Aryzta should sell US business and focus on Europe – sector bankers
17 JUN 2020
Aryzta [SWX:ARYN], a Switzerland-based frozen foods company, should sell its North American arm to reduce complexity and focus on its European operations, two sector bankers and an investment advisor said.
The company
appointed Rothschild to conduct a review of all its strategic and financial options which is expected to be concluded by the end of July. In May, Swiss activist investor
Veraison Capital disclosed a 17.3% shareholding in-concert with existing investor
Cobas Asset Management, and
asked for changes to simplify the company and help boost its share price. In 2018, Cobas argued for the sale of non-core assets during its campaign to block or reduce a EUR 800m capital raise, which eventually went ahead regardless.
Aryzta’s US business would not be valued more than six or seven times its EBITDA, around the same valuation as the 6x EBITDA expected for the US arm of
CSM Bakery Solutions, the bankers said. The CSM sale process was
reportedly put on hold recently due to valuation issues, which does not give confidence for a successful sale of Aryzta’s assets, the first banker added. Aryzta’s North American segment’s underlying EBITDA was EUR 98m for FY 2019, and EUR 46.5m for the 1H of 2020 – down 22.8% on a like-for-like basis.
At the right price, the US business is “worth more in other hands”, said Gabriel Castro, a financial advisor at RSR Inversión & Patrimonios, an EAFI which advises funds and investment vehicles in several banks that hold around 850,000 shares and about EUR 2.8m worth of hybrid instruments. There were many private equities interested in the US business prior to the 2018 capital increase, he suggested.
RSR Inversión & Patrimonios will support Veraison/Cobas’s EGM proposals for board changes as it shares their concerns, Castro told this news service.
Veraison/Cobas have
requested an EGM vote to remove Chairman Gary McGann and four other directors from the board, with current board member Kevin Toland retaining only his role as CEO. It is recommending three new board members, including former head of Aryzta Europe, Urs Jordi, as chairman. The company has committed to holding the EGM by mid-August.
Aryzta’s management did not listen to Cobas regarding the US business in the past, and haven't really improved it, Castro said. He believed Veraison/Cobas would be successful at the EGM because the campaign has more supporters this time, and should have all of their shares registered. RSR is in the process of registering all of the shares it advises, Castro said.
The company cannot continue without raising capital in some form, the first banker suggested. Many of its clients operate in the food service space which is still shut down due to national lockdowns, he added. Even when food service providers reopen, they will likely operate below full capacity, he added.
Aryzta needs to undergo an operational turnaround to help increase margins by taking out costs and eventually closing some factories, this banker said. The company has so far not been able to afford to do the restructuring that it needs, he said.
However, current shareholders are unlikely to participate in a capital hike because they probably lost money on the most recent raise in 2018, this banker said.
A capital increase is not needed, said Castro, adding that Aryzta has done a good job deleveraging and selling the Picard business. He pointed to Aryzta’s reported liquidity of EUR 389m at 22 May, compared with EUR 385m at 30 April, as reported by the company.
Governance concerns and operational outlook
Poor management is an issue that activist investors should tackle, according to Jorge Castresana, chief investment officer at minority investor Valorvento, adding that he does not have any confidence in the executive team.
The three board members suggested by the Veraison/Cobas shareholder group were acceptable to Valorvento, given they all know the industry and have been directors of similar companies, Castresana said. However he was unwilling to say which way he would vote at an EGM.
Another ex-shareholder told this news service he had sold his stake at the start of 2020 after management did not show up at a seminar where he was supposed to meet them. “Very poor governance, very poor management, all very disappointing. That’s why I decided to pull the plug,” this investor said.
Other capital raising options that wouldn’t involve tapping existing investors for cash include a private investment in public equity (PIPE), the first banker said, noting they have been popular in the last few months.
A take-private option could still be on the cards, the first sector banker said. A turnaround of Aryzta would be easier if the company was delisted by a private equity buyer, as reported by this newswire in June 2019. As a private company, Aryzta would face less public scrutiny in the implementation of such a strategy.
While generally the bakery space is attractive for investors, food service will be struggling for the next 12 months, a third sector banker added. Activists could create value by moving Aryzta’s focus away from food service and towards a more popular direct-to-consumer product range via M&A, he added.
The company’s focus is on the low-cost businesses of Retail, Quick Service Restaurant and Food Service, so Castro expects that, once the lockdown eases, cash flow will come back strong and Aryzta will be in a good position to refinance the hybrids, he said.
An Aryzta spokesperson reiterated previous statements to the market, noting that the investment case set at the previous capital raise in 2018 is being progressively delivered. Regionally, its Rest Of World and Europe segments are delivering in line with mid-term margin guidance, while North America “is not but is being focused on and resourced accordingly”, he said.
Aryzta is now focused on protecting its business and the interests of all stakeholders in the midst of the COVID-19 crisis, the spokesperson said. The company has taken a series of decisive measures to reduce operating costs and to protect liquidity, and has also obtained precautionary waivers from its banking syndicate, he added.
Veraison Capital declined to comment.
by Barbara Pianese, Deane McRobie and Divya Grover
