Focus: M&A "balances" baker Aryzta in North America
Aryzta enhances channel mix in North America
Switzerland-based bakery group Aryzta announced two acquisitions in North America yesterday (10 March) as it revealed sales in the region came under pressure during the first half of the year. The acquisitions bring Aryzta a number of benefits - not least rebalancing the group's channel mix in the region. Katy Askew reports.
With 90% of second-baked sales originating in Europe and North America, the need to grow markets that are essentially flat is clear. This means expanding market share and acting as a consolidator in the sector.
To this end, Aryzta has played an active role in M&A in both North American and Europe. In 2010, the group agreed to pay a combined US$1.08bn for US firms Fresh Start Bakeries and Great Kitchens. Last year, Aryzta struck a deal to buy privately-owned German baker Klemme to boost its presence in European retail.
Europe-based Aryzta has been accelerating expansion in North America in particular, increasing the proportion of sales it generates in the market. During 2013, Aryzta's North American sales accounted for 47% of group sales. Aryzta looks set to drive continued growth in the region and the group announced the acquisition of two bakeries in the region - Pineridge Bakery in Canada and Cloverhill Bakery in the US - yesterday.
The company said it had agreed to pay a combined EUR730m (US$1.01bn) for the businesses, with further post-acquisition investments of EUR70m anticipated.
The inclusion of Pineridge and Cloverhill in Aryzta's results are expected to generate double-digit earnings per share growth in fiscal 2015, the first full year the businesses, the company said. Aryzta revealed it typically targets a 15% return on investment in the first three years of completing an acquisition.
While the timing of completion remains uncertain - because the deals are still pending regulatory approval - CFO Patrick McEniff said their earnings contribution in the back half of this year is expected to offset the negative impact of currency exchange. "We have had this temporary FX headwind of around 5% in Q2. We are anticipating that those transactions should offset that in H2," he said.
Speaking during an analyst call, McEniff revealed the businesses generated combined revenues of EUR400m 2013 and "have been experiencing double digit growth". Margins at each bakery are "similar" to Aryzta, he added.
Putting Aryzta's rating under review, Kepler Cheuvreux analyst Christoph Ladner observed the acquisitions should boost the top line - a necessary move given weak comparable trends in North America.
He wrote: "The acquisition of Pineridge Bakery and Cloverhill Bakery will once again boost revenues... On the other hand we have no reason to increase our estimates on rather subdued organic growth and margins."
Aryzta announced the news as it reported a 3.5% drop in sales from its North American businesses during the six months to the end of December. Revenues in the region were hit by a "difficult Q2 for food solutions" and the exit of "less attractive business" in the period, management revealed.
The acquisitions of the two bakery businesses aim to address some of the issues that hit first-half sales in North America. In particular, Pineridge and Cloverhill will rebalance Aryzta's channel mix - increasing the group's exposure to retail and balancing out volatility in the market through a more diversified business model.
"[Pineridge and] Cloverhill deal in the retail space. We will get more balance between retail and foodservice with the acquisitions," chief executive Owen Killian suggested.
Davy Research analyst John O'Reilly said the acquisitions would ensure Aryzta was less "dependent" on existing channels.
"These look to be designed to diversify bakery operations from near total dependence on frozen par-baking and from in-store preparation. In addition, new channels, vending and the convenience store sectors are being engaged in North America," O'Reilly said.
Pineridge offers Canadian retailers a range of thaw-and-sell, ready-to-serve, freezer-to-oven and proof-and-bake products. Killian stressed the business provide Aryzta with increased access to the "attractive" Canadian market. Meanwhile, Cloverhill ramps up Aryzta's presence in convenience channels through its customer base and single serve, ready to eat, pre-wrapped technology. The business provides Aryzta with an "attractive entry point" in the "new category" of ready to eat snacks, management revealed.
"When you look at the speciality foods segment, you've got frozen dough... par-baked, thaw-and-serve and RTE packaging. What we are doing with Cloverhill is following a consumer trend towards convenience. With most consumers they require an element of all of those... it helps us on that journey, it accelerates it and it provides up with better channel access in being able to deliver all of that," Killian said.
Through the Cloverhill and Pineridge transactions, Aryzta gains access to new customers and capabilities. But more than that, the group is buying spare capacity. "[Cloverhill and Pineridge] have both been investing in capacity and their growth is largely coming from newly established capacity. There is also untapped capacity that we believe we can unlock," Killian said.
Key to Aryzta's ability to unlock this capacity are organisational changes that the group has undergone, management suggested. "The cross selling capability is very well established in the business," Killian insisted. "In other words we have single offices teams for all of our top customers.... The fact that we make these acquisitions indicates our level of confidence that our business can take this on board and we do have the relationships with customers to unlock this growth."
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