European bakery business ARYZTA is once again reassessing its business model after a difficult few years and now has agitating shareholders pressing for change too. Simon Harvey reviews the options as Covid-19 creates new challenges.

Aryzta has embarked on another strategic review with a possible solution a full-scale sale of the business as previous, and still ongoing efforts, to turnaround the struggling bakery firm have arguably yielded limited results.

The reasoning behind such a drastic proposition is Aryzta’s huge debt – currently around EUR1.7bn (US$1.8bn) – and the burden on its balance sheet that comes with servicing the load in terms of interest payments, according to Jon Cox, head of European consumer equities at Kepler Cheuvreux.

While chief executive Kevin Toland has been disposing of “non-core assets” under a three-year transformation programme, which is now nearing completion, it’s not been enough to soothe its Achilles heel, although the company has made progress in reducing the debt somewhat.

A key aim of Project Renew, launched in 2017, was to generate EUR450m from asset disposals and to deliver EUR200m in cost savings as the Zurich-based company, which is listed in Switzerland and Ireland, adjusted its business model to focus on the “core frozen bakery business”. But clearly, asset sales alone are not sufficient.

Last October, Aryzta completed the long-awaited sale of its stake in French frozen food firm Picard – it still retains 4.5% – for EUR156m, which took the value of asset disposals to EUR380m. However, it then went on to sell its UK foodservice business Delice de France through a management buyout for EUR7m, leaving scope for other divestments.

Agitating investors are now pressing for change in Aryzta’s business model, namely simplification, but what might that entail? It was revealed this week that Cobas Asset Management, which in 2018 was Aryzta’s biggest shareholder with around a 14.5% stake, has formed a “shareholder group” with Switzerland-based fund Veraison. Between them, they have pooled their holdings, whereby they now own 17.3%.

A spokesperson for Cobas, based in Spain, declined to confirm if other investors are among the new group, and would also not disclose the individual share ownership.

“A dire situation”

So what other options might be on the table? Three possibles spring to mind or a combination of all of them: An exit from the long-struggling North American operation; the sale of Aryzta’s remaining foodservice business; and, or, pulling out of the company’s other markets in South America, Asia, Australia and New Zealand.

Cox says: “I think they are in a bit of a dire situation and what they’ve decided to do is basically thinking, may be the best thing going forward is to be sold entirely or listen to offers for big parts of the business, which obviously most people would look at North America, which has been struggling.

“It really is a buyers’ market. The company is seriously distressed, and it has a terrible balance sheet. But from a fundamental perspective, I find it hard to believe someone is going to come in and offer them a load of money.”

Each option has its pros and cons, but ultimately, would Aryzta be able to raise enough funds to pay down debt sufficiently to create greater value for shareholders? 

“To be honest, with that much debt, and the situation the company is in, I’m not sure if there is a great deal of value there at the moment,” Cox adds. “I’m not sure whose going to pay ten times EBITDA or whatever, to pay off that debt and then make a little bit of money for the existing shareholders.” 

It emerged this week via a joint statement from Cobas and Veraison that they “have joined forces to actively contribute to improvements in the company”.  

The statement continued: “Trust in Aryzta must be rebuilt. Only in this way can Aryzta create value for all stakeholders again. However, the shareholder group believes that Aryzta should focus more strongly and that the complexity of the group must be significantly reduced.”  

Aryzta responded on Thursday (14 May) by saying it had launched the latest strategic review in April and hired France-headquartered investment bank Rothschild & Co. to explore options. The process is expected to be completed in July.

Share slump discomfort

The investors’ discomfort with Aryzta’s performance was coined in the context of the share price, which has fallen 69% this year to around 0.33 Swiss francs, and is down considerably from CHF13.28 five years ago. 

[Aryzta] “has once again slumped significantly more than the market”, the two said, despite the extra EUR800m of capital raised in 2018 to bolster its balance sheet and cut debt.

However, the precise intentions of Cobas and Veraison in issuing such a statement are of course not entirely transparent. It’s anyone’s guess as to what they mean by “trust”, and, one would presume, given Cobas is a relatively long-term investor, that it alone ultimately has some sort of faith in the company.

An outright sale of Aryzta may arguably not be the outcome they are seeking, especially from Cobas, as one presumes it would have exited the investment if it wasn’t entirely satisfied.

Europe and North America are the baking firm’s two-largest markets. But the latter would be the most obvious candidate for disposal – should Aryzta chose not to sell the company and opt for a piecemeal sell off – because it has consistently underperformed, while Europe is regarded by Toland as core to the business.

Aryzta generated EUR3.38bn in group revenues last year, with Europe contributing EUR1.71bn and North America EUR1.4bn. The rest of the world division posted earnings of EUR272m, or 8% of the group total.

