Unilever's GSK asset bid risks rating downgrade, says Fitch

BY Reuters | CORPORATE | 01/18/22 11:12 AM EST

Jan 18 (Reuters) - Ratings agency Fitch said that Unilever's (UL) bid for GlaxoSmithKline's consumer health assets would put the consumer goods group's 'A' credit rating at risk because of the huge debt it would have to swallow.

Unilever's (UL) 50 billion pound ($67.88 billion) initial bid for GSK's consumer health arm, which owns brands including Panadol painkillers and Sensodyne toothpaste, was rejected by the pharmaceuticals company.

"Unilever's (UL) offer... is likely to raise Unilever's (UL) debt to an extent that it would not be able to reduce to levels consistent with an 'A' rating category over 2024-2025, opening the possibility of a multi-notch downgrade into the BBB category," Fitch said in a report https://www.fitchratings.com/research/corporate-finance/unilever-risks-downgrade-with-new-growth-strategy-18-01-2022.

The ratings agency said the proposed deal would have raised Unilever's (UL) net debt to between between 4.5 and 5.0 times EBITDA in 2022, which is above Fitch's threshold of 3.3 times EBITDA for an 'A' rating.

Those metrics would only deteriorate, given that Unilever (UL) would need to raise its bid to clinch a deal, Fitch said. The agency viewed GSK's operations as complementary to Unilever's (UL) and the proposed deal would bring cost and sales benefits, but it added that the acquisition would carry a high integration risk.

Echoing concerns raised by several analysts, Fitch said the combination would involve Unilever (UL) entering and managing the distribution of over-the-counter medicines while continuing to innovate without access to GSK's pharmaceuticals know-how.

($1 = 0.7366 pounds) (Reporting by Siddharth Cavale in Bengaluru Editing by David Goodman)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.