The planned demerger will divide Associated British Foods into two distinct FTSE 100 companies without raising new capital for existing shareholders. While Primark generates nearly £10 billion in annual turnover, performance has been dampened by a 4.7% drop in continental European like-for-like sales and an 11% decline in operating profits. To counter these headwinds, the business is opening US stores, expanding click-and-collect, and prioritizing a UK home delivery service. Meanwhile, the parent firm has halted its £1.9 billion share buyback program as sugar and ingredients headwinds pressure earnings.
Key points
The planned demerger will untangle the fashion retailer from food brands like Twinings an…: The planned demerger will untangle the fashion retailer from food brands like Twinings and Ovaltine by late next year.
Stagnant operating margins of approximately 10% and falling European demand present opera…: Stagnant operating margins of approximately 10% and falling European demand present operational hurdles ahead of the corporate split.
Retail expansion into the United States alongside new delivery services will serve as pri…: Retail expansion into the United States alongside new delivery services will serve as primary growth drivers for the independent firm.
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The business logic for demerging Primark from Associated British Foods’ greater Ovaltine-to-Twinings empire – an event due to happen by the end of next year – is impeccable. Read this year’s results statement and you wonder why the controlling Weston family took 20 years to get behind the idea.
One paragraph can be about a yeast plant in India or the impact of high gas prices on sugar-refining margins; the next can jump to Primark’s new “digital flywheel” or the progress of the “By Coleen” collection. Even by conglomerate standards, food staples and discount fashion has always been an odd mix. Separating into two FTSE 100 companies, with stand-alone governance, makes sense.
But it would be hard to say the rejig will reveal tons of value, another reason conglomerates often give for doing the splits. Primark obviously isn’t a hidden jewel because it already makes two-thirds of the group profit – and it isn’t currently on sparkling form either.
Or, at least, it’s not in continental Europe. A like-for-like sales decline there of 4.7% for the financial year is jarring…
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