Shareholders have previously urged Toland to quit North America but he has stuck with it. While views do change, he said in March, when issuing six-month results through January along with a profit warning: “With a clear strategy in North America that needs to be fully implemented, we are convinced that we are taking the necessary steps to build a strong successful business that will be a core contributor to the improvement of the overall group performance and its future growth prospects.”

North American sales in those six months declined 5.3% in organic terms, more than twice the pace of the group’s 2.5% drop, which was similar to the 2.8% decrease in Europe.

And Toland noted the North America division was “significantly behind” with respect to EBITDA, although he admitted revenues were expected to be “bumpy” in the first two quarters before picking up in the second half. 

In emphasis of his commitment to markets across the Pacific, the company invested in expanding capacity at a Canadian frozen bread plant in Ancaster, Ontario, last year to support “long-term growth plans”.

But Aryzta is consolidating its manufacturing operations in the region too, revealing in March it had closed three North American bakeries to add to two shut down in Europe.  

Plight of foodservice

Nevertheless, the crisis we are currently seeing in the foodservice segment amid government-imposed closures due to coronavirus, may have turned his hand.

Aryzta’s biggest earner in North America is quick-service restaurants (QSR) – mainly the supply of burger buns to fast-food chain McDonald’s – where associated organic revenues fell 6.6% in the first half through January, and that was before Covid-19 reared its ugly head. So the impact in the February-to-April quarter could be much worse.

“It’s probably very, very difficult for them, and we will get an indication of that in quarter three as to how bad sales are,” Cox says. “It basically means that this year and next year you are not going to really deleverage, and because you’ve got this big debt, which is just accruing interest, then they are in a much worse situation than they were six or seven months ago.”

Covid-19 has put Aryzta’s other foodservice operations in the spotlight too, namely the Coup de Pates business, which includes the La Carte d’Hubert range of poultry, meat, cold cuts, seafood, entrées, garnishes and cheeses. Coup de Pates, meanwhile, produces tarts, quiche, sandwiches, muffins and baguettes.

Along with Delice de France, Aryzta had also ditched another foodservice business in 2017, Ireland-based La Rousse Foods, suggesting Coup de Pates could also be ripe for disposal. 

In 2019, Aryzta’s global foodservice operations generated EUR960m in revenues, made up of EUR550m in Europe and EUR346m in North America, according to the company’s annual report.

QSR brought in another EUR977m, with most of that (EUR634m) coming from North America, and EUR153m from Europe.

Asked if foodservice could come up for disposal, Cox responds: “Potentially without a doubt. I think they will listen to any offers. Obviously all strategic and financial options are available to them but really you’re just mucking around the edges. Selling small units where you get 50m here or a 100m there, it doesn’t really do much of a dent. You need a big disposal.

“I’d be very surprised if they get more than EUR300m or EUR400m from what’s in North America. So you still have over a billion in debt.”

“Giving away the good stuff”

So what about other geographical operations? Aryzta lists South America, Asia, Australia and New Zealand as its main international destinations.

With combined revenues of EUR272m, the rest of the world segment is relatively small in terms of what valuations might come from any exit from those countries or regions, making such a move unlikely. And emerging markets in Asia and South America perhaps offer good potential too as consumer purchasing power continues to gain traction.

Cox at Kepler Cheuvreux says: “You could pull out of these smaller markets but actually that business is the part of it that actually grows and where the profitability is pretty decent. You would just be giving away the good stuff and the good stuff is not a lot.”

Rothschilds may come up with other solutions during the review process that haven’t been discussed here, and we will have to wait until July to see what comes to fruition. But debt levels are a rod in the back for Aryzta and the investment bank may well come up with an alternative option there.

Of the EUR1.7bn, so-called hybrid debt stood at EUR906m in January, consisting of perpetual, callable, subordinated notes, denominated in euros and Swiss francs. 

In the March earnings statement, Aryzta notes: “As the instruments have no maturity date and repayment is at the option of Aryzta, these perpetual callable subordinated instruments are recognised within other equity reserves at historical cost, net of attributable transaction costs, until such time that management and the board of directors have approved settlement of the applicable instrument.”

Nevertheless, the company still has EUR867m of obligations to deal with, although that has come down and has consequently reduced the net debt-to-EBITDA ratio to 1.96 times, the lowest since 2013.

Aryzta said in January that the “weighted average interest cost of the group debt financing facilities” was 1.9%, up from 1.7% in July last year.

Whatever outcome is decided from the review process, Aryzta is now in a much more precarious position, with so much uncertainty as to how long the crisis will last and when the out-of-home sector will reopen. And now it has another challenge, a global recession.

Cox says: “The world has changed in the past six months. So you’ve got a heavily indebted company going into this huge health and economic crisis and I think that’s why they have suddenly decided – we need to do something much more serious.”