Why Toshiba and Johnson & Johnson are the latest corporate behemoths doing the splits
Three is a trend, so the saying goes.
So news of two more big company demergers today, hot on the heels of the three-way break-up of 129-year-old US industrial giant General Electric announced on Wednesday, suggests that “doing the splits” is being looked at anew by company boards.
Toshiba, one of the best known companies in Japan, announced that it is breaking itself up – also splitting itself into three separate businesses.
One division will be focused on Toshiba’s electronics devices
The 146-year old company said one of the them would be focused on infrastructure, including products and services such as water treatment, trains, power turbines and nuclear-plant maintenance.
A second will be focused on electronic devices such as power semiconductors.
The third business, which will retain the Toshiba name, will manage the company’s stake in the flash-memory company Kioxia Holdings and other assets.
The move follows an accounting scandal six years ago – after which activist shareholders urged the company to break itself up.
The measure, however, may not go far enough with those investors that had wanted Toshiba to go private.
It received – and rejected – a takeover proposal in April from CVC, the private equity group, valuing it at $20bn.
General Electric announced a break-up earlier this week
Toshiba’s move attracted a good deal of interest since it has echoes of the GE announcement which, in turn, was at least partly inspired by similar moves two years ago by the German industrial stalwart Siemens.
Hot on the heels of that news came the announcement that Johnson & Johnson, the $429bn healthcare and consumer goods giant that is America’s 12th largest public company, is to split itself in two.
J&J, the world’s biggest healthcare company by both sales and market value, will hive off its consumer health business, the owner of brands such as Band-Aid, Listerine, Tylenol, Neutrogena and the eponymous Johnson’s baby oil, into a separate company.
The core J&J business will retain the company’s existing pharmaceuticals and medical devices businesses.
The consumer health business will be the smaller of the two but will still be a substantial company, with annual sales of $15bn a year, in its own right.
Like Toshiba, J&J has had a difficult few years, becoming embroiled in a costly legal battle with the US state of Oklahoma over its past sale of painkillers.
More recently it has been dogged by allegations – furiously denied – that its talcum powder caused cancer.
But Alex Gorsky, J&J’s chief executive, insisted that the demerger – due to take place during the next 18 to 24 months – was nothing to do with that.
Johnson & Johnson denies allegations about its talcum powder Pic: AP
He told the Wall Street Journal, which broke the story: “The best path forward to ensure sustainable growth over the long term and better meet patient and consumer demands is to have our consumer business operate as a separate healthcare company.”
As with Toshiba and GE, J&J is a stalwart of its country’s business scene.
It dates back some 135 years to when three brothers, Robert Wood Johnson, James Wood Johnson and Edward Mead Johnson, launched a business selling surgical dressings, supposedly after hearing a speech by the British surgeon and pathology and antisceptic pioneer Joseph Lister.
J&J sold the world’s first commercial first aid kits and the world’s first women’s sanitary products.
It moved into pharmaceuticals in 1959 and the more predictable cash flow from its consumer goods businesses helped finance research and development into the more up-and-down, but potentially more lucrative, drugs and medical devices businesses.
More recently, though, some investors have become unhappy at the relatively sluggish performance of the consumer goods arm.
Its sales rose by 1.1% last year while the pharmaceuticals arm grew by 8%.
Shareholders these days prefer to focus on specific sectors.
J&J boss Alex Gorsky said the demerger was the “best path forward to ensure sustainable growth”
An investor in J&J seeking exposure to its pharmaceuticals business will not, necessarily, want exposure to its consumer goods arm.
Activist investors such as Elliott, ThirdPoint, ValueAct and Starboard are now mighty beasts in the investment world, unafraid to take on some of the world’s largest companies.
No chairman or chief executive wants to see them popping up on their shareholder register.
Taking pre-emptive action, for example a demerger, is one way of avoiding costly, draw-out and debilitating battles with such investors.
J&J’s move is also in keeping with those of other big pharmaceuticals companies.
The German drugs giant Merck sold its consumer healthcare business, which owned brands including the hay fever remedy Claritin and the sun tan lotion maker Coppertone, to Bayer seven years ago.
