Associated British Foods plans to spin off Primark from its food businesses, telling investors on Tuesday that the fashion retailer will be better positioned to grow on its own.
AB Foods said financial markets will better understand and value both its food businesses, which include brands such as Ovaltine, Ryvita and Twinings, and Primark if the fashion arm has a separate London listing, with its own board and investors.
Primark, founded in Dublin in 1969, trades from 486 stores in 19 markets and has annual revenues of about 9.5 billion pounds ($12.8 billion). AB Foods’ other businesses, which also include sugar, ingredients and agriculture divisions, operate across 52 countries with about 9.8 billion pounds of revenue.
While AB Foods says Primark now has the scale and growth opportunities to go it alone, it has faced growing competition from Chinese online giants Shein and Temu and in January warned on profit, highlighting weakness in continental Europe.
SHAREHOLDERS BACK SEPARATION, CEO SAYS
CEO George Weston said the demerger was not a response to trading issues and shareholders, including Wittington Investments, the holding company for the Weston family which owns just under 60% of AB Foods’ equity, backed the separation.
“They think we’re doing the right thing,” Weston told Reuters, adding the review of the group’s structure did not consider selling Primark.
But highlighting the challenge ahead, AB Foods posted an 18% fall in first-half core profit and said full-year profit would be below the year before, reflecting concerns over consumer spending due to the Iran war, weak U.S. cooking oils and bakery ingredients markets and a more cautious sugar outlook.
AB Foods shares fell 3%, extending a decline over the last year to 16.5% and giving it a market value of about 13 billion pounds.
Most analysts’ sum-of-the-parts valuations of AB Foods show Primark trades at a significant discount to peers.
RBC said the demerger should improve the medium- to long-term investability of the foods businesses, and valued Primark at just over 7 billion pounds as a standalone. Rival Next has a market capitalisation of about 16 billion pounds.
RBC’s analysts said Primark could trade on a price-to-earnings multiple of around 10 times, reflecting recent negative like-for-like sales trends and the absence of a transactional digital offering outside Britain. They expect the food businesses to command a higher multiple of around 13 times.
“The consumer outlook and outlook for both sides of the business looks quite challenging,” they added.
Chris Beckett, consumer staples analyst at Quilter Cheviot, said the move is not the value-unlocking moment some might like.
“The separation will leave two FTSE 100 companies, both ultimately family-owned via charitable trusts, which underlines that this is more about structure than strategy,” he said.
FIRST-HALF PROFIT FALLS
On completion of the demerger, expected by the end of 2027, AB Foods investors will hold shares in both listed entities. Weston will remain AB Foods CEO and Eoin Tonge will lead Primark.
The group estimated dis-synergies of below 45 million pounds and one-off transaction costs of about 75 million pounds.
For the 24 weeks to February 28, AB Foods reported adjusted operating profit of 691 million pounds, on revenue down 2% to 9.47 billion pounds.
It expects the cost consequences of the Iran war to be manageable but, echoing other retailers, warned of a risk to Primark’s sales if it persists and consumer spending deteriorates.
It said an encouraging start to spring/summer trading in March was followed by a softer April.
Source: Reuters.com