(Bloomberg) — Associated British Foods Plc will separate budget fashion chain Primark and break up one of the UK’s biggest conglomerates after more than three decades.
The move, which many investors believed the billionaire controlling Weston family would never consider, will turn Primark into one of Europe’s biggest standalone clothing companies, facing up to rivals like Inditex SA and H&M. The separate food arm will span groceries to sugar plantations.
Yet it comes with both businesses under pressure. Shares of AB Foods fell as much as 7.1% in London, after it reported a drop in operating profit and warned Primark is facing softer trading as the war in Iran dents consumer confidence.
“A decade ago the separation might have landed differently, but today the retail backdrop is far less forgiving,” Chris Beckett, an analyst at Quilter Cheviot, said in a note.
It marks the biggest change in the history of the group, which can be traced back to 1935 when Garfield Weston — grandfather of current Chief Executive Officer George Weston — set up a bakery in the UK.
“Primark will be probably the only — or certainly by some way the biggest — international retail clothing business on the FTSE 100, and food will be the only food pure-play in the FTSE 100,” Weston said. “We are setting up two big, significant businesses with the governance that is appropriate for both.”
Inflation Pressure
Weston will continue to lead the food business — which will retain the AB Foods name — at a time when manufacturers are facing inflationary pressure from the Middle East conflict. Eoin Tonge, currently CEO of Primark, will stay in his role.
The company expects the split to attract shareholders put off by AB Foods’ sprawling interests, and to improve understanding of a food business that includes the Twinings tea and Jordans cereals brands.
Though they each have annual revenue of close to £10 billion ($13.5 billion), Primark accounts for the majority of operating profit and the group has been largely followed by retail analysts rather than food specialists.
After years of dominating the budget clothing market especially in the UK, Primark is now being squeezed by online rivals including Shein and Temu, and saw weaker sales over the key holiday period.
Primark’s like-for-like sales in the UK rose 1.3% in the six months through February, in what AB Foods called a “difficult retail environment” that’s now been made worse by the Middle East conflict.
New Collections
The retailer boosted spending on advertising and digital in the UK, with clothing collections from British celebrity Coleen Rooney and fashion influencer Perrie Sian. It also started a teenage-focused label with prices starting at £3.50.
Weston said Primark intends to roll out more of these advertising efforts to Europe, where like-for-like sales declined 5.6% in the first half.
Overall, the group’s adjusted operating profit fell 17% to £691 million, and it is now forecasting a full-year operating loss in its sugar business.
“This was a challenging half which we knew it was going to be,” said Weston. “We are confident that the second half is going to be better.”
AB Foods expects the split to be completed by the end of 2027. It will take place via a dividend demerger, meaning current AB Foods shareholders will be issued an equal amount of shares in the newly listed Primark.
The Weston family will keep a majority stake in both Primark and the separate food business via its Wittington Investments vehicle. AB Foods is being advised by Rothschild & Co.
(Updates with analyst, CEO comments from fourth paragraph.)
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