Why Toshiba and Johnson & Johnson are the latest corporate behemoths doing the splits

Published

3 years ago

November 12, 2021

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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.

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.

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.

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.

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.

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

Cineworld owners screen plan for stock market comeback in New York

Published

11 hours ago

November 17, 2024

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Cineworld owners screen plan for stock market comeback in New York

Cineworld’s hedge fund backers are drawing up plans to return the cinema operator to the public markets amid continuing uncertainty about the future of dozens of its British sites.

Sky News has learnt that the company’s owners are at the early stages of considering a New York listing for the business, with the first half of 2026 considered a likely window for it to take place.

City insiders said that a flotation was likely to encompass Cineworld’s operations outside the UK, with the group’s board expected to consider a sale of the British operations at some point.

They cautioned, however, that no decisions had been reached and would not be for some time.

The fate of Cineworld’s business in the UK has been mired in uncertainty for months, with the company initially exploring a sale of it before turning to a restructuring plan which compromises many of its landlords and other creditors.

It has announced the permanent closure of six sites, but it emerged last month that nearly 20 more were at risk of being shut amid ongoing talks with property owners.

The restructuring plan is due to complete later this month, which some landlords have opposed over the fairness of its terms.

Documents circulated as part of the restructuring plan process highlighted the fact that the company did not have sufficient funding to meet a quarterly rent bill on June 24 of £15.9m.

“Absent this funding, the UK Group would have been insolvent on a cashflow basis,” they said.

Other cinema operators, such as Odeon, are now poised to step in to take over small numbers of Cineworld’s other sites.

The company trades from more than 100 locations in Britain, including at the Picturehouse chain, and employs thousands of people.

Cineworld grew under the leadership of the Greidinger family into a global giant of the industry, acquiring chains including Regal in the US in 2018 and the British company of the same name four years earlier.

Its multibillion-dollar debt mountain led it into crisis, though, and forced the company into Chapter 11 bankruptcy protection in 2022.

It delisted from the London Stock Exchange in August 2023, having seen its share price collapse.

In addition to the UK, Cineworld also operates in central and Eastern Europe, Israel and the US.

Cineworld has been contacted for comment.

Business

Former Tory minister Heaton-Harris eyes top job at football regulator

Published

2 days ago

November 16, 2024

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Former Tory minister Heaton-Harris eyes top job at football regulator

A former Conservative cabinet minister has thrown his hat into the ring to become the inaugural chair of Britain’s new independent football regulator.

Sky News has learnt that Chris Heaton-Harris, who stood down as an MP at July’s general election, is among those who applied for the role ahead of a deadline on Friday.

Mr Heaton-Harris is himself a qualified football referee who has officiated at matches for decades.

A former Northern Ireland secretary and chief whip under Rishi Sunak and Boris Johnson respectively, he said in 2022 of his part-time career as a football official: “I took a [refereeing] course and that was it, I’ve been going ever since.

“Football has done wonders for me throughout my life so I would recommend it to everybody.”

Mr Heaton-Harris is among a large number of people who have applied for the role of chair at the Independent Football Regulator (IFR), according to officials.

A publicly available timetable for the search says that interviews for the £130,000-a-year post will end on 11 December, with an appointment expected in the new year.

It is the second time that the government has embarked on a search for a chair for the IFR after an earlier hunt was curtailed by the general election.

The role will be based at the watchdog’s new headquarters in Manchester and will require a three-day-a-week commitment.

The Football Governance Bill had its second reading in the House of Lords this week, as part of a process that will represent the most fundamental shake-up in the oversight of English football in the game’s history.

The Labour administration has dropped a previous stipulation that the regulator should have regard to British foreign and trade policy when determining the appropriateness of a new club owner.

The IFR will monitor clubs’ adherence to rules requiring them to listen to fans’ views on issues including ticket pricing, while it may also have oversight of the parachute payments made to clubs in the years after their relegation from the Premier League.

The top flight has issued a statement expressing reservations about the regulator’s remit, while it has been broadly welcomed by the English Football League.

The IFR’s creation will come with the Premier League embroiled in a civil war over Manchester City‘s legal battles emanating from allegations that it breached the competition’s financial rules.

