Primark's demerger from ABF makes sense but may not reveal value
UKPulse Money Desk
The business logic for demerging Primark from Associated British Foods is impeccable, but it's unlikely to reveal tons of value.
- Primark will be demerged from ABF by the end of next year
- The demerger makes sense due to the odd mix of food staples and discount fashion in the conglomerate
- Primark is not currently on sparkling form, with a like-for-like sales decline of 4.7% in continental Europe
The business logic for demerging Primark from Associated British Foods' greater Ovaltine-to-Twinings empire 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.
Why this matters: The demerger may not have a significant impact on investors due to the lack of expected value creation
What this means for you: If you're a shareholder in ABF, you'll receive what you already own, just in two parts, but don't expect significant value creation from the demerger