Tuesday 25 June 2019

Richard Curran: Chairman McGann's woes at Aryzta just went from bad to worse

Embattled Aryzta chairman Gary McGann and its CEO face questions on the turnaround strategy. Photo: Bloomberg
Embattled Aryzta chairman Gary McGann and its CEO face questions on the turnaround strategy. Photo: Bloomberg
Richard Curran

Richard Curran

It was a case of another quarter and another profit warning for bakery giant Aryzta last week. The company's shares are down around 60pc so far this year, having plummeted by 23pc last Thursday.

As Aryzta chairman Gary McGann is just a summer away from his second anniversary in the job, questions still remain about the strategy for turning things around.

There has been executive carnage at the top of the company over the last two years. Firstly, Owen Killian went as chief executive. Then the chief financial officer and the CEO of the Americas operations departed.

Overseeing a mass exodus at the top is all well and good, especially if investor confidence has been lost. But you have to have new people ready to step into the roles. This doesn't appear to have been the case at Aryzta. Keith Cooper from FTI Consulting was appointed as an interim CEO for America, having been brought in to advise the company from March 2017. He is then replaced by the new CEO for America, David Johnson.

Another consultant - this time from KPMG, David Wilkinson - was brought in on an interim basis as CFO. Frederic Pflanz was then later appointed as CFO.

Meanwhile, such musical chairs at the top ran the risk of encouraging others to leave the group. So in 2017 McGann, who sits on the remuneration committee, agreed to grant four top executives in the management team special retention payments of half their base salary to stay on.

At the time the company said: "These payments are one-off in nature and reflect the exceptional circumstances and challenges facing Aryzta during FY17, including the need to ensure continuity and stability within the business, particularly for our customers, our employees and shareholders."

Within 10 months of Aryzta's financial year end, three of those four have left the group. It doesn't look much like continuity or stability.

The company says it has a plan to turn things around, but the scale of this latest profit warning will dent investor confidence. Having previously said it was expecting to deliver ebitda around 20pc below 2017, it is now looking at another 12pc off that.

Put in money terms, having made ebitda of €418m in 2017, it is now heading towards €295m to €305m for 2018, according to Goodbody Stockbrokers. This is a colossal warning to deliver as late in the financial year as the third quarter.

Under McGann, Aryzta has hired a virtually brand new senior team that also includes a new chief strategy officer and a new chief people officer.

The strategy to remedy the problems seems to be twofold. It has announced a €200m three-year cost-saving programme without a lot of detail. And it has been selling off assets.

However, there still isn't a buyer for its 49pc shareholding in French premium foods group Picard. This acquisition was seen as the straw that broke the camel's back for former CEO Killian. It was taking the business in a different direction and it was a costly buy for less than half the business.

Ironically, it has been growing very strongly and the €90m in dividends Aryzta has so far received from the business has strengthened the group's balance sheet. It may even have been the difference in preventing Aryzta from breaching its banking covenants, which require net debt/ebitda of four times.

Goodbody puts it at around 3.8x to 3.9x.

Group chief executive Kevin Toland was putting a brave and honest face on things during a conference call with analysts.

"While we have made solid progress in what is a multi-year turnaround programme, we have clearly underestimated the extent of the challenges and the time required to address those challenges," he said.

Full marks for honesty, but investors don't want to hear about how challenges have been underestimated. It's a nice way of saying we got it wrong.

The reasons for the profit warning are troubling. Some things were well known and ongoing such as higher labour costs in North America and higher input costs. But others such as insourcing in Switzerland and Germany and weak consumer spending in some European markets are tricky.

Difficulties in the European business are a worry where volume sales fell but were partially offset by higher pricing. This isn't a strategy for growth. It is more like further firefighting.

Paddy Power Betfair first past the post with US merger deal

Paddy Power Betfair (PPB) has been first past the post in tying up a merger deal with FanDuel the American fantasy sports operator. Analysts like the deal which will see PPB with a 61pc stake in a business which combines FanDuel and PPB's existing US operations.

PPBs American business is valued at around $612m in the deal and the Irish company will pay FanDuel shareholders $158m in cash. This looks like a great deal for Paddy Power because it gives it access to a recognised American brand and around five million customers who are interested in betting.

But there are a few questions about the deal. FanDuel has raised close to $400m in equity from investors in recent years in six funding rounds. Their planned merger with Draftkings was scuppered by the American Federal Trade Commission last year on competition grounds. Its last fund raising was said to value FanDuel at over $1bn. But this Paddy Power deal appears to value the FanDuel business at closer to $400m or, in other words, what investors have put in so far.

FanDuel has gone head-to-head to with Draftkings by spending huge sums on advertising. It was probably going to have to raise a lot more cash in the years ahead to fund marketing and other costs associated with the liberalising of gambling laws in different states. This gives investors some cash back and a 39pc stake in a bigger game, along with a cash-rich majority shareholder in the form of Paddy Power. It is clear that some of the momentum has gone out of valuations for both FanDuel and Draftkings since their merger was blocked a year ago.

Paddy Power has done well, but it still needs to win licences, assuming various states back legalising gambling and then spend big in the US market, before it can reap those rewards. This is without knowing yet what sort of regulatory and taxation barriers might be put in place.

INBS probe is drifting from history to obscurity

The Central Bank inquiry into certain transactions at Irish Nationwide was always going to get somewhat theatrical and even bizarre. The main man under investigation, former INBS chief executive Michael Fingleton, is representing himself and had some tetchy exchanges with former regulator Con Horan during the week.

This followed his terse exchanges with his former chairman at the society, Michael Walsh, a few days previously.

Fingleton's logic seems to be that if things were so bad at INBS, then why didn't the regulator pursue it more heavily? This sees him imply the regulator didn't take certain issues too seriously back in 2006.

Meanwhile, Horan ended up emphasising the severity of the measures he had taken against the society, including raising its capital ratios required to underpin further property lending.

Dealing with who said what to whom 12 years and €5.4bn later, the whole thing is drifting towards obscurity.

Sunday Indo Business

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