Next week, the 20 Premier League clubs will meet for a lengthy shareholder meeting, with a vote on amended Associated Party Transaction rules hanging in the balance.

The league needs 14 clubs to vote in favour for the rule changes to be passed.

Contrary to earlier expectations, however, a detailed discussion on a financial distribution agreement between the Premier League and EFL is unlikely to be on the agenda.

A Department for Culture, Media and Sport spokesperson said: “The process for recruiting the Independent Football Regulator chair is under way but no appointment decisions have been made.

“We do not comment on speculation.”

This weekend, Mr Heaton-Harris could not be reached for comment.

Business

Pizza Hut UK hunts buyer amid Budget tax hike crisis

Published

2 days ago

November 16, 2024

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Pizza Hut UK hunts buyer amid Budget tax hike crisis

Pizza Hut’s biggest UK franchisee has begun approaching potential bidders as it scrambles to mitigate the looming impact of tax hikes announced in last month’s Budget.

Sky News has learnt that Heart With Smart (HWS), which operates roughly 140 Pizza Hut dine-in restaurants, has instructed advisers to find a buyer or raise tens of millions of pounds in external funding.

City sources said this weekend that the process, which is being handled by Interpath Advisory, had got under way in recent days and was expected to result in a transaction taking place in the next few months.

HWS, which was previously called Pizza Hut Restaurants, employs about 3,000 people, making it one of the most significant businesses in Britain’s casual dining industry.

It is owned by a combination of Pricoa and the company’s management, led by chief executive Jens Hofma.

They led a management buyout reportedly worth £100m in 2018, with the business having previously owned by Rutland Partners, a private equity firm.

One source suggested that as well as the talks with external third parties, it remained possible that a financing solution could be reached with its existing backers.

HWS licenses the Pizza Hut name from Yum! Brands, the American food giant which also owns KFC.

Insiders suggested that the increases to the national living wage and employers’ national insurance contributions (NICs) unveiled by Rachel Reeves would add approximately £4m to HWS’s annual costs – equivalent to more than half of last year’s earnings before interest, tax, depreciation and amortisation.

One added that the Pizza Hut restaurants’ operation needed additional funding to mitigate the impact of the Budget and put the business on a sustainable financial footing.

The consequences of a failure to find a buyer or new investment were unclear on Saturday, although the emergence of the process comes amid increasingly bleak warnings from across the hospitality industry.

Last weekend, Sky News revealed that a letter co-ordinated by the trade body UK Hospitality and signed by scores of industry chiefs – including Mr Hofma – told the chancellor that left unaddressed, her Budget tax hikes would result in job losses and business closures within a year.

It also said that the scope for pubs and restaurants to pass on the tax rises in the form of higher prices was limited because of weaker consumer spending power.

That was followed by a similar letter drafted by the British Retail Consortium this week which also warned of rising unemployment across the industry, underlining the Budget backlash from large swathes of the UK economy.

Even before the Budget, hospitality operators were feeling significant pressure, with TGI Fridays collapsing into administration before being sold to a consortium of Breal Capital and Calveton.

Sky News recently revealed that Pizza Express had hired investment bankers to advise on a debt refinancing.

HWS operates all of Pizza Hut’s dine-in restaurants in Britain, but has no involvement with its large number of delivery outlets, which are run by individual franchisees.

Accounts filed at Companies House for HWS4 for the period from 5 December 2022 to 3 December 2023 show that it completed a restructuring of its debt under which its lenders agreed to suspend repayments of some of its borrowings until November next year.

The terms of the same facilities were also extended to September 2027, while it also signed a new 10-year Pizza Hut franchise agreement with Yum Brands which expires in 2032.

“Whilst market conditions have improved noticeably since 2022, consumers remain challenged by higher-than-average levels of inflation, high mortgage costs and slow growth in the economy,” the accounts said.

It added: “The costs of business remain challenging.”

Pizza Hut opened its first UK restaurant in the early 1970s and expanded rapidly over the following 15 years.

In 2020, the company announced that it was closing dozens of restaurants, with the loss of hundreds of jobs, through a company voluntary arrangement (CVA).

At that time, it operated more than 240 sites across the UK.

Mr Hofma and Interpath both declined to comment.