Aryzta is awaiting the outcome of an external review

Aryzta is awaiting the outcome of an external review

European bakery business Aryzta, which is in the midst of a strategic review, will need to sell an additional EUR600m (US$673.8m) of assets to reduce its "unsustainable financial structure".

That is the opinion of Veraison Capital, a Switzerland-based asset manager, and Cobas Asset Management in Spain, which together have pooled their holdings, whereby the group now holds 20% of the Swiss-Irish bakery firm, making them the largest shareholders.

The investor group took the unusual decision yesterday (2 July) to host a conference call with analysts and the media to press home their demands for change at Zurich-based Aryzta, which has been struggling to revive its financial performance in recent years, burdened by a huge debt pile and a protracted under performance in North America, despite a EUR800m capital-raising exercise in 2018 and around EUR380m of asset disposals.

On Thursday, the investors said they are not seeking a "fire sale" but instead are looking for Aryzta to focus on its core business, reduce risk by cutting debt and rebuild trust among shareholders and the investment community as they noted how the share price has fallen 70% since 2018.

Taking Aryzta's hybrid debt into account, they estimate leverage, based on debt/EBITDA is around 7.1 times, more than the 2.5 to three times industry average. Selling further assets would take it "out of the hands of creditors", the shareholders said.

"If your debt level is higher you are constantly focused on delivering liquidity, paying your responsibilities to the banks and other creditors and you don't have the flexibility, you don't have the room for manoeuvre that you need to really develop the business further," they explained. "It is clear that the current Covid-19 situation might make the situation more difficult but is not the reason for the troubles Aryzta is in. The troubles go further back."

Chief executive Kevin Toland has sold off a number of "non-core assets" – including foodservice businesses Delice de France and La Rousse Foods, as well as Aryzta's stake in French frozen food retailer Picard – but net debt still stands at EUR1.7bn, including the hybrid instruments.

Veraison and Cobas are also calling for Toland to step down from the board so he can focus on his core duties, and have put forward three nominees: Urs Jordi as chairman, along with Armin Bieri and Heiner Kamps, who is currently a member of the investor group. 

The board has "overseen significant and consistent value destruction over the last five years", they said.

Aryzta generates the majority of its revenue in Europe and North America, with a small contribution from the 'rest of the world', namely South America, Asia, Australia and New Zealand. The company sells into the retail, foodservice, convenience and quick-service restaurant channels, which includes McDonald's and Subway. It also supplies products under its private label, as well as its own brands.

Analysts have suggested any of those business segments or regions could feature in Aryzta's current strategic review – it hired French investment bank Rothschild & Co. in April to conduct it – and any of those could come up for disposal.

But the shareholders have been critical of Aryzta in its agreement, upon their request, to hold an extraordinary general meeting scheduled for mid-August. They are concerned before then Rothschild will make its recommendations to the board before they have had a chance to negotiate as such.

In the view of Veraison and Cobas, Aryzta's European operations have stagnated over the last five years and the company has lost market share, while North America is in decline and the rest of world is small in comparison.

Also, profits have failed to rise with any solid momentum, they said, outlining some key objectives: "Develop an engine for profitable growth, accelerate NPD and innovation; accelerate channel penetration; accelerate quality and efficiency gains; and accelerate customer development."

Veraison and Cobas concluded: "Focusing on the core, Aryzta today runs about EUR3.5bn in sales, 53 bakeries have a large product assortment - that's foodservice business, bakery business on five continents in numerous distribution channels, relies on private label as well as their own brands - so this generates complexity which makes it very hard to believe that Aryzta will really be able to add value in each and every part of this complex structure."

See just-food's recent analysis: Is outright sale of Aryzta the ultimate solution to debt woes?