The Economist - USA (2022-01-22)

The Economist January 22nd 2022 Business 59

Unilever

Healthcheque

W

henunileverboughtBestfoodsfor

$20.3bnattheturnofthemillenni­

um,itwasoneofthelargestcashacquisi­

tionsever.Aftertwofailedbids,theBritish

consumer­goods giant dug up an extra

$2bntosweetenthedeal.It divested 700 of

itsbrandsintheyearthatfollowedbutre­

plenisheditslarderwithBestfoods’Knorr

soupandHellman’smayonnaise.Now,in

pursuitofanothermegamergerthatcould

befourtimesasbig,Unileverhasbeenpre­

paredtodisposeofthelarderentirely.

Unilever’snewtargethasbeenthecon­

sumer­health unit of GlaxoSmithKline

(gsk), a Britishdrugmaker.OnJanuary15th

it emerged thatthe soup­to­soap group

wasofferingtopay£50bn($68bn)forthe

business. gsk, which has been keen to

ditch the divisionin order to focus on

morelucrativeprescriptionmedicines,re­

fusedtobite.Themarketschoked:Unilev­

er’ssharepricefellby7%thenexttrading

day.Analystsarealmostuniformintheir

viewthatthedealisa badidea,arguingthat

itpresentsmoreriskthanUnilever,witha

marketcapitalisationof£94bn,canstom­

ach. Sellinglagging categorieslike food

maynotbeenoughtofundthetransaction,

ofwhichnearly£42bnwouldbeincash.

Fitch,a ratingsagency,warnedthatUnilev­

ercouldloseitsacreditratingifittookon

toomuchdebt.

AlanJope,whotookoveraschiefexecu­

tivethreeyearsago,seesthefutureofcon­

sumergoodsinhealthandhygienepro­

ductsratherthanfood.Handsanitiserand

paracetamolhavecertainlysoldwelldur­

ingthepandemic.Moreover,Unileverhas

a bigpresence indeveloping countries,

whichcouldcreatenewmarketsforgsk’s

brandssuchasSensodynetoothpasteand

Advilpainkillers.Still,onJanuary19ththe

company, possibly having read all the

warning labels about the deal, said it

would not raise its offer above £50bn,

whichgsk’s bossessaidundervaluedtheir

division.Thismayendthepursuit.

Itwon’tendMrJope’stroubles.Heis

underimmensepressuretoimprovethe

group’s performance. The affable Scots­

man hasso far beenunable to reignite

growthinhisthreeyearsincharge.Unilev­

er’ssharepricehasdeclinedinthepan­

demicevenasthoseofrivalssuchasNes­

tlé, a Swissgiant, or Procter &Gamble

(p&g),anAmericanone,havegoneupby

morethan20%(seechart).A career­defin­

ingdealmighthavesethimapartfromhis

predecessor,PaulPolman,whowasknown

foreschewingfinancialengineering.Ifthe

£50bntransactioncametopass,itwould

beoneofBritain’sbiggest­ever.

Thereisalsoa growingsentimentthat

Unilever’szealforpurpose­drivenbrands,

firstinstilledbyMrPolman,hasrunoutof

steam. From ethically sourced tea and

fighting deforestation with sustainably­

sourcedpalmoiltomarketingDovesoap

asa women’s­self­esteemproject,thefirm

hassoughttoconnectwithshoppers on

theirvaluesanddrawinvestorsinterested

inenvironmental,socialandgovernance

(esg) factorsaswellasprofits.Although

esgremainspopular,hintsofa backlash

againstitareappearing.ThismonthTerry

Smith, anassetmanager who isamong

Unilever’stoptenshareholders,groused

thatthefirmhas“losttheplot”bypursuing

sustainabilitymedalsattheexpenseoffi­

nancialperformance.A hard­headedpivot

toa moreprofitablehealthbusinesscould,

if successful,allaysuchworries.

Thedealwouldhavebeenproblematic,

andnotjustbecauseitlookedlikea heavy

lift for Unilever. Megamergers seldom

workoutasadvertised,andMrJope’sfirm

is not renowned for stellar execution.

