Thursday 22 March 2018

High-profile French deal was CEO's undoing

Owen Killian
Owen Killian

David Holohan, Chief Investment Officer Merrion Capital

Aryzta - formed in 2008 after a landmark merger between Ireland's IAWS and Swiss baker Hiestand - had global ambitions. It also had a management team that was both driven, and very well incentivised to grow Aryzta into an international food group, with operations and brands spanning several continents.

To achieve management's lofty ambitions, Aryzta became a serial acquirer of businesses in Europe and North America. Billions of euro were spent on increasing the company's reach and, in effect, doubling down its exposure to convenience baked goods. The mantra at Aryzta was that increased size and scale in a fragmented global market would give rise to higher profitability.

Shareholders supported the strategy and were rewarded with a share price that performed very well. From the low levels that the share price fell to during 2009, shares of Aryzta rebounded strongly and increased by 300pc to peak at over 80 Swiss francs in 2014. Yesterday afternoon, they were changing hands at 33 Swiss francs.

Management, led by Owen Killian, continued to expand, and spent $1bn acquiring Canada's Pineridge Bakery and US-based Cloverhill Bakery in 2014. It was during the latter part of 2014 and during 2015 that Aryzta management's luck began to change. Revenue growth levels began to slow at recently acquired businesses, resulting in negative operating leverage and a fall in profitability. Aryzta responded by making a strategic investment in Picard, a French specialist in frozen food, using proceeds from the sale of Aryzta's €632m stake in the successful Irish agricultural company Origin Enterprises.

It is the Picard transaction that laid the foundation for yesterday's resignations of Mr Killian and his executive team. Despite numerous questions raised by investors over the strategic merits of the Picard deal and indeed, the expensive valuation multiples placed on Picard by the company's private-equity owners, Aryzta completed the transaction.

Coinciding with shareholder unrest, the share price of Aryzta continued to lurch lower and declined to between 35 and 45 Swiss francs, and maintained that range for most of 2016. Then, last month's profit warning saw the share price collapse 32pc in a day.

In business, a ceo is as good as his last deal. The Picard transaction became Owen Killian's undoing.

For the next ceo and cfo of Aryzta, the legacy of a decade-long acquisition splurge is a share price that is back at levels last seen shortly after the foundation of Aryzta and debt levels that are too high. In the short term, Aryzta is challenged but a new direction, away from serial acquisitions, is to be welcomed by investors.

Irish Independent

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