Activist that shook up Aryzta took bread out of the oven way too soon

Activist investor Toronto-based Vision Capital may be causing headaches for Ires Reit board members as it presses for the property group to put itself on the market.

However, investors in another listed company with deep Irish roots, baked goods group Aryzta, owner of the Cuisine de France brand and supplier to the likes of McDonald’s, Lidl and Aldi, have reason to cheer the intrusion of a similarly pesky shareholder three years ago.

That activist, Veraison Capital, was more interested in deep restructuring and refocusing of a business that had long lost its way — and actually fought a plan by Aryzta’s then-management team to sell up.

Shares in the Swiss-based company, which also saw its centre of gravity move from Dublin to Zurich during the overhaul, are changing hands at more than double the price of a bid that emerged in late 2020 from US hedge fund Elliott

The turnaround since the investment fund orchestrated a boardroom coup in September 2020, which installed industry veteran Urs Jordi as chairman, has been impressive.

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Shares in the Swiss-based company, which also saw its centre of gravity move from Dublin to Zurich during the overhaul, are changing hands at more than double the price of a bid that emerged in late 2020 from US hedge fund Elliott, a suitor that was courted by the previous board led by Irish corporate doyen Gary McGann. It has outperformed the wider Zurich market by a factor of 11 over the period.

Aryzta reported last month that its revenues jumped 24 per cent to more than €1 billion for the six months to December, with demand for its products, including par-baked pastries and breads and frozen cookies, rising almost 6 per cent despite it pushing its prices up 19 per cent to claw back its own rising costs, as the Ukraine war sent the price of flour and butter soaring (even if they are now well off last year’s peaks).

Earnings before interest, tax, depreciation and amortisation (ebitda) more than doubled to €129 million to beat market expectations of €117 million. UBS analysts reckon Aryzta’s gradual shift from commoditised breads to more speciality offerings, like sourdough and walnut baguettes, are helping margins when the wider European market is more challenged.

Under Urs, a trained baker and confectioner, Aryzta has also made massive headway in cutting its debt pile with the help of the sale of unwanted assets, including a deeply problematic US business and a Brazilian unit.

Net debt — including a chunk of hybrid debt-equity instruments that don’t have a repayment date but where interest costs had been rolling up for years — has fallen from €1.89 billion in mid-2020, or 7.3 times ebitda, to €1.1 billion last July.

The past 10 months has also been marked by Aryzta buying back €250 million of its hybrid notes, leaving 590 million Swiss francs (€599 million) of such debt outstanding.

While it could be argued that the perpetual nature of the hybrid debt — which peaked at €973 million two years ago, including accumulated interest — saved the business from total collapse during its darkest days, Jordi’s paydown plan has, according to analysts, made Aryzta much more investible.

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Analyst Jon Cox of Kepler Cheuvreux sees Aryzta’s net debt falling to a little over €600 million over the next two years — or just two times earnings, which is well below the company’s three-times target.

Still, for now, Aryzta remains only an investment for punters “willing to take risks” with what remains a highly-indebted company, said Patrik Schwendimann, an analyst with Zuericher Kantonalbank said in a recent report.

Irish investors, including a number of co-ops and farmers, are estimated to account for less than 10 per cent of all shareholders. Many more fortunate local shareholders sold out years ago when the going was good.

Investors started to get nervous in March 2015 when the company posted weaker-than-expected results

Formed in 2008 through the merger of then Owen Killian-led IAWS in Dublin and Swiss group Hiestand, Aryzta subsequently went on a massive mergers and acquisitions binge under Killian, which would see the stock peak at close to ChF19 [Swiss francs] in 2014.

Investors started to get nervous in March 2015 when the company posted weaker-than-expected results and followed up two weeks later with the questionable purchase of a non-controlling 49 per cent stake in French frozen foods firm Picard.

Things went from bad to worse the following January when it emerged that the group’s US cookies business, Otis Spunkmeyer, bought in 2014 as part of its purchase of Illinois-based Cloverhill Bakery, was losing major contracts from food groups that outsourced production to it — after Aryzta decided to go head-to-head with them with products on retail shelves.

By early 2017, Killian and some of his key lieutenants were gone. McGann was subsequently hired to try to turn the ship around. He brought in former DAA chief Kevin Toland as his chief executive.

The duo would raise hundreds of millions from disposals, including most of Aryzta’s stake in French frozen foods business Picard, its former La Rousse Foods unit in Ireland, two Cloverhill facilities in the US, and a 50 per cent stake in a UK flatbreads business. But they dithered for too long on raising equity, before launching a highly dilutive €800 million cash call in late 2018.

Veraison would go on to sell almost all of its shares by the end of that year, when the stock was trading at an average price of about 0.7 Swiss francs

By the time Veraison parked its tank on the front lawn in May 2020 — joining forces with another dissident, Cobas Asset Management, within months of the pandemic hitting orders from quick-service restaurants and the catering industry as the world went into lockdown — the board, seemingly fresh out of other ideas, already had investment bankers Rothschild advising on a potential sale.

McGann and co were in advanced talks to sell the company to Elliott Management, led by New York hedge fund billionaire Paul Singer just before the boardroom coup that September. A subsequent bid of ChF0.8 per share from Elliot was shot down by the new regime, led by Veraison.

Strangely, Veraison would go on to sell almost all of its shares by the end of that year, when the stock was trading at an average price of about ChF0.7, below Elliott’s offer. The activist still doubled its initial ChF33 million outlay in the process.

Had it left the stake to bake a bit more in the oven, it would have more than doubled its money again.