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Could Whitbread’s sale of Costa force AB Foods to do something similar with Primark?

Analysts long argued that it made little sense for Whitbread to keep both Costa and Premier Inn under the same roof, and calls are growing for AB Foods to spin off Primark, its star asset

primark store
IG’s Chris Beauchamp reckons Primark will never get a fair value while it has the sugar business as a stablemate

Associated British Foods PLC’s (LON:ABF) pre-close trading update on Monday showed once again that it was Primark bailing out its struggling sugar business.

Forgive me if you’ve heard this before.

The FTSE 100 group has often been asked whether it plans to spin off its successful value fashion chain or sell the sugar division, but the answer has always been the same: being part of a larger group gives all of its businesses more financial firepower.

READ: AB Foods warns of currency hit to profits

There was a similar defiance from Whitbread PLC (LON:WTB) when analysts and shareholders argued that it made little sense to have a coffee chain (Costa) and hotel chain (Premier Inn) under the same roof.

Despite the initial reluctance, Whitbread bosses came to their senses and struck a deal with Coca Cola to offload Costa for the best part of £3bn.

Analysts reckon that could prompt the AB Foods board to at least consider the option of splitting up its business.

“I’m not sure why ABF hangs on to the sugar division when it continues to impair overall performance,” said IG’s chief market analyst Chris Beauchamp.

“Primark has demonstrated the ability to keep growing, and it would likely command a higher premium without the sugar business dragging performance.

He added: “As Whitbread spins off Costa, the voices calling for ABF to take the hard decision will only grow louder.”

Whitbread’s board eventually bowed to pressure from activist investors, a scenario which analysts think could also play out with ABF.

Major shareholder unmoved

The big issue in this particular case is that almost 60% of ABF’s shares are held by chief executive George Weston and his family.

That means the Westons need to be on board with any proposed changes and, so far at least, they have shown little interest in breaking the status quo.

If the family opts to maintain things as they are, Beauchamp is convinced that Primark, along with ABF shareholders, will continue to be held back by the ailing sugar business.

“The problem for Associated British Foods is that it is a perfectly good clothing retailer for the mass market but until either the sugar market turns around or ABF bites the bullet and gets rid of it the shares will be serial underperformers.”

ABF shares dropped more than 4% at the opening bell on Monday, although they have recovered some of those losses as the day has worn on and are down 1% to 2,249p in early afternoon trading.

Quick facts: Associated British Foods PLC

Price: 1877.5 GBX

Market: LSE
Market Cap: £14.86 billion

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