Business

Tuesday 20 November 2018

Richard Curran: 'Aryzta hard work is just beginning after narrow victory at AGM'

Aryzta chairman Gary McGann said it would ‘limp along and be a wounded animal for quite a length of time’ without the capital injection
Aryzta chairman Gary McGann said it would ‘limp along and be a wounded animal for quite a length of time’ without the capital injection
Richard Curran

Richard Curran

When it comes to bakery giant Aryzta, there has been 'trouble at mill' for some time. After getting a controversial €800m rights issue over the line at this week's AGM, chairman Gary McGann may feel it is a case of job done.

However, the nature of the victory, especially over its largest shareholder Cobas Asset Management, which opposed the plan, suggests there is still a way to go.

McGann and the management team got the go-ahead from shareholders but by the slimmest of margins. The plan was backed by 52.88pc of the voted shares with a staggering 46.98pc against.

Still a win is a win and the rights issue will go ahead. But real questions remain about its future direction. Having secured permission, Aryzta has to go out now and sell the 900 million new shares to investors.

Given the scale of opposition to the plan, and the massive shareholder dilution resulting from it, it is unclear how many existing investors will take up their rights. That may mean finding a range of new shareholders.

Existing stock holders are looking at a significant dilution of their shares. The new registered shares will be offered to existing shareholders at a price of CHF1 (€0.88) per share and they will be offered the right to buy 10 new shares for every share they hold.

This is a huge rights issue and a huge dilution. It would technically dilute shareholdings by 90pc if investors decide not to go ahead and exercise their rights.

Shareholders are offered shares at a discounted price. The discount, at around 40pc, was bigger than expected, reflecting the uncertainty that surrounds this whole process and whether it will work.

Two clues point to the likelihood of a low take up of rights from existing shareholders - the very modest support for the board and the share price falls after the AGM.

Firstly, many of the shareholders weren't just unhappy with the rights issue plan, but gave a thumbs down to the board too.

When it came to re-electing board directors, the highest vote went to new appointee and former McDonald's US executive Michael Andres, who received backing from 61.5pc of the votes cast. From McGann (60.66pc) right through non-executive directors, the support levels were relatively low. Even chief executive Kevin Toland secured backing from just 57.8pc of the votes cast.

Shares in Aryzta tumbled 20pc to CHF 20.51 last Thursday after the AGM. It means the value of the rights, attaching to each share under this new issue, has also fallen.

For the board and management the AGM was a victory in so far as the controversial plan will now go ahead. Some existing shareholders are likely to be replaced by new investors as management spearhead an investor roadshow.

It is a tough choice. Do nothing and get diluted by 90pc. Sell your shares at a loss in the market or invest more money in the turnaround to try and get your money back.

The rights issue is underwritten by bankers so the money will be raised. The next big challenge will be to deliver the three-year cost cutting and growth plan.

The rights issue is priced to go at CHF1 per share. After the meeting, the company's largest shareholder Cobas Asset Management which opposed the plan, said it would consider "additional measures" but did not elaborate further. Cobas believed a smaller rights issue would have sufficed combined with asset disposals.

Aryzta chairman Gary McGann told the meeting "the consequences of not raising the type of share capital we're talking about is that this business will limp along and be a wounded animal for quite a length of time".

He has got his hands on the medicine, but it's too early to say whether it will work.

Ireland isolated on digital tax

Forget Brexit for a moment. The British have inadvertently caused further problems for the Irish government and its love affair with large global tech companies.

In his Budget during the week, British Chancellor of the Exchequer Phillip Hammond, introduced a digital sales tax of 2pc on tech company revenues in the British market. This is similar to the 3pc digital levy proposed by the EU on certain revenues such as online advertising. The EU plan is strongly backed by France and the number of countries supporting it is growing.

Up to now our Finance Minister Paschal Donohoe has resisted the introduction of the EU measure. Ireland's quibble has been that it would be better to resolve issues around how much tax tech companies pay, through a wider global or OECD initiative. A 3pc EU levy would simply drive these companies to somewhere like, well the UK, after Brexit.

Hammond has now sunk a hole in that argument and it is becoming more difficult for the Irish government to put up resistance. Our allies in opposing the measure are getting fewer with reports suggesting our position is now only shared by Sweden, Denmark and Estonia.

Throw in the unwavering support from our EU colleagues on Brexit (so far at least) and Donohoe may appear isolated and even ungrateful in saying no to the tax when he sits down next week with his EU counterparts in Brussels.

The measure would hit Irish corporate tax take by a modest enough €160m a year. But the Government is concerned this could be just the start and it could raise doubts in the minds of decision-makers in these tech giants about what else might be coming.

If Donohoe is under pressure from other EU finance ministers on the issue, just imagine the pressure from tech companies themselves, who will want Ireland to oppose it and ensure it is not an EU-wide initiative.

In truth, other countries could just go ahead themselves and arrange something similar, so we don't have a full veto.

The French are leading the charge on this and it would be a big win for them, further cementing the influence of French president Emmanuel Macron at