Companies, as a rule, prefer acquisitions to streamlining and disposals. The former bring scale and new revenue streams, yet sprawling businesses can also benefit from focusing on their best bits without the distraction of underperforming divisions.
Demergers, where a company cleaves itself in two, are the most extreme form of disposal. These are highly favoured by activist investors who turn up on shareholder registers usually with a sum-of-the-parts argument in mind. That’s what led, for example, to the break-up of Cookson a decade ago into two separate listed companies, of which only Vesuvius now survives, and more recently encouraged GSK to offload its non-science brands joint venture Haleon.
Now household goods company Reckitt Benckiser has joined its peer Unilever in pushing through a portfolio clear-out as a way to deliver shareholder value. Unilever is dumping its lowest margin unit, ice creams, through a listing or buyout, and Reckitt wants to shed its poorer performing brands.
Ultimately, the strategy is intended to deliver leaner cost bases, and to free up management time to devote to higher-margin products with the best growth prospects. But Reckitt has an additional motive. The disposal plan offers a solution to the biggest problem in its portfolio, infant formula division Mead Johnson, a costly acquisition it deeply regrets.
Spin-offs and slimming down can be well received by markets — both the Unilever and Reckitt plans got a good reception — but they must prove their value through cost savings and improved financial performance otherwise investors will lose faith, leaving the companies even more vulnerable to takeover.
BUY: ITV (ITV)
The Hollywood writers’ strike has weighed on the TV company’s sales and cash flow, writes Jemma Slingo.
This time last year, ITV reported a decline in advertising sales but said its production arm was growing well. Twelve months down the line, the situation has reversed. Total advertising revenue climbed by 10 per cent in the first half of 2024 (helped by the Euros), but ITV Studios sales tumbled by 13 per cent.
This was not unexpected. The US writers’ and actors’ strikes have delayed around £80mn of revenue from 2024 to 2025, and weak demand from European broadcasters has made the situation worse. The strikes have had a nasty effect on cash flow too: cash conversion in the period was just 17 per cent, reflecting a “significant increase” in working capital as filming roared back to life.
From a profit perspective, however, ITV is thriving. Group Ebita — its preferred metric — jumped by 40 per cent to £213mn, helped by operational gearing in the advertising division, £23mn of cost savings and higher margin, back catalogue sales from the production arm. ITV said it is still on track to deliver £40mn of savings this year.
There were some announcements in the latest results that may cause consternation. For starters, the production business is only expected to bounce back in the final quarter of the year, leaving plenty of room for things to go wrong. Management has also downgraded its revenue outlook for the division from “flat” to a low single-digit decline. This is due to a “small number of key productions being contracted as executive productions rather than co-production” which impacts when sales are recognised. While this isn’t expected to affect profitability, shareholders are unlikely to be thrilled.
Given the improved outlook for advertising, however, ITV’s rigorous cost saving plan, and historically strong production arm, we think a forward price/earnings multiple of 8.7 times still looks too low.
HOLD: Reckitt Benckiser (RKT)
Guidance has been cut after a tornado hit US warehouse, writes Christopher Akers.
The big news on results day at Reckitt Benckiser was the announcement that it plans to sell some of its homecare brands, including Air Wick, Mortein, Calgon and Cillit Bang, by the end of 2025, and is considering whether to offload the Mead Johnson nutrition business too.
As part of the company’s new focus on its “high-growth, high-margin powerbrands”, it wants to dispose of a home care brand portfolio which brought in 13 per cent of net revenue last year. From January 1 2025, it will restructure its operating segments and report results under the three divisions of Reckitt (home to its best-performing brands), Essential Home, and Mead Johnson.
The last of these units could soon be exited if a buyer can be found, as “all strategic options” are being considered.
A $5bn impairment was recorded on the purchase in 2020, and the Chinese business was sold in 2021. Mead Johnson is currently mired in legal cases in the US, as is formula rival Abbott Laboratories, due to allegations that their products caused bowel disease necrotizing enterocolitis in infants. Reckitt, which denies the claims, lost a $60mn court case on the issue in Illinois in March.
Alongside divestment hopes, the company is also accelerating plans to cut fixed costs, and expects to post £1bn-worth of restructuring charges over the next three years as it targets reducing the cost base by at least 300 basis points.
In the background of the unexpected strategic overhaul was a mixed half-year performance. Health and nutrition revenues went backwards, down 4 per cent and 11 per cent, respectively, while hygiene sales were flat. The gross margin climbed 120 basis points to 61 per cent, while a 5 per cent decline in adjusted operating profit was better than expected, despite a 100 basis points increase in brand equity investment.
Management cut its annual like-for-like net revenue growth guidance from a range of 2-4 per cent to 1-3 per cent in the aftermath of the damage caused to the company’s Mount Vernon, Indiana, warehouse by a tornado earlier this month.
A valuation of 13 times forward consensus earnings compares to 19 times at consumer goods peer Unilever. The shares have been weak, down by almost a third over the past five years, and the lowly valuation could attract takeover interest. But much depends on what happens with Mead Johnson.
HOLD: Arbuthnot (ARBB)
The boutique financial services group must wait for fixed rates to catch up as profits fall, writes Julian Hofmann.
Posh bank Arbuthnot suffered from a technical quirk as interest rates on £3bn of fixed deposit accounts moved from 1.92 per cent to 3.19 per cent, costing the bank £35.2mn. This was the main reason for the fall in reported profits and reflected the fact that it can take up to a year for a change in interest rates at the Bank of England level to adjust properly through a commercial bank’s income statement. Management expects that this trend will continue for the remainder of the year.
Historically, Arbuthnot tends to suffer a relatively indifferent first-half performance as its private client base will use balances to pay tax liabilities during the period. The £235mn reduction in deposits was largely seasonal, but also the result of shifting to a gilt-based saving product for some customers and encouraging others that are “non-relationship” to shift expensive maturing deposits elsewhere.
However, despite these outflows, since the start of the year the bank’s deposit balances increased by 3 per cent, or £103mn, driven largely by the bank’s strategy of attracting current accounts from underserved small and medium-sized companies (SMEs).
Wealth management is another key selling point for Arbuthnot and inflows here of 15 per cent over the period meant that funds under management ended the half at £1.96bn. Two-thirds of the inflows were from new clients.
The bank’s management forecast that falling interest rates would have an impact on profits in the short term.
Arbuthnot is a paradox for investors; the bank’s stability and secure ownership are an attraction, but the lack of free-float liquidity means the share price is not an accurate gauge of prospects or sentiment.