Moreover,theconsumer­healthmarketis

Theconsumer-goodsgiantwants

lessteaandmoretoothpaste

From Hellman’s in a hand cart

Share prices, January 1st 2020=100, $ terms

Source:RefinitivDatastream

130

120

110

100

90

80

70

2020 21 22

Procter & Nestlé

Gamble

Unilever

passengers  will  fly  as  did  in  2019.  iata,  a
trade body, reckons that 3.4bn people will
buckle  up  in  2022.  That  is  nearly  double
the number in 2020, though still some way
shy of 2019, when 4.5bn took to the air. 
Uncertainties  remain,  however,  not
least the pandemic. Consider the Omicron
variant. Ed Bastian, boss of America’s Delta
Air  Lines,  has  described  navigating  the
past few weeks as “hellacious”, after some
8,000  of  his  staff,  about  10%  of  the  total,
contracted the virus. Crew shortages, tight­
er travel restrictions and bad weather con­
spired  to  force  the  cancellation  of  60,000
flights worldwide between December 24th
and January 3rd, calculates Cirium, an avi­
ation­data  firm.  That  corresponds  to
roughly  one  in  every  40  flights.  The  fact
that  the  worst  Christmas  period  for  a  de­
cade  still  made  December  the  busiest
month  of  2021  illustrates  just  how  far  the
industry has to go. 
Covid­19’s  unpredictable  course  shows
that even bright spots can cloud over. Large
domestic  markets,  unaffected  by  interna­
tional travel bans and other unco­ordinat­
ed  border  restrictions  over  vaccinations
and testing, have led the recovery. Within
America, the world’s biggest internal mar­
ket,  demand  for  seats  has  nudged  above
80% of pre­covid levels. In China it has ex­
ceeded  pre­covid  times  on  occasions  over
the  past  year,  thanks  in  part  to  the  coun­
try’s  strict  “zero­covid”  strategy.  Although
lockdowns to snuff out recent outbreaks in
the run­up to the Winter Olympics in Beij­
ing  next  month  have  slapped  the  chock
blocks back on, China’s aviation regulator
still expects domestic traffic at around 85%
of pre­pandemic levels in 2022. 
The plans for restoring capacity among
the world’s airlines give a sense of the like­
ly shape of improvement on international
routes, which iatapredicts will reach only
44% of pre­crisis demand this year. Some
low­cost  airlines  serving  short­haul  con­
nections  in  America  and  Europe,  where
travel  restrictions  may  soon  be  relaxed,
could  surpass  pre­covid  capacity,  reckons
iba, another aviation­research firm. Amer­
ica’s  big  three  network  carriers  will  also
benefit from the reopening of the lucrative
transatlantic market, which this year is ex­
pected  to  bounce  back  to  where  it  was  in

2019. Delta will approach pre­covid capaci­
ty in 2022, and United may exceed it. Some
of  Europe’s  legacy  airlines  may  benefit,
too.  iag,  owner  of  British  Airways,  is  ex­
pected to restore all of its flights across the
Atlantic by summer 2022. 
Airlines  in  the  Asia­Pacific  region  are
likeliest  to  remain  stuck.  Many  govern­
ments,  relying  on  isolation  to  control  the
virus, have toughened already strict travel
rules to contain Omicron. Capacity is still
around  60%  below  previous  highs.  Singa­
pore Airlines will run at half of its pre­co­
vid  capacity  for  at  least  the  first  couple  of

months  of  2022;  Australia’s  Qantas  may

operate at just 45% this year. 

Even if Omicron were the last of covid,

airlines  have  other  things  weighing  them

down. As Andrew Charlton of Aviation Ad­

vocacy, a consultancy, notes, governments

have  doused  beleaguered  airlines  with

cash  to  keep  them  aloft.  Much  of  that—

around $110bn, says iata—needs to be paid

back. And that is on top of new debts owed

to  private­sector  creditors.  Moreover,  so

long as demand remains weak airlines will

find it hard to pass the rising cost of fuel on

to  passengers.  The  industry’s  net  losses

will narrow from the staggering $138bn in

2020  and  $52bn  in  2021.  Collectively,air­

lines  are  expected  to  lose  another$12bn

this year. Better—but hardly stellar.n