Pfizer announced at the end of 2018 that it was merging its consumer healthcare business, the maker of Chapstick lip balm, Centrum multi-vitamins and Advil painkillers, with the consumer healthcare arm of Britain’s GlaxoSmithKline.
GSK emerged in effective control of the business and, in February last year, said it would demerge it.
J&J is going down a path previously trodden by GSK
That move effectively is the road that J&J now plans to go down.
But, as with GSK, it is not without risk.
Without the predictable cash flows of consumer healthcare products, the research and development arms of the stand-alone pharmaceuticals businesses will have to be more disciplined, channelling their resources only into work where a positive outcome can be guaranteed.
It was why Sir Andrew Witty, GSK’s former chief executive, always refused to break up the company.
His successor, Dame Emma Walmsley, decided something more radical was required.
Mr Gorsky, at J&J, has clearly reached the same conclusion.
One thing is clear: with three gigantic and storied companies – GE, Toshiba and J&J – all announcing break-ups within days of each other, demergers are very much back on the business agenda.
Business
Post Office scandal: Victims say government’s control of redress schemes should be taken away
Post Office scandal victims are calling for redress schemes to be taken away from the government completely, ahead of the public inquiry publishing its first findings.
Phase 1, which is due back on Tuesday, will report on the human impact of what happened as well as compensation schemes.
“Take (them) off the government completely,” says Jo Hamilton OBE, a high-profile campaigner and former sub-postmistress, who was convicted of stealing from her branch in 2008.
“It’s like the fox in charge of the hen house,” she adds, “because they were the only shareholders of Post Office“.
“So they’re in it up to their necks… So why should they be in charge of giving us financial redress?”
Nearly a third of Ms Hamilton’s life has been dominated by the scandal
Jo and others are hoping Sir Wyn Williams, chairman of the public statutory inquiry, will make recommendations for an independent body to take control of redress schemes.
The inquiry has been examining the Post Office scandal which saw more than 700 people wrongfully convicted between 1999 and 2015.
Sub-postmasters were forced to pay back false accounting shortfalls because of the faulty IT system, Horizon.
At the moment, the Department for Business and Trade administers most of the redress schemes including the Horizon Conviction Redress Scheme and the Group Litigation Order (GLO) Scheme.
The Post Office is still responsible for the Horizon Shortfall scheme.
Lee Castleton OBE
Lee Castleton OBE, another victim of the scandal, was bankrupted in 2007 when he lost his case in the civil courts representing himself against the Post Office.
The civil judgment against him, however, still stands.
“It’s the oddest thing in the world to be an OBE, fighting for justice, while still having the original case standing against me,” he tells Sky News.
While he has received an interim payment he has not applied to a redress scheme.
“The GLO scheme – that’s there on the table for me to do,” he says, “but I know that they would use my original case, still standing against me, in any form of redress.
“So they would still tell me repeatedly that the court found me to be liable and therefore they only acted on the court’s outcome.”
He agrees with other victims who want the inquiry this week to recommend “taking the bad piece out” of redress schemes.
“The bad piece is the company – Post Office Limited,” he continues, “and the government – they need to be outside.
“When somebody goes to court, even if it’s a case against the Department for Business and Trade (DBT), when they go to court DBT do not decide what the outcome is.
“A judge decides, a third party decides, a right-minded individual a fair individual, that’s what needs to happen.”
Pic: AP
Mr Castleton is also taking legal action against the Post Office and Fujitsu – the first individual victim to sue the organisations for compensation and “vindication” in court.
“I want to hear why it happened, to hear what I believe to be the truth, to hear what they believe to be the truth and let the judge decide.”
Neil Hudgell, a lawyer for victims, said he expects the first inquiry report this week may be “really rather damning” of the redress claim process describing “inconsistencies”, “bureaucracy” and “delays”.
“The over-lawyeringness of it,” he adds, “the minute analysis, micro-analysis of detail, the inability to give people fully the benefit of doubt.
“All those things I think are going to be part and parcel of what Sir Wynn says about compensation.
“And we would hope, not going to say expect because history’s not great, we would hope it’s a springboard to an acceleration, a meaningful acceleration of that process.”
