & research reports on ScopeOne, Scope’s digital marketplace, which includes API solutions such as for Credit Sphere.

       

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