Unilever and Glaxo shares move in opposite directions on unit bid news, FTSE 100 up, and Taylor Wimpey reassures on cladding costs

Unilever / GlaxoSmithKline

“The market has given a thumbs down to news that Unilever has bid for GlaxoSmithKline’s consumer goods division. The negative share price reaction probably reflects investors’ fears that Unilever is going to come back with a higher offer and potentially pay too much,” says Russ Mould, Investment Director at AJ Bell.

“GlaxoSmithKline’s share price has jumped on the news as Unilever’s actions effectively fire the starting gun for a bid war for the consumer goods unit. Nestle could be interested, so too private equity.

“Unilever looks to be bidding for the unit because it needs to inject some excitement into its business, having recently disappointed with sales and profit margins.

“This really is a Marmite situation for GlaxoSmithKline’s shareholders – they’re either hoping for a quick return now through a sale or better returns in the future through the planned demerger.

“GlaxoSmithKline chief executive Emma Walmsley would be delighted if someone came and paid top dollar for the unit, as she’s been under pressure from investors to deliver some good news for a long time.

“Some long-term GlaxoSmithKline investors may not want a sale, as they might have been looking forward to the consumer goods unit being demerged later this year.

“Demergers can be beneficial as management are able to run the business with more freedom, rather than simply being a division of a bigger company and having to follow group protocol. Therefore, the consumer goods arm could be worth a lot more in time, if allowed to forge its own path as a standalone business and potentially enjoy a stock market re-rating.

“Unilever says its priority is to materially expand operations in health, beauty and hygiene. Might it be willing to sell its food and refreshment arm which includes Magnum ice cream and Hellmann’s mayonnaise?

“It would certainly have to make some disposals if it were to buy the consumer goods arm from GlaxoSmithKline, but equally the food business is a cash cow so not something it would give up lightly.

“Even proposing the sale of the food arm could kick up a major fuss with shareholders who would probably see it as one of the core pillars of the group.”

Markets

“The FTSE 100 made a strong start on Monday morning amid some blockbuster M&A news and as China cut interest rates in the face of slowing growth.

“GlaxoSmithKline was the top riser on the index after news emerged at the weekend of a £50 billion bid for its consumer healthcare business from Unilever, with Reckitt Benckiser pulled higher in its slipstream.

“While a series of approaches have been rebuffed, the news has given investors some insight into what the unit might be worth and they like what they see. Unilever was heading firmly in the other direction after seeing its interest warded off.

“The Chinese GDP figures were no worse than expected. However, the central bank’s decision to ease rates reflects concern about a property market slowdown and the impact of tighter restrictions brought in to limit the spread of the Omicron variant of Covid-19.”

Taylor Wimpey

“Taylor Wimpey seems confident that the good times can continue to roll for housebuilders well into 2022.

“The housing market’s gravity-defying recovery from the pandemic and the increased demand for larger more flexible living space driven by working from home trends has underpinned strong revenue, profit, margins and cash flow for the sector.

“Taylor Wimpey is no exception and the company’s strong balance sheet position means it is poised to launch a share buyback to reward shareholders.

“Recent moves by the Government to address the cladding crisis in the wake of the Grenfell disaster in 2017 have buffeted housebuilder share prices, with the industry expected to bear more of the costs.

“However, Taylor Wimpey struck a reassuring tone on this issue. It appears to be proactively getting out ahead of the issue, noting it has identified all affected buildings and existing provisions should be enough to cover the cost of repairs.

“The challenge for the company will come as house prices cool, particularly as this has masked rising build costs so far. Inflationary pressures could begin to bite more if sales price growth stalls.

“Though a slowdown in the market could create an opportunity for Taylor Wimpey to buy land at attractive prices, thereby setting itself up for more profitable sales in the future.”

These articles are for information purposes only and are not a personal recommendation or advice.