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June: Post Office knew about faulty IT system
A Department for Business and Trade spokesperson said they were “grateful” for the inquiry’s work describing “the immeasurable suffering” victims endured.
Their statement continued: “This government has quadrupled the total amount paid to affected postmasters to provide them with full and fair redress, with more than £1bn having now been paid to thousands of claimants.
“We will also continue to work with the Post Office, who have already written to over 24,000 postmasters, to ensure that everyone who may be eligible for redress is given the opportunity to apply for it.”
Octopus Energy Group, Britain’s largest residential gas and electricity supplier, is plotting a £10bn demerger of its technology arm that would reinforce its status as one of the country’s most valuable private companies.
Sky News can exclusively reveal that Octopus Energy is close to hiring investment bankers to help formally separate Kraken Technologies from the rest of the group.
The demerger, which would be expected to take place in the next 12 months, would see Octopus Energy’s existing investors given shares in the newly independent Kraken business.
A minority stake in Kraken of up to 20% is expected to be sold to external shareholders in order to help validate the technology platform’s valuation, according to insiders.
One banking source said that Kraken could be valued at as much as $14bn (£10.25bn) in a forthcoming demerger.
Citi, Goldman Sachs, JP Morgan and Morgan Stanley are among the investment banks invited to pitch for the demerger mandate in recent weeks.
A deal will augment Octopus Energy chief executive Greg Jackson’s paper fortune, and underline his success at building a globally significant British-based company over the last decade.
Octopus Energy now has 7.5m retail customers in Britain, following its 2022 rescue of the collapsed energy supplier Bulb, and the subsequent acquisition of Shell’s home energy business.
In January, it announced that it had become the country’s biggest supplier – surpassing Centrica-owned British Gas – with a 24% market share.
It also has a further 2.5m customers outside the UK.
Kraken is an operating system licensed to other energy providers, water companies and telecoms suppliers. Pic: Octopus
Sources said a £10bn valuation of Kraken would now imply that the whole group, including the retail supply business, was worth in the region of £15bn or more.
That would be double its valuation of just over a year ago, when the company announced that it had secured new backing from funds Galvanize Climate Solutions and Lightrock.
Shortly before that, former US vice president Al Gore’s firm, Generation Investment Management, and the Canada Pension Plan Investment Board increased their stakes in Octopus Energy in a transaction valuing the company at $9bn (£7.2bn).
Kraken is an operating system which is licensed to other energy providers, water companies and telecoms suppliers.
It connects all parts of the energy system, including customer billing and the flexible management of renewable generation and energy devices such as heat pumps and electric vehicle batteries.
The business also unlocks smart grids which enable people to use more renewable energy when there is an abundant supply of it.
In the UK, its platform is licensed to Octopus Energy’s rivals EON and EDF Energy, as well as the water company Severn Trent and broadband provider Cuckoo.
Overseas, Kraken serves Origin Energy in Australia, Japan’s Tokyo Gas and Plentitude in countries including France and Greece.
Its biggest coup came recently, when it struck a deal with National Grid in the US to serve 6.5m customers in New York and Massachusetts.
Sources said other major licensing agreements in the US were expected to be struck in the coming months.
Kraken, which is chaired by Gavin Patterson, the former BT Group chief executive, is now contracted to more than 70m customer accounts globally – putting it easily on track to hit a target of 100m by 2027.
Earlier this year, Mr Jackson said that target now risked being seen as “embarrassingly unambitious”.
Last July, Kraken recruited Amir Orad, a former boss of NICE Actimize, a US-listed provider of enterprise software to global banks and Fortune 500 companies, as its first chief executive.
A demerger of Kraken will trigger speculation about an eventual public market listing of the business.
Its growth in the US, and the relative public market valuations of technology companies in New York and London, may put the UK at a disadvantage when Kraken eventually considers where to list.
One key advantage of demerging Kraken from the rest of Octopus Energy Group would be to remove the perception of a conflict of interest among potential customers of the technology platform.
A source said the unified corporate ownership of both businesses had acted as a deterrent to some energy suppliers.
Kraken has also diversified beyond the energy sector, and earlier this year joined a consortium which was exploring a takeover bid for stricken Thames Water.
This weekend, Octopus Energy declined to comment.
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