Business Irish

Monday 24 June 2019

Richard Curran: Investors still waiting for the 'up' on the Aryzta rollercoaster ride

Aryzta chief executive Kevin Toland
Aryzta chief executive Kevin Toland
Richard Curran

Richard Curran

What a ride the last year has been for Aryzta. The Swiss-Irish food group bit the bullet during the week and announced an €800m rights issue.

The company had managed to keep within its banking covenants this year but that might be challenging next year without bolstering the balance sheet. The scale of the rights issue surprised some, especially given that the amount involved is greater than the group's current market capitalisation of around €740m.

Chairman Gary McGann of Aryzta
Chairman Gary McGann of Aryzta

Aryzta chairman Gary McGann and chief executive Kevin Toland will have their work cut out to manage this fund-raising in the coming months. Investors know they will be heavily diluted if they don't take up their rights but equally may need some convincing before writing more cheques to back a company whose shares have fallen by 75pc so far this year. One broker described it as a "rescue rights issue" and it is a little unusual, not just because of its scale. The rights issue will feel riskier than a typical fund raising given the context in which it is happening.

It won't happen immediately.

The group will report results in October, publish a prospectus and then do the required investor roadshow, so there could be some uncertainty and volatility in the share price for a couple of months to come.

Everybody now knows the amount to be raised but the actual share price probably won't be known for a while yet. It will likely be at a substantial discount to the current market price. One broker said in a note that it could be at a 20pc discount but that might be conservative. There were mixed views across the broking community about the announcement. One said it was about grasping the nettle and taking a tough decision while Swiss-based broker Baader Helvea was a lot tougher on new management.

It said that last October the chairman and chief executive "set out on a journey with which they 1)wanted to stabilise the business 2) sell Picard (Aryzta's stake in the French good group) and 3) avoid a capital increase - a year later they have failed on all three points", the broker said.

The rights issue must have been a particularly tough announcement for chairman Gary McGann to make.

Speaking to this newspaper after the AGM in December, he said the only reason the group would contemplate a rights issue was if new chief executive Kevin Toland was struggling to execute his turnaround strategy because of any cash shortage. "It would be the last option we'd look at having exhausted all other options", he added.

At that time he said there was no evidence at that stage that any cash call would be required of shareholders. "Principally, the concept of taking the easy path of asking the shareholders to throw in a few bob to help us out before the management have completed the things they should be doing to help the company out, I think is probably the wrong way round", McGann said.

Of course McGann can argue that disposals have occurred and the rights issue gives the company the breathing space to find a buyer for its share in Picard, and it is positive in that sense. Aryzta has been something of a forced seller of its stake in Picard, which isn't always the best position to be in.

The rights issue move also provided some stability to the share price as the market pauses for breath and shareholders decide what to do. And of course it strengthens its cash position once it pays down some debt. Brokers commented on the further clarity given around Aryzta's €200m cumulative three-year cost saving plan but investors will want to be totally convinced on its deliverability and the wider investment case before taking the rights issue plunge.

Also on the positive side, Aryzta confirmed its fourth quarter trading was in line with expectations including meeting earnings guidance for full year 2018.

There are lots of variables still to settle around the rights issue. Curiously, one of them is the price of wheat and how rising wheat costs in Europe will impact the group's trading next year. It may need to secure price rises with clients. These are all questions shareholders will want to satisfy themselves on before going back into the stock.

Roll up, roll up for shared bike stampede by investors

Former Dragons' Den entrepreneur Sean O'Sullivan has once again shown his investment credentials by bagging around €30m from a €4m investment in Jump Bikes, a business which provides shared bikes in cities in the US. O'Sullivan was an early investor Netflix, Guitar Hero and many other businesses. His SOS venture funds have made several hundred investments and have put €300m into a variety of firms.

But Jump Bikes may be one of his most rapid high-paying returns.

The firm was bought by Uber for €200m earlier this year. This is no longer O'Sullivan's problem, but is it really worth €200m?

The company provides very attractive looking electric powered bikes which can do up to 20mph. They can be locked to lampposts and existing bike rails and don't need dedicated lock-up facilities.

This week Uber reported higher losses after ramping up its spending. Adjusted net losses increased to $659m in the first quarter as rising expenses outpaced its revenue growth. The founders of Jump Bikes were perfectly poised to sell to Uber and give its new chief executive another expansion story to tell the market ahead of its proposed IPO.

But will Uber make its €200m back?

Across America local officials are bracing themselves for a stampede as bike-sharing startups, backed by tens of millions of dollars, plan to cover most cities. Jump operates in nice attractive hipster type places like San Francisco, Providence and Austin, Texas, where the well-paid tech nerds enjoy kale and craft beer. When Uber brings this to Europe, it may be a different story. Hong Kong shared bike company Gobee went bust from losses and high maintenance costs.

In Hong Kong it has half the city shared bike market with 17,000 bikes and five other big rivals. It had expanded into France but pulled out after 1,000 bikes were stolen and nearly 3,400 were damaged.

Berlin alone has 18,000 shared bikes from eight different companies. And this is in country where taxi drivers are holding protesting against Uber's car service.

O'Sullivan had the smarts and sense of timing to spot a great opportunity and many will now pile into shared bikes to replicate it or hope Uber will buy them out.

It won't be all free-wheeling.

Caroline Downey wins big in MCD deal with Live Nation

Live music entrepreneur Denis Desmond has sold off half of his MCD Productions business to international music venue group Live Nation. Basically, a company owned jointly by Desmond's Gaiety Investments and Live Nation has bought MCD.

However, the biggest beneficiary of the deal may well be Desmond's wife Caroline Downey. MCD is owned by Gaiety Investments in Jersey, which in turn is owned by Irish company Ronmall. The Irish company, Ronmall, has A Ordinary and B Ordinary shares. Denis Desmond and Caroline Downey both own 43.9m A Ordinary shares each. However, Caroline Downey also has a further 68.6m B Ordinary shares.

The B shares are non-voting, according to the company's Articles of Association, so she doesn't have more control over the company than him. But the B shares rank equally in the event of a payday.

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