Primark-A-Go-Go: The Last Post for the Conglomerate?

Analysts were recently taken aback by the news that the Weston family-controlled business, Associated British Foods (ABF), was considering a strategic break up with the possible separation of Primark, its fast-fashion brand, from the wider food business. Surprise, because there was no activist pressure as such for a break up given the family’s tight ownership, and surprise because the Weston’s have always strongly defended the unusual model of combining fast-fashion with Twining Tea, Horlicks and Kingsmill bread. Should it go ahead, this may be the last post for a once common phenomenon of the London stock market: the conglomerate.

A traditional conglomerate typically owned a diverse array of businesses, often uncorrelated from each other, and as a result were much unloved and disparaged by the market. However, they were a once dependable feature of the UK’s mighty imperial industrial and manufacturing heritage. Think ICI and GEC to name just two. From a corporate perspective, the typical conglomerate grew via acquisition to become some of the biggest corporations the UK had ever seen, even if the rationale sometimes made little sense cosmetically or economically. The fact that GEC made everything from circuit breakers, to locomotives to refrigerators made sense only from the perspective of ‘electric’ being a common thread. Founded in 1886, GEC grew to become the UK’s largest private employer in the 1980s before its sorry dissolution in 1999.

Conglomerates made some sense: diversity provided a shield against economic cycles and downturns, whilst the economies of scale and a centralised vision focused capital on market leading technologies and innovation (GEC was at the forefront of Britain’s post-war industrial renaissance). Criticisms however, included complexity, diversion of management time into under-performing areas, and more simply a failure to focus. Market agitation to ‘release value’ ultimately became so pressing the break up and dissolution of these once mighty behemoths became unstoppable.

The markets may have had a point. Perhaps the most bewildering conglomerate of them all was ‘Buns-to Guns’ Tomkins.  Founded as a modest engineering company in 1925, Tomkins grew in the 1990s via seriously aggressive acquisition to become a collection of strangely disparate businesses that included gun maker Smith + Wesson and baker, Rank, Hovis, McDougall. However, very few of these businesses ended well. The break up of Imperial Chemical Industries (ICI) which made everything from paint to pharmaceuticals was one notable exception given its pharmaceutical division became part of the nascent AstraZeneca (now the UK’s largest company), and its chemicals and coatings division a leading part of Dutch company AkzoNobel*. GEC went from being a titan of UK defence and engineering via gross mismanagement to an entity (Marconi) no bigger than a small-cap until being finally put out of its misery. The frustration for investors was always the difficulty of accurately valuing a collection of disparate businesses; the risk that capital discipline would be lost, and the oft repeated sense that value would be enhanced if only some of the underlying businesses were liberated from the conglomerate model (as happened at ICI).

Should ABF break itself up into two substantive FTSE100 businesses (both still controlled by the family it should be noted), the final flag lowering over the conglomerate model will be complete. Or will it?.

Whilst we are unlikely to see the likes of ICI, Tomkins and GEC again, conglomerates, in all but name, continue to haunt areas of the market, some successfully, some less so. Unsurprisingly, some of these are attracting the attention of activist investors zealously agitating to release value, whilst others, oddly, are cosily allowed to ride the wave of opposition, largely because they are well-managed. M&S is a conglomerate in all but name, given its food business has little in common with fashion, other than their both being ‘retail’. M&S is seldom under siege to separate the two businesses. Halma, an under the radar conglomerate began life in 1894 as a tea and rubber play, but through careful and continual acquisition is now a decentralised group of over 50 companies in three diverse engineering disciplines; it has been a continual darling of the market.

J Sainsbury, on the other hand, with a ‘Groundhog Day’ type persistence, continues to mismanage its forays into areas not linked to its supermarket business – first Homebase and now its troubled catalogue child, Argos. Conglomerates in some areas of the market still make sense; the integrated production and broadcasting model of ITV has compelling logic, but it has been unable to withstand the discount the market applies to its deeply unloved model, and is now scoping a separation. Barclays, with its retail and investment banks continues to divide market opinion, with a break up routinely touted, but always resisted.

The conglomerate is an interesting corner of market history that served its time and is now largely defunct in its classic form. One senses however that managements continue to see the advantage of business diversity and variety, even if some of these experiments disappoint. Perhaps it should be incumbent on the markets to show greater understanding of these models where they make sense, and only agitate for break-up, where they do not.   

*WHITEFRIARS has a position in Akzo Nobel