Associated British Foods rises to bread battle with Warburtons
Associated British Foods is taking on bread giant Warburtons with its Hovis merger. Could this be the biggest thing since sliced bread for the FTSE 100 giant?
One of the London Stock Exchange’s biggest stalwarts is ditching the wardrobe and betting on the bread bin.
Associated British Foods (ABF), which has been listed on the FTSE 100 since 1994, is owned by billionaire Westons, Britain’s sixth-richest family.
The group announced earlier this year that it plans to offload Primark, the fast-fashion retailer which accounts for nearly half of its revenue.
The firm hopes to focus on its food empire, which numbers brands including Twinings, British Sugar and Patak’s.
Earlier this week, ABF confirmed its £75m takeover of bakery giant Hovis, which it will merge with its own Allied Bakeries to create the UK’s largest bread brand.
George Weston, ABF’s chief executive, said the acquisition will fire up the firm’s bread arm as it attempts to return to growth. Last year, the group revealed that Allied Bakeries was weighing on overall profit as it contended with a “challenging market”.
Such is the scale of the merger, which will create a new company known as Hovis Bakeries, that the deal had been paused by the competition regulator over concerns that it would result in fewer options for British consumers.
But, following an investigation, the Competition and Markets Authority decided to green light the deal amid fears that ABF would quit the bread market entirely if its merger was blocked.
Warburtons ‘doing something very well’
The combination of Hovis and Allied Bakeries leaves this new entity to face off against the UK bread market’s only other major presence, 150-year-old Warburtons.
The family-owned bread brand will prove a worthy competitor for Hovis Bakeries. Warburtons toasted its 150th year in business by notching a 33 per cent jump in profit before tax to £42m last month, as volumes grew by four per cent.
Adding a third to profits in a sector as competitive as British baked goods “doesn’t normally happen,” Panmure Liberum analyst Anubhav Malhotra told Morning Wire.
“They are clearly doing something very, very well which is basically giving customers the products that they want and investing in innovation and marketing,” he added.
Warburtons has done well to adapt to a British consumer which is rapidly moving away from regular bread products and towards alternatives like crumpets and wraps, he said.
The firm has also taken on the social media-driven surge in the popularity of fibre and protein-rich foods, he said, with new ranges and marketing.
Hovis, on the other hand, “has been losing its way for a while,” Malhotra said. “If you go to the Hovis website and see the list of products that they have, there’s nothing that mentions protein, there’s nothing that mentions fiber.”
The newly-created Hovis Bakeries can hope to save a huge amount of cash by streamlining its joint operations, Malhotra said, and should pile all of this money into creating new consumer-friendly products and marketing campaigns.
Merger ‘makes for shopper win’
Clive Black, a director at Shore Capital, agreed, telling Morning Wire that the merger “should help further rebalancing and bring superior operations and economics to ABF in two to three years time”.
Though Allied Bakeries has been a “running sore” for ABF in recent years, Black points out that the sprawling firm has other fires to fight among its books.
In an empire of brands as large as this, “there are likely to be problem children amongst the family silver,” he said. Most recently, ABF revealed that it is bracing for a full-year loss of as much as £60m in its sugar operation.
“In Sugar, the duration and severity of the Middle East conflict have increased gas price expectations for next year, which has impacted our European profit outlook,” the group said.
Notwithstanding its issues in sugar, the Weston Family can look forward to a productive heavyweight battle with Warburtons in years to come, Black said.
“As the market evolves, a stronger Hovis, which also makes supermarket private label bread, plus a still motoring Warburton’s, with wider capacity still easing out, should make for a shopper win with more innovation coming through and the benefit of competition,” he said.