Aryzta’s new chairman has five weeks to come up with a plan

Fund managers and analysts who dialled into Aryzta's full-year results conference call on Tuesday to get a sense of whether a rapport was developing between chief executive Kevin Toland and his new chairman Urs Jordi, after a tumultuous boardroom tussle, may be none the wiser.

But it crystallised how the centre of power when it comes to deciding the future of the besieged Swiss-Irish breadmaker has shifted from Dublin to Zurich.

Developments in Aryzta in the past five months would be enough to give the casual follower whiplash.

In May, after a five-year slump in the company’s fortunes and share price, a group of rebel shareholders ultimately holding a 20 per cent stake joined forces to press for the company to “significantly reduce its complexity” and create shareholder value.

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The shareholders, led by Zurich-based Veraison Capital, quickly compiled a list of three baking industry figures they wanted to install on the board, including Jordi, the former chief executive of Hiestand International, which merged with Cuisine de France owner IAWS in 2008 to create Aryzta.

The investor group wanted rid of chairman Gary McGann, who had been brought on board in late 2016 to try and turn around a troubled ship, and three other non-executive directors. It also called for the removal of Toland, who had been hired by McGann in 2017, from the board to focus on his chief executive duties.

Aryzta, meanwhile, announced in May it had hired investment bank Rothschild to carry out a "strategic review". It would ultimately lead to a unit of billionaire US hedge fund manager Paul Singer's Elliott Management declaring a month ago that it was in advanced talks to buy Aryzta.

Jordi and the Veraison group’s other two director picks secured overwhelming shareholder backing to join the board at an extraordinary general meeting (egm) three weeks ago. McGann and the three other non-executives targeted by the dissidents, seeing the writing on the wall, had already signalled before the meeting that they were stepping down – leaving no Irish directors.

While Jordi declared at the egm that now was “the worst time” for a sale of Aryzta, as the company’s woes have been compounded by a slump in sales amid Covid-19, he said on the call on Tuesday that “all strategic options” are on the table.

Now on the board, he has a fiduciary duty to carefully weigh any offer from Elliott. But it’s clear this is not his preferred option.

Jordi told analysts that Aryzta had received “unsolicited expressions of interest to acquire parts” of the group since he took control of the board – a development he declared to be “very positive”.

Special subcommittee

The new chairman has set up a special subcommittee to consider future options, including his two fellow new board members, Heiner Kamps, founder of German bakery group Kamps, and Armin Bieri, the former chief executive of Aryzta Switzerland, and two other directors. Toland, who was part of a board that decided to enter advanced negotiations with Elliott, is not at the table.

“I want to restate my view that Aryzta has a long positive future. My vision for Aryzta is one that is less complex, more focused and structured around its core markets and core businesses,” Jordi said. “This will improve the sustainable financial performance and reduce its current excessive debt significantly.”

An outright sale seems improbable, according to analysts – especially if Elliott comes in with an offer around the 0.8 Swiss francs (74 cent) mark that has been suggested in some recent Swiss reports.

While this is almost 30 per cent above current trading levels, Andreas von Arx, at Swiss-based analyst Baader Helvea, believes that assets sales and debt reduction could get the proper value of Aryzta shares to "clearly above" one franc.

A sale of the group’s troubled North American business, which incurred a €437 million goodwill impairment in the year to July, has to be high up the agenda. So too, the group’s relatively small but so-called “Rest of World” businesses, which mainly partner with quick-service restaurants and catering firms in Asia, Australia, New Zealand and Brazil. This would leave Aryzta focused on Europe.

But while Swiss business publication Handelszeitung reported in June that an unnamed party was willing in 2018 to buy the US business for between $1.2 billion (€1 billion) and $1.8 billion, van Arx reckons the sale of this unit and the Rest of World division combined wouldn’t achieve the €600 million of asset sales that Jordi is known to be eyeing.

That's in addition to almost €400 million raised by disposals under McGann and Toland, including most of its stake in French frozen foods business Picard, its former La Rousse Foods unit in Ireland, two Cloverhill facilities in the US, and a 50 per cent stake in a UK flatbreads business.

Aryzta’s €1 billion net debt as of the end of July stood at 3.7 times earnings. But that ignores €926 million of outstanding subordinated debt with no payback date – including almost €130 million of rolled-up interest.

Dividends

Aryzta executives said on the call that there are no plans to start paying dividends on these hybrid debt-equity notes any time soon. While some investors believe Aryzta must eventually approach these bondholders to get them to take a “haircut” on what they are owed, the group seems to be reluctant to think about that at this stage. But is it only a matter of time?

Any new chairman would normally expect to be given 100 days’ grace to take stock. But Jordi, having whipped up investor hopes before last month’s coup, won’t have such a luxury.

He’ll need to have something to say by the time Aryzta holds its annual general meeting in less than five weeks’ time.