Misguided Picard purchase and bad luck in the US conspired to bring down Killian
Few were surprised to hear that Aryzta chief executive Owen Killian has decided to step down in the summer. He had been under severe pressure from the company's shareholder base for some time on the back of profit warnings and a €450m French acquisition that seemed difficult to comprehend.
Inevitably, Killian's decision to spend €450m on a 49pc share of Picard, the French speciality foods business, will be seen as the main catalyst for his fall. The share price even tanked the day he announced he was buying it in 2015, at a time when Aryzta was already under pressure in the US with its main baked goods business.
Aryzta is now preparing to sell its stake in the French business in a dramatic U-turn on Killian's decision. So how could someone who had expanded the business so dramatically and successfully get that one so wrong?
Back in 2008, the old IAWS seemed to have enormous potential. And it did. But there were fundamental weaknesses in the business. Its customers tended to be relatively small in size. And its over-dependence on the UK and Irish markets left it vulnerable in a downturn.
It couldn't really go after the major global food customers, like fast food chains or giant supermarket groups, unless it did its own manufacturing. Yet most of its manufacturing was outsourced.
A new bakery plant costs €150m to €200m and takes about three years to build. So if you want to play in the big league, you have to acquire businesses with their existing manufacturing facilities and scale your business.
So Killian (pictured inset) went on a buying spree. But the recession, especially in Ireland and the UK, put the business under extreme pressure. The economic collapse changed customer buying habits. The jumbo breakfast roll was gone. People started buying fewer coffees and buns. They started bringing their lunch into work. Spending habits changed.
For the newly-formed Aryzta, born out of a merger with Swiss bakery business Hiestand, the timing couldn't have been worse. It had spent over €100m on a new factory in Dublin. Commissioned in 2005, it was ready just in time for the 2008 collapse and was working at just 40pc capacity when it opened. It has taken several years of recovery to bring it to where it is now - operating at full capacity.
But Killian had a plan. Expand the narrow customer base and go after new markets to become less dependent on Ireland and the UK. That meant getting into North America and pitching for bigger customers.
And the best way to achieve it was by acquiring businesses. He bought all round him and the market loved it. Aryzta's share price shot up by 300pc.
Killian had made a fortune himself on the back of the expansion through a generous share award scheme. Just two years ago, his shareholding was worth €46m.
Since 2008, Aryzta has been transformed. Back then it was mainly in bread. Now it is mainly in sweet baked goods - a growing product category. In 2008, most of its manufacturing was outsourced. Now it is 75pc in-house.
In 2008, it had small customers. Now it has large customers. In 2008, it was mainly a European business. Now it is as big in the US as in Europe.
It had revenues last year of €3.8bn and it has 42 bakery plants around the world. But all of this big league stuff comes at a price. The business became much more capital intensive. Plants have to be upgraded. The time frame on investment return becomes a lot longer.
Aryzta has spent €3bn on acquisitions since 2008 but it has also spent €1.4bn investing in new plant and equipment.
Having done well, Killian hit the buffers. Some of it was bad luck, some of it was bad decisions.
In North America, one of its biggest customers was taken over by private equity group 3G. It wanted to extract more out of the business and pushed Aryzta heavily on price when it came to new contract negotiations.
Aryzta didn't back down and lost some of its business to that customer. The takeover of the customer was bad luck, but perhaps with hindsight it could have bended more to retain what was a loss of business.
Other market factors in the US squeezed the performance of the business on volume and price.
All the while, there had been a growing tension between some institutional shareholders and management around communication and strategy. As a Swiss business, many of its shareholders were used to looking at food companies like Nestlé, with modest leverage and solid, steady performance.
Killian was in the process of ratcheting up Aryzta into the big league in a relatively short space of time. This meant borrowing and heavy capital expenditure to gain returns over the longer term.
So, when the group's performance began to suffer, shareholders were not prepared to give Killian as much time as he might have wanted.
These difficulties hit a hiatus in 2015, when, just after reporting disappointing profits, Killian announced the acquisition of the Picard stake. He had used the proceeds of selling out of Origin Enterprises to fund the acquisition, so it wasn't about borrowing. However, it shifted Aryzta into the "B to C" market. Everything the company did had been "B to B", or business to business. Its customers were the supermarkets or fast food chains, not the end user.
Picard is a business to consumer operation, which meant it stuck out as something completely different to the rest of the group. Not only had Killian made this significant strategic shift, he hadn't prepared the market well enough in advance. It came as a shock.
For Killian, it was a business with revenues of €1.8bn and an earnings margin of more than 12pc. It also threw off lots of cash, which meant it didn't require the major capital investment of other parts of the business.
All good stuff, but Aryzta had paid a massive price for a minority shareholding, in a non-core business, and investors felt the market had not been properly prepared for this shift.
All the while, Aryzta shares were tanking. In March last year, Killian had to sell €16m of his own shares that had been used as collateral on a personal investment.
This was two-thirds of his holding. Having had a stake worth €46m, his remaining shares today are worth around €6.4m. Killian's days in charge of Aryzta were numbered.
This week the company took the added precaution of renegotiating more headroom in its banking covenants. It is a prudent thing to do but it doesn't look good. Aryzta is a heavily invested business generating in excess of €300m in profits. Once Picard is sold off, its overall performance should improve in the years ahead.
It is not a distressed business, having borrowed money on the corporate bond market before Christmas at just 1.6pc.
New chairman Gary McGann has two short-term challenges. Firstly, he has to ensure it gets the best possible price for its stake in Picard. The proceeds will reduce debt, which currently stands at €1.7bn. Its net debt is very manageable at around three times EBITDA.
Secondly, he has to find a new ceo. The real question is whether the company becomes a takeover target. It should take the board several months to find a new ceo. It would be easier for a takeover approach to come while there is a weakened outgoing management team.
However, any prospective bidder might want to wait a little longer, until it feels Aryzta has come through these choppy waters and also see what kind of price can be gotten for Picard before committing to anything.
Killian has had a very good run. But equally mistakes have been a significant factor in determining the timing of his exit.