ABF poised to reveal result of Primark and food business demerger plan

Primark may break free from Kingsmill, Twinings and the sugar business this week when Associated British Foods announces plans on a mooted demerger.The potential split comes at a tricky time for the group controlled by the billionaire Weston family, with its fashion and food arms facing tough competition and rising costs.ABF, which owns bakeries, a sugar production business and provides ingredients to the restaurant trade alongside selling brands including Patak’s spice flavourings, Blue Dragon sauces and Jordans cereals, said in November last year that it was considering a demerger of Primark, its fashion arm. It said a strategic review carried out with the help of the advisory company Rothschild & Co had “a view to maximising long-term value”.That was followed by a subdued statement on Christmas trading in January when the company admitted that annual sales were likely to be flat year on year and profits down.Now, the conflict in the Middle East is expected to have only added to trading pressures and the City is braced for the company to reveal disappointing results for the first half of the year on Tuesday.“We would not be surprised if the group has begun to face additional trading and cost headwinds post the start of the Iran conflict, and the potential longer-term impact on petro-chemical prices around the world,” said Darren Shirley, an analyst at Shore Capital.George Weston, the third-generation chief executive of ABF – whose grandfather founded the company – will have to make up his mind about the potential demerger of the family empire.The company could be tempted to stick with its formula of steady cashflow from a food business to help fund the international expansion of cut-price fashion in a tough environment.To complicate matters, ABF is embroiled in an investigation by the competition watchdog into a planned merger between its Allied Bakeries, the owner of Kingsmill, and a rival Hovis.ABF has offered to put its Northern Irish business up for sale, to allay concerns about competition issues in the part of the UK that may cause the deal to be blocked.Despite the problems, several analysts believe the split from Primark remains likely to go ahead.The appointment of Eoin Tonge – the experienced former ABF, M&S and Greencore finance director – as the new boss of Primark last month also hints that the demerger is likely.Richard Chamberlain, a retail analyst at RBC Capital Markets, said the demerger still “makes sense given the lack of synergy between the two [parts of the businesss]”. But he added: “We think the growth outlook for both sides of the business looks challenging.”