Friday 23 March 2018

McGann must rise to the challenge at Aryzta

Investors are looking to new chairman Gary McGann to restore their confidence in Cusine de France owner Aryzta, writes Samantha McCaughren

Gary McGann, the former chief executive of Smurfit Kappa, has in recent days been appointed the new chairman at Aryzta
Gary McGann, the former chief executive of Smurfit Kappa, has in recent days been appointed the new chairman at Aryzta
Samantha McCaughren

Samantha McCaughren

Two years ago, investors in Aryzta, the Swiss Irish food company, started to get nervous. For three years, Aryzta had spoken of the expected benefits of a major transformation programme. It would deliver efficiencies. New production capacity would be invested in and old facilities would be retired. Customer relationships would be enhanced and layers of management would be stripped back.

Strong growth would follow and the market bought into the story. Shares were riding high at over €70.

However, in late 2014 it became clear that the growth expected from the transformation programme had yet to materialise and margins were shrinking. Further investment would be needed.

Fintan Ryan, an analyst with Berenberg in London, said: "That's when people started saying, where is the growth going to come from? That is when it became less and less obvious where the double-digit earning growth would come from."

Aryzta, the company which owns Cuisine de France and sells baked goods to the likes of McDonalds and Burger King, had for years impressed the market with a convincing growth story led by a strong management team.

Chief executive Owen Killian had never been viewed as terribly accessible by the markets, but many institutional shareholders had bought into his self-assured vision for the company.

However, as investors began to feel uneasy, the company's future performance and corporate governance came into sharp focus. "When the story was going well, they always gave management benefit of the doubt," said a senior market source.

But as shares halved in value over 18 months, unhappiness intensified.

This discontent was encapsulated in a damning note from Societe Generale, which commented that it was hard to imagine that investor sentiment could get much worse at the Swiss Irish company.

In recent days, the company has taken what many believe is an important step in trying to restore that damaged investor confidence - the appointment of a new chairman, Gary McGann, former chief executive of Smurfit Kappa.

There will be an expectation from shareholders that he will take stock of what has gone wrong at the company and take some bold measures to address them. "It's a step in the right direction," said Ryan. "The question now is what does he do when he gets in?"

Corporate governance has been one major bone of contention, drawing attention to Killian's generous pay package and share entitlements.

He is one of the best paid chief executives in Ireland, with his annual package often amounting to several million euro.

The other issue which has weighed on the minds of institutional investors has been Aryzta's acquisition of a 49pc stake in French frozen food company Picard, which was bought for €446m. It was viewed as non-core, despite Killian's appetite for the deal.

In a meeting with Swiss analysts last week, Killian said there would be a review of its position on Picard under new chairman Gary McGann.

Analyst Jon Cox of Kepler Cheuvreux said: "(Aryzta) might not exercise a call option to purchase the remainder of the business."

He added that Killian had said he was well aware that not all investors wanted the deal to go ahead.

A number of sources told the Sunday Independent that the preference for many institutional investors would be to sell the Picard stake and abandon any plans to buy out the rest of the business.

Killian outlined last week that several "stage gates" would have to be achieved to proceed with the purchase of the remaining Picard stake.

Warren Ackerman, who wrote that stinging Societe Generale note in October 2015, put questions about the Picard deal high on his list of concerns in a new report issued after last Monday's full year results. A question he proposed for management: "Would you consider exiting your 49pc stake in Picard if you are not able to get an investment grade rating? What exactly do you think could be the scale and scope of synergies between Picard and Aryzta if you were to fully consolidate? How much would it cost you to buy out the remaining 51pc stake?"

Ryan added: "A lot of investors would like to see Aryzta exit Picard one way or another.

"It seems from management that they are not as wedded to it - they didn't seem as bullish about it as they did six months ago.

"They were adamant they would only do it if they reached certain stage gates."

These included Aryzta getting to €850m ebitda and Picard getting to €150m ebitda and Aryzta substantially deleveraging the business. "That would seem quite a tall order at this stage".

"If they don't exercise their option, presumably Lion Capital, which owns the other 51pc, will dispose of it through a trade sale or an IPO," said Ryan. "Aryzta would surrender drag-along rights so would have to go along with Lion Capital."

If Aryzta does sell Picard, it would go some way towards appeasing investors.

However, the company needs to show underlying improvement in margins. Currently, ebitda margins are at 12.5pc and turnover is quite static.

Branded food companies such as Danone and Nestle boast margins of as much as 16pc, with commodity companies around 6pc to 8pc.

Ackerman said: "(Aryzta) has underperformed both operationally and from a share price point of view in the past 18 months. We think 2017 will be another difficult year."

This is despite some positive dynamics, especially around cash flow and the new chairman.

Killian will come face to face with many of his shareholders and their representatives on Thursday at a rare investor day in Toronto, Canada.

The other big question about McGann's plans for the company when he takes over the chair in December will involve his approach to the management team, with Ryan questioning whether or not he would usher in changes to the executive line-up.

Ackerman believes Killian will be given some time to prove he can return healthy growth to the business.

"The market will doubtlessly be looking to these appointments to help improve corporate governance and perhaps, in time, foster in a new executive management team," he said.

"This may happen in the course of time, but we don't expect any changes in the near term.

"Rather, we think chief executive Owen Killian will be given time to see whether the strong recovery in 2018 actually materialises."

Sunday Indo Business

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