In late 2015, after a rocky six months in which Aryzta’s stock had tumbled 50 per cent amid a series of disappointing earnings results from the Swiss-Irish food group, Société Générale analyst Warren Ackerman said in a note to clients that it was “hard to imagine that investor sentiment could get much worse”.
He was wrong.
Shares in the Swiss-Irish food group took a nosedive last Tuesday after the company warned its earnings could drop by a further 20 per cent. Within hours the stock had tanked to an eight-year low of €28, wiping more than €1 billion off its market value.
Aryzta blamed the impact of Brexit, reduced revenue in the United States and higher-than-expected labour costs.
While wage inflation was a factor, Brexit appears to have been chucked into the mix to provide cover for the real source of its woes - North America.
The business there has suffered from overcapacity for several years, partly because of a shift in production of cookies for fastfood chain Subway from the US to Europe, and as a result of reduced volumes sold by its other big clients – McDonald's and Burger King.
The company has tried to fill the gap by directly marketing its brands to customers, mainly through its Otis Spunkmeyer and La Brea subsidiaries.
This, however, has put it in direct competition with other clients, who had outsourced their baking to Aryzta. In retaliation, several of these clients have pulled their business, resulting in a major reversal in revenue.
Higher margin
“Aryzta’s brand investment strategy in Otis Spunkmeyer will, in time, replace the co-pack volumes and create a more predictable and higher margin business,” the company said. Another bone of contention with shareholders has been the acquisition of a 49 per cent stake stake in French frozen food group Picard for €447 million.
The Picard brand, pitched as high-end convenience selling everything from frozen Chinese dumplings to tiramisù, is not viewed as a good fit for the company, which had previously signalled a move to get out of the frozen food market.
Aryzta's chief executive Owen Killian all but admitted this at a conference call with analysts this week. "The Picard investment, as you know, has been contentious with shareholders. If we didn't announce that the board will prepare to consider our strategy in relation to this joint venture then I think we'd be failing in the expectations of our shareholders."
These two factors have left the company in a funk since early 2015, with shares trading down nearly 55 per cent.
Killian did not help matters by finding himself in a position where he had to offload most of his own stake in the company in March.
In the latter part of last year, however, the share price recovered slightly, returning to over €40. The company also drafted in Smurfit Kappa’s Gary McGann as chairman, a move designed to quell investor anger.
Share sell-off
A line appeared to have been drawn in the sand, and Killian was given the benefit of the doubt. However, Tuesday’s negative trading update proved the last straw for many, precipitating a massive share sell-off.
Most chief executives would have been shown the door by now, and it is a fate that may still await Killian.
“I guess many investors would like to see [Killian step down],” said a fund manager responsible for his firm’s position as a top 15 investor. He declined to be named or to say whether he has made this view known to Aryzta.
Another former major investor said he sold his stock in recent years as he began to distrust the company’s projections and was concerned about the group’s high remuneration of its top executives.
Yet the chief executive's ties to the company run deep. Killian was there at the start when it was little more that a mishmash of failing fertiliser and feed businesses, then known as the Irish Agriculture Wholesale Society (IAWS).
In 1997, with Killian as number two, IAWS took a new tack, buying Cuisine De France and reinventing itself as a convenience food business. Cuisine De France's par-baked concept tapped into a new trend in the market. IAWS paid a hefty IR50 million (€64m ) for the franchise but only after other potential buyers, including Greencore, had baulked at the price.
Acquisitions
The revenue generated by Cuisine funded later acquisitions of Delice de France in 1999, La Brea Bakery in 2001, Groupe Hubert in 2005 and Otis Spunkmeyer in 2006, as well as an eventual tie-up with coffee and doughnut chain
Tim Hortons
.
Killian took over as chief executive in 2003, and spearheaded a tie-up with Swiss group Hiestand, which formed Aryzta in 2008.
Despite its difficulties, the company is still a world leader in pre-baked bakery goods with an annual turnover of nearly €4 billion.
Killian’s remuneration since he become chief executive has topped €28 million, while the value of his stake in the group peaked at €56 million in June 2014, at the prevailing exchange rate between Swiss francs and the euro at the time. He sold €17.4 million worth of shares that month, within six weeks of the stock hitting an all-time high.
He was forced to sell a further €16.8 million of shares – or two-thirds of his remaining stake – last March as the stock, held as collateral against personal borrowings, plunged.
His remaining holding is currently worth €5.9 million, while his 750,000 fully vested stock options are all under water, with the price at which he is entitled to convert them into shares currently above their market value.
In late 2014, Killian was awarded the RDS Medal of Industry, the State’s top business accolade. In his acceptance speech the normally media-shy Roscommon native, who lives with his wife and two children in Zurich where the company is headquartered, talked about the art of staying relevant to the consumer and the dangers of standing still in the fast-moving world of food retail.
However, weeks after receiving the award, things began to sour. How long Killian can firefight his way through these difficulties remains the subject of speculation.
Company’s strategy
As part of his introduction McGann is undertaking a review of the company’s overall strategy, which will ultimately decide the fate of its Picard stake.
Most pressingly, analysts at UBS and Goldman Sachs believe Aryzta faces challenges as it goes about refinancing €600 million of bank loans that fall due next February. At the very least the group faces higher interest costs.
UBS analyst Jörn Iffert expects that Aryzta’s debt burden, against the backdrop of declining earnings, will be close to that allowed under its banking covenants in 2018.
Killian has ruled out going cap in hand to shareholders for money to bolster its balance sheet. “We don’t anticipate a capital increase in the business because we have passed the cycle of heavy capital investment,” he said.
Which is just as well. It hasn’t many friends in its investor base these days.
