What brought Aryzta to the point of an €800m ‘rescue’?

Eleven months after taking over the helm of beleaguered baked goods group Aryzta, Kevin Toland finally caved in to the inevitable this week, unveiling plans to sell €800 million of stock to slash the company's debt pile and give him room to work on a turnaround plan.

Much of the 68 per cent slump in the share price under the new chief executive’s watch – before Monday’s announcement – could have been avoided if he had bitten the bullet earlier.

Toland, the former head of airport operator DAA and erstwhile senior executive at nutrition group Glanbia, inherited something of a basket case at Aryzta after long-time boss Owen Killian quit following a series of profit warnings and weak financial results.

Formed a decade ago through the merger of Dublin-listed IAWS, best known here for its Cuisine de France brand, and Swiss group Hiestand, Aryzta subsequently went on a massive mergers and acquisitions binge. However, investors began to raise questions in March 2015 when the company posted weaker-than-expected results and followed up two weeks later with a questionable deal: the purchase of a 49 per cent stake in French frozen foods firm Picard.

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Stability

Any lingering investor confidence in Killian’s team collapsed like overproofed dough in January last year when Aryzta fessed up to major problems in North America. Its US cookies business, Otis Spunkmeyer, bought in 2014 as part of its purchase of Illinois-based Cloverhill Bakery, had been 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.

Toland had a number of key tasks when he took on the job: stabilising the operation; tackling its €1.7 billion debt mountain; working out if there was a viable business at the end of the day; proceeding at pace with the sale of unwanted assets; and, most importantly, rebuilding shareholder trust. The result so far is mixed, at best.

For Jean-Philippe Bertschy, an analyst with Swiss bank Vontobel, Toland started off on the wrong foot when he set “very aggressive” targets last November – predicting earnings before interest, tax, depreciation and amortisation (ebitda) would stabilise in Aryzta’s financial year to July 2018.

Shock warnings

Within two months, Toland was forced into a shock warning, saying full-year earnings would fall 20 per cent. He blamed rising butter prices in Europe, “Brexit-related pressures” in the UK and soaring transport and labour costs in the US, where the company lost a third of its Cloverhill workforce – about 800 staff – after a raid by federal authorities on immigrant workers without proper papers.

Then, in May, Aryzta issued a fresh profit alert, citing many of the same issues. Concerns that the group would breach its banking covenants subsequently went into overdrive, culminating in the stock slumping by more than a third in value in the first eight days of trading in August.

Toland has raised about €230 million so far from disposals – including Irish restaurant supplier La Rousse and its troubled Cloverhill facilities – and a dividend following a Picard refinancing, according to Berenberg analyst Fintan Ryan in London.

However, until now, the chief executive doggedly resisted going cap-in-hand to the market for fresh cash. This has led to a massive destruction of value.

While some analysts predicted that Aryzta would need about €350 million of fresh capital to tide it over, the size of the €800 million plan has come as a surprise.

Patchy information

However, the hope is that it will allow Aryzta repay some of its more expensive debt and give the company the firepower to undergo a proper restructuring programme. For all the money Killian spent on deals over the past decade, it appears that the group was far from properly integrated.

This, according to Jonathan Fyfe at Swiss investment bank Mirabaud, has left Toland with poor and patchy information on parts of the business, leading to the type of shock profit warnings we've seen.

The additional funds will also give Aryzta more negotiating power as it seeks to get the best possible price for its Picard holding, which is said to be worth between €350 million and €360 million.

For Fyfe, the share sale is nothing short of a “rescue” deal. But what Aryzta “desperately needs” is to increase business orders and volumes, with its facilities only running at about 60 per cent of capacity, he said.

Aryzta was at least able to say this week that there were no financial surprises in its fourth quarter. But shareholders will need clarity on the impact of a recent wheat price spike on future earnings, following a summer drought in Europe, if Toland wants to avoid his share sale falling flat.

Seamus Ross retreats from prying market eyes

Developer Seamus Ross’s flirtation with the stock market didn’t last long; he has pulled out of talks in recent weeks to reverse his Alanna Homes business into a publicly quoted cash shell.

The shell in question, Dublin-listed Zamano, a former mobile technology company that sold its operating assets to management last year, said last Monday that the proposed reverse takeover deal is now off the table. While it never mentioned Ross or Alanna, it was the worst-kept secret in town.

Zamano said that it will now move to return its remaining cash – estimated at €5.3 million – to shareholders “as quickly and efficiently as possible”. Publicity-shy Ross, meanwhile, will be able to avoid the market and media scrutiny that would have accompanied a stock market flotation.