The case for slicing up consumer conglomerates further
Investors are better able to value pure plays, while lacklustre units can dilute overall growth and margins at sprawling companies
For a species that went out of fashion decades ago, conglomerates are surprisingly tenacious. Asia is full of them; America’s century-old industrial Honeywell is only this year hiving off its aerospace business. Even after a wave of disposals, the likes of chemicals group BASF have more to shed to become single-focus plays. Sometimes splitting up is just too damned hard. Kraft Heinz paused plans to do so. It also failed to make good on a plot to combine pantries with Unilever.
The longstanding case against conglomerates, which virtually all trade at a discount to the sum of their parts, is twofold. Investors are better able to value pure plays, and wince as lacklustre units dilute overall growth and margins. Operationally, management is spread thin, inefficiencies emerge and capital allocation becomes a bunfight.
To this, add the unwinding of one-time supposed benefits: synergies from plugging several businesses into centralised back-office processes like IT are smaller now that technology has scythed these costs. From an investment perspective, diversity can be bought more productively: there is an entire universe of ETFs offering exposure to every sector under the sun.
Former conglomerates have often benefited from slimming down. Siemens’ share price has been on the ascent since it began hiving off units in 2018. Operating margins have improved, more or less steadily, since then; next year’s forecast of 13.5 per cent, according to Visible Alpha, is almost double 2018 levels. A sweeter example: confectioners Hershey and Barry Callebaut are set to benefit more, in percentage terms, from falling cocoa prices than broader food peers Nestlé and Mondelez.
Another camp in favour of slicing up conglomerates includes management consultants, investment bankers and others that advise on splits and other financial gymnastics. These have yielded over $3bn in the past five years for investment banks. Look at Mead Johnson Nutrition, originally spun off from Bristol Myers Squibb and eventually acquired by Reckitt. When the consumer goods conglomerate sold the China part of its infant formula business, £200mn of the $2.2bn price tag went on transaction and other costs.
A lot depends on the quality of assets that a company has. That’s an issue Kraft Heinz grapples with: splits are no cure if your portfolio is stuffed with brands that people aren’t keen to buy. By contrast, Berkshire Hathaway is the ultimate example of a conglomerate investors actually like.
Private equity companies are the modern incarnation of the conglomerate — often picking up the businesses such behemoths hive off. KKR bought Unilever’s spreads business; Advent and Cinven acquired Thyssenkrupp’s elevators unit, and are now reportedly selling it. Their model contains extra spice though: scooping up management and performance fees on a portfolio of businesses is more lucrative than simply running them.