Food group Aryzta consumed with its finances rather than markets

“When you have the CEO and the CFO meeting customers to talk about the balance sheet, debt covenants and risks of breech as distinct from talking about orders, innovation and new markets, you know have a problem.”

This was Aryzta chairman’s Gary McGann answer to a question about the scale of the food group’s planned €800 million rights issue and when he and the board first realised how big it would have to be to address the company’s ailing balance sheet.

His answer illustrates just how consumed the company has become with its finances.

“We were repeatedly finding ourselves in that situation,” he told reporters at Aryzta’s annual general meeting in Zurich on Thursday, where the company’s capital-raise strategy was narrowly approved by shareholders against a backdrop of anger and frustration on the part of investors.

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The move will technically dilute shareholdings by 90 per cent if investors fail to take up the rights issue and comes on the back of a 90 per cent collapse in shareholder value over the past three years. The discount on the new shares – at 40 per cent – was also larger than expected, suggesting the underwriting banks don’t see it as a slam dunk.

These are challenging times for Aryzta’s shareholders and the company’s insistence that its strategy will once and for all draw a line under the current performance cycle was met with what can only be described as sceptical aquiescence.

“We need to get to a point where [chief executive] Kevin [Toland] at half-yearly results and quarterly updates is talking about the business, not about debt covenants and profit warnings,” McGann said.

Acquisitions binge

An eight-year-long acquistion binge under the previous team, led by former chief executive Owen Killian, saw the company lumbered with a massive €1.6 billion debt pile, nearly five times earnings, and drift away from its core competencies as a distributor of frozen baked goods.

Some €500 million of the capital raise will go towards paying down debt. It is expecting to raise an additional €450 million from disposals, including the offloading of its 49 per cent stake in French frozen food group Picard.

“The capital increase together with underlying business stability will go a long way to addressing the important issue of customer confidence in the business,” McGann told shareholders.

“We clearly underestimated both the nature and extent of the challenges facing this business. The reality is that the performance of this business has been in decline for a number of years,” he said.

In his address to investors, Toland played up the back-to-basics theme, suggesting the company’s focus was once again “narrow and deep”, meaning it was solely concerned with its core frozen business-to-business bakery business. “This is very quickly becoming what I would call a normal industrial operating group, focused on the customer and the performance,” he said.

Toland noted the company still held leading market shares in its five core categories: artisan breads, buns, doughnuts, biscuits and laminated dough. He promised the company’s finances would improve and this would once again create substantial shareholder value. How long shareholders will have to wait for another dividend remains unclear.