McGann must weigh his options as he tries to save half-baked Aryzta
New chairman Gary McGann has big decisions to make about the future of the Irish-Swiss food group after a management clearout, says Samantha McCaughren
Aryzta chief executive Owen Killian and his senior management team had been on borrowed time since a dismal profit warning wiped well over €1bn off the value of the company last month.
Investors were livid about the shockingly bad update and new chairman Gary McGann was left in no doubt of what was expected next - a clear-out at the very top of the company.
The action came on Tuesday, with the company announcing a series of dramatic moves designed to shake-up the par-baked food business.
Long-serving ceo Killian is to go, as will two key lieutenants; chief operating officer/chief financial officer Patrick McEniff and ceo of the Americas John Yamin. Aryzta's unpopular stake in French company Picard is likely to be sold, while banking covenants have been loosened.
While the market welcomed the moves, this is only the beginning of a period of immense change and uncertainty for the company.
In the coming weeks and months, McGann will have to ask himself if Aryzta can once again become a fast-growing and innovative food group and fulfil Killian's vision of a global food company. Or decide if shareholders would be better served if the company was broken up and sold to the highest bidders.
Killian was correct in believing in the potential for the Cuisine de France par-baked goods model, bringing it from the retail sphere to the commercial market. But some market sources are now questioning if it can work as a business of vast scale covering both the US and Europe.
It is now accepted that there are fundamental issues in the business that will take time to fix. The financial performance and outlook are disappointing, with profitability and margins under pressure. "They are losing volumes, they are losing sales, they are losing customers and they are losing margins," said one source.
In basic terms, the company is not selling enough product at the right price - and that is because it is losing customers. As economies of scale diminish, margins are eroded.
One market source said that there was a suspicion that Aryzta had an issue with customer relationships. Its customer base is made up of the biggest players in the global food business - McDonald's, Starbucks, Subway and Burger King are just a few.
They are extremely powerful entities and successful relationship management for any supplier is crucial.
But in the US Aryzta rubbed some customers up the wrong way.
In its recent profit warning, Killian outlined how an investment in Cloverhill Bakery in the US had not delivered. At the heart of the issue had been Aryzta's belief that it could grow its Otis Spunkmeyer consumer brand, which is produced at the facility. However, rival brands - essentially Aryzta's core customer base - did not take to it well.
"I can understand [why] my competitors [decided to] withdraw their volumes from Cloverhill. They have said to us, 'Why should we leave you our money to grow your brand?' I would probably do the same the thing. And it does hurt us financially," said Killian at the time of the profit warning.
A note to clients from Berenberg expressed surprise that the company had not identified this conflict between its business customers and its ambitions to grow its own branded business in direct competition.
Berenberg added that Aryzta had been "befuddled" by these sort of issues in the past, claiming this had not been a one-off. The broker also warned that risks of such mistakes being repeated remained - for now at least.
One long-time critic of Aryzta, Warren Ackerman of Societe Generale, said that the US would remain a problem. "The fundamental issue is that Aryzta has too much spare capacity in the US. In our view, a full review of its cost base is needed and we suspect US factory closures will be required," said Ackerman in a note.
The future plans for the US are uncertain, but McGann is moving quickly on Picard. Although there are deeper problems at the company, the acquisition of 49pc in the French frozen food company has come to epitomise what was seen as wrong with Killian's strategy.
It will be sold but the question now is, at what price?
Berenberg said: "Any net proceeds from the exit of Picard will be used to strengthen the balance sheet. However, given the nature of the situation and the lack of other plausible buyers (and limited IPO options due to its debt levels), we believe that Aryzta will likely have to take a hit to the price that it paid for its initial stake."
Ackerman had never been a fan of the Picard deal. "Our view has been that Aryzta couldn't afford it and the synergies weren't compelling."
It will now work with Lion Capital, owners of the other 51pc stake in Picard, to 'monetise' Aryzta's interest in Picard.
"This could mean selling back its 49pc share to Lion, possibly at less than the €447m it paid - an IPO where Aryzta exit on listing or finding a trade buyer for the entire business. We believe Aryzta is not in a strong negotiating position, but even so we would like to see the cash monetised asap."
Some brokers believe that the price could be €300m or even less, given that Aryzta is on the backfoot. Other believe the company may get lucky and make a small profit.
Fintan Ryan of Berenberg said much remains unknown. "There is certainly a lot more to do, we don't yet know who is taking over and what plans they might have or the strategic views the chairman might have himself. Whether they need to wipe the slate clean, will there be asset write downs and further asset sales beyond Picard," said Ryan.
"There is a lot of goodwill on the balance sheet from acquisitions, so that's an obvious one. And there are a lot of intangible assets that have become part of the acquisitions, so they could also be looked at with a more critical eye."
McGann will have to stand back and ask how many of these problems can be fixed and how long it may take.
Ackerman said "a quick turnaround is not likely" and that there would "still be bumps" ahead.
Ryan agreed. "We believe that there is little that can be done in the short term to turn around the operational headwinds which have stemmed from volume pressures in both North America and Europe. These headwinds have weighed on margins and look set to persist into 2017 and 2018," he said.
McGann is perhaps helped by the fact that he is new to the job and was not involved in the strategy in the past, so should be able to take a cold look at the company.
Some in the market feel that patience with Aryzta has already run out and that his best option will be to break up the company rather than try to push it back onto an uncertain track.
Faith in the Aryzta vision has been badly eroded and McGann will have an uphill battle if he tries to re-tell the company's story to a doubting investor community.
Sunday Indo Business