Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The concept of the “conglomerate discount” — where investors value sprawling companies for less than the sum of their parts — seems to have been invented in 1987 by business professor Michael Porter. This came about two decades too late for Associated British Foods, which had already branched out from food into clothing retail. Now the Primark owner says it may break up. If doing so doesn’t prove Porter’s theory, nothing will.
Demerging is in fashion. Consumer goods groups Unilever, Keurig Dr Pepper and Kraft Heinz all hope to erase long-standing conglomerate discounts by — the theory goes — having more focused management, more knowledgeable analysts and attracting investors interested in pure plays.
Things aren’t always so straightforward. Shares in Kraft Heinz have drifted lower since the foods group unveiled plans to split up, a decade after the merger that created it; so have shares in US conglomerate stalwart Honeywell, which announced its split plans in February, under pressure from activist fund Elliott Management.
Yet it’s hard to think of a better candidate for a demerger than the £16bn ABF. Cohabitation creates negligible benefits for its divisions. They follow different cycles: Primark’s brand of fast fashion is discretionary, food ingredients are a staple. Working capital requirements differ; so do their notional balance sheets: retail provides three-quarters of operating profit with half the group’s assets.
To Porter’s point, it does seem like ABF carries a conglomerate discount. Putting the food division’s £1.2bn of forecast ebitda on a multiple of 10 times — a 30 per cent discount to Nestlé — and Primark’s £1.8bn on H&M-style multiples would yield an equity uplift of about 25 per cent.
An unshackled Primark could, for example, increase investment. Not just more stores but, potentially, full-scale selling online, which the chain currently does not offer. Of course, conglomeration does afford some benefits that separation would remove, in that one side can subsidise the other. In bad years, such as supply chain choked 2023, there would be no handy food-generated cash flows coming through.
Nonetheless, increased focus is only one of the charms of a break-up. Bite-sized parts can also act as an invitation for bidders prepared to pay a premium. That’s what saved the initially uninspired demerger of cereal maker Kellogg. In this case, ABF’s governing Weston family intends to maintain its majority shareholding in both units. That makes a sale less likely.
Still, one deal could lead to another. After hiving off Primark, the next step could be to separate out the group’s sugar division, a commodity business that gobbles up working capital and turned in a loss last year. That might depend on whether investors reward the Westons for making this first big split. But if Porter’s principle doesn’t hold true for ABF, one should wonder whether the conglomerate discount really exists at all.
louise.lucas@ft.com
