Associated British Foods shares slide as £10bn Primark spin-off confirmed
FTSE 100 titan Associated British Foods has confirmed plans to spin off clothes retailer Primark, signalling a dramatic change in direction for the food and retail firm.
Shares in the firm slid more than six per cent on Tuesday’s open, leaving the stock down 16 per cent in the year so far.
The market had widely expected Associated British Foods (ABF) to spin off the retailer following an internal review as it battles with intense competition from high street rivals H&M and Zara.
The announcement seals months of speculation over Primark’s future, and ABF said it expects both firms will be listed separately on the blue-chip FTSE 100 index.
ABF enlisted Rothschild & Co last year to help it carry out a “strategic” review to weigh up whether to offload the retailer.
The firm said it is “confident” in the prospects of both businesses, and chief executive George Weston said the move is an “important step in the evolution” of the group.
Associated British Foods is controlled by the Westons, the UK’s richest family, whose holding company, Wittington Investments, holds about 59 per cent of the firm.
As well as Primark, ABF owns tea brand Twinings, baked goods maker Kingsmill and subsidiary British Sugar.
ABF, which has seen its share price drop so far this year, said it expects the demerger to cost around £75m.
The split-off will occur through a dividend demerger, which will allow ABF to separate off Primark by distributing shares in it to existing shareholders.
Primark sales grew in last year
FoodCo, which is what will remain of ABF once Primark is split off, operates across 52 countries and takes around £9.8bn in annual revenue.
Primark today operates 486 retail stores across 19 markets, with approximately £9.5bn of annual revenue and more than 83,000 employees.
Overseas expansion has been a key area of focus for the business, as it seeks to build market share across Europe and the US.
Michael McLintock, who is currently chair of ABF, will stay on until the spin-off is complete in 2027.
George Weston, who is the chief executive of ABF, will become the boss of FoodCo while Primark’s current chief executive Eoin Tonge will remain head of the clothes retailer.
Associated British Foods saw pre-tax profit across the group fall by nine per cent to £632m in the year to February, as revenue dipped by two per cent to £9.5bn.
Primark saw like-for-like sales grow by 1.3 per cent in the UK, and the clothes retailer gained market share in the year.
Analysts said Primark’s vulnerabilities could be exposed once it is left to stand on its own two feet.
Robyn Duffy, an analyst at RSM UK, said Primark is more vulnerable to the demand-side risks that could be caused by the Iran war, while ABF could take a bigger hit from supply chain constraints.
Dan Lane, lead analyst at Robinhood UK, said the budget clothes retailer has historically driven 50 per cent of the total group’s revenues but about 70 per cent of its profits.
“While Primark is undoubtedly the jewel in ABF’s crown, if it is to be judged on its own merits soon, it will give up the supportive scaffolding of the other units,” he said.
Iran war could tank consumer spending
ABF said it expects Primark will be able to manage costs caused by the Iran conflict, but said it “remains alert to potential further deterioration in consumer spending”.
The firm said the impact of blockages to energy and fertiliser supply chains caused by the conflict is “unclear”.
ABF said in August it would purchase Kingsmill’s bakery rival Hovis for £75m, but this deal has since been stalled by the competition watchdog over fears the reduced competition could spike prices for consumers.
The British-Canadian Weston family, through Wittington Investments, also own department store Fortnum & Mason and homeware chain Heal’s.
ABF was founded by W. Garfield Weston in 1935 as Food Investments Limited, before floating on the London Stock Exchange in 1994.