Associated British Foods may recently have gone some way to answer the persistent questions it has faced about its future in the UK bread market – but the food-to-retail conglomerate has also had to deal with queries about the very make-up of its empire for just as long.
And, last week, the owner of Mazola cooking oil, Silver Spoon sugar and Twinings tea raised eyebrows with its announcement that, yes, it might now be ready to split its food operations from Primark, its international clothing-retail business.
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The board of the London-listed group has been reviewing the company’s structure “with a view to maximising long-term value”, ABF announced.
The business sought to emphasise that “no decision has been taken” but added the review may lead to a separation of Primark from its interests in food, which, as well as grocery brands, take in sugar refining, food ingredients and businesses in agri-food like feed and fertiliser.
ABF’s largest shareholder, Wittington Investments, “remains committed to maintaining majority ownership of both businesses”, the company added.
The UK-headquartered group is run through five “operating businesses” and retail, which houses Primark, is the largest by sales, generating £9.5bn, or $12.49bn, (around 48%) of the company’s group sales of £19.46bn in the year to 13 September.
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By GlobalDataThe accounts showed the ABF group generated an operating profit of £1.48bn. On its own, the retail business brought in £1.12bn in operating profit during the year.
Tune into any call ABF’s management holds with City analysts and most of the questions focus on Primark and its prospects.
“Our unique and exceptional food business has historically been less well understood by the financial markets than Primark, yet it has a highly attractive portfolio, deep global expertise and much potential,” George Weston, ABF’s chief executive, said last Tuesday when the Tip Top baker announced the results and its strategic review. If the split does happen, Weston told analysts he “would hope to continue as CEO of the food businesses”.
ABF has not been alone among more sprawling businesses in facing the argument that it faces the so-called “conglomerate discount” – that the company is, put simply, valued less than the sum of its parts.
A counter argument would be ABF’s diversified nature shelters the company from downturns. Now, however, it’s clear another type of future for the business could be on the horizon.
“A big call”
Speaking to analysts after announcing the possible demerger, Weston wanted the focus of their questions to be focused on ABF’s annual results, which were published at the same time.
Needless to say, that was, understandably, unlikely. Barclays analyst Warren Ackerman asked why the company was considering the move. “As long as I’ve covered the stock, I never really thought it’s on the table, so what’s changed in your mind?” he asked
“It’s about long-term governance,” Weston replied. “I think there are two different issues. The first one is food where I think we haven’t, quite frankly, been getting the scrutiny from the investment community that would serve us well because most of the scrutiny has been about retail and perhaps we want to put that right.
“On Primark, it’s really about oversight of what is now a very big and very complicated business. And just maybe there’s a better oversight model available to us than the brilliant model that we’ve been running with for 60 years. So, you go ‘Well, that was 60 years. That worked absolutely fabulously and now, looking into the future, maybe it’s time to do something different.
Weston acknowledged it is “a big call” and added: “In terms of timing, I would imagine that we would have come to a conclusion about whether to stay together or pull ourselves apart by the interims and the process of actually getting there will take 18 months or so.”
Questions over Primark
In a note to clients, Ackerman said there is “broad agreement that there is pretty compelling logic” in a split but there is “some head scratching around the timing of the announcement” amid “lacklustre trading” and the valuations among some peers in food and ingredients being under pressure.
“The underlying question we think some investors are trying to get at is whether the announcement around the consideration of a split was being made from a position of strength or a position of relative weakness,” Ackerman added.
ABF’s retail division, which attracts much of the City’s focus given its contribution to the company’s revenues and profits, saw its sales inch up 1% in the year to 13 September, contributing to a 2% increase in operating profit. However, like-for-like sales fell 2% amid declines from the retailer’s combined UK and Ireland business and from its operations on continental Europe.
While Primark’s gross margins are back to being above pre-Covid levels, the retailer’s like-for-like sales may worry some investors, especially if a split does happen. “The disadvantage could be a lack of food cashflow to help fund expansion of Primark going forward,” RBC analyst Richard Chamberlain said.
A mixed 12 months for food…
ABF’s food assets have just had a mixed 12 months. Revenue and operating profits from the grocery division were down (though sales were flat at constant-currency), as the company’s US oils and UK bread business offset growth from hot-drinks brands Twinings and Ovaltine (which have consistently performed well) and better sales and earnings from the group’s assets in Australia and New Zealand.
Revenue from ABF’s ingredients business fell but operating profits grew amid “productivity savings” and work on managing input costs.
The sugar arm, sales fell amid low European prices. The division swung to an operating loss as the lower sales mixed with the high cost of beet.
And ABF’s agriculture business saw revenue and operating profit decline amid “one-off costs” and “a reduced contribution” from the Frontier grain-marketing venture the company has with Cargill.
ABF has a somewhat cautious outlook for its mix of food business for its new financial year. The company expects profits from its grocery arm “to be around the same level” as the US oils business continues to be challenging.
It expects to “hold adjusted operating profit in ingredients at broadly this year’s level” and the same metric for agriculture “to remain in line with 2025”. ABF is forecasting “a small adjusted operating profit” from its sugar business as beet prices ease and the group benefits from recent restructuring actions.
…but split seen as positive
That said, within ABF’s overall basket of food assets, the company’s management sees a number of a positives, including its “international grocery brands” like Twinings, Ovaltine and Blue Dragon, behind which the group is investing in capacity in Poland.
Weston also points to “strong fundamentals” in ABF’s sugar business in Africa and the potential of its ingredients arm. In the year just past, 60% of the company’s £1.2bn capital investment in went into food. “Really the future of the food group is about growing the lovely bits, much more than it is about fixing the last few kind of headaches,” Weston told analysts.
ABF has sought to take action at some of its more challenging food businesses in recent quarters, including the move to bolster Allied Bakeries by buying UK competitor Hovis and restructuring its Spanish sugar business Azucarera.
“With the decisions that have been taken over the last 18 months, [ABF’s food business] will have less baggage, should have a strong balance sheet, be very cash generative and be a platform for further growth,” Shore Capital analyst Clive Black tells Just Food.
“I don’t sense that ABF is going to become a stereotype, high-dividend yield, cash-generative, staple business. I think there are ambitions to grow that company and the platforms in agriculture, ingredients and grocery absolutely provide that.”
Richard Wyborn, a partner at European consultancy Food Strategy Associates, calls out areas where he thinks ABF may look to invest. “It has stated it wants to drive its big brands Ovaltine, Twinings and Mazola while it will also want to take steps to grow its position in bakery ingredients, something that will likely be a focus for future acquisitions,” he says.
Aside from Africa, some see ABF being more circumspect about investing in its sugar business. ABF’s sugar arm might be “more of a cash-generative business, sweating the assets in the UK and Spain”, Black says. “But [ABF’s food business] should be a medium- to long-term growth story with a very strong balance sheet.”
It would be too easy to point ABF’s possible split as another example of a major, listed name turning to a demerger to drive value. “I don’t see it like that,” Wyborn says. “This separation makes far more sense than some other recently announced deals given the near-zero synergies that exist across the retail and foods-related parts of the business.”
Black agrees. “This is different. This is about a business where it’s going to be looking at focusing upon wholly segmented channels between retail and food.
“Within the context of AB Foods, this is not about a strategy of focus in terms of further demergers and value creation that way. This is about the benefit of focus at a food-group level and applying a growth strategy upon the strong foundations in agriculture, ingredients and grocery – very different to the list of multi-product, FMCG companies where, frankly, focus has been engineered because there were diseconomies from being set up as they were.”
