Conglomerate Associated British Foods (ABF) has decided to spin off budget fashion chain Primark. The retail arm’s demerger from the food business follows years of speculation regarding a breakup of the FTSE 100 group.
The decision to demerge Primark was taken after a review of ABF’s structure in a bid to improve returns.
Shares in ABF fell on the news, though the other catalyst for selling was the group’s H1 earnings miss. ABF also warned of ‘a risk to Primark sales’ if the Middle East conflict persists and consumer spending deteriorates. In addition, the company has become ‘more cautious’ on the outlook for its sugar business.
Doing the splits
Following the split, Associated British Foods and Primark will both be listed on the FTSE 100. ABF’s biggest shareholder Wittington Investments will retain majority stakes in both companies.
ABF CEO George Weston will lead the food business, which operates globally and boasts annual revenue of around £9.8 billion. Eoin Tonge will be CEO of Primark, a global fast-fashion retailer with roughly £9.5 billion of annual revenue.
What did the CEO say?
George Weston said the demerger marks ‘an important step in the evolution of ABF. For our food business, the separation will enable greater understanding of the breadth and strength of our differentiated portfolio and its long-term growth opportunities as the only FTSE 100 pure play food producer.
‘For Primark, it enables the creation of appropriate governance to maximise the future potential offered by Primark’s powerful brand, strong customer proposition and opportunities in existing and new markets.’
H1 earnings miss
Against a backdrop of soaring costs and pressure on consumer spending, ABF’s H1 results showed a 20% plunge in pre-tax profits to £663 million. That was below the £688 million the market was looking for, while group revenue weakened 2% to below £9.5 billion.
Primark faces challenging consumer market conditions, especially in Europe.
‘An encouraging start to spring/summer trading in March was followed by softer trading in April,’ said ABF, ‘as we started to see the impact of the Middle East conflict on the consumer.’ Lower selling prices impacted the sugar arm and profits also declined in the grocery business.
ABF still expects FY26 operating profit and earnings per share to be below last year. However, it is now guiding for operating losses in sugar.
ABF has long suffered from a ‘conglomerate discount’. This refers to the market’s tendency to value a diversified company at less than the sum of its parts.
So there is logic in separating the retail and food businesses, which investors will be able to value as standalone entities. Primark has grown to a size where it requires laser focus to capitalise on its own growth prospects in overseas markets.
That said, investors may question the timing of this demerger, planned to take place before the end of 2027.
Primark will be striking out alone in an ultra-competitive environment. And the discount clothing chain will no longer benefit from the dependable cash generation of the broader group.
Interactive Investor’s Richard Hunter says ABF feels its sugar, grocery, ingredients and agriculture businesses ‘would be better served by hiving off Primark so that investors can fully focus on the exposure to foods which gives the group its name. Unfortunately, at the current time, these units are providing little solace.’
Read the press release here: https://www.abf.co.uk/investors/regulatory-news
You might also like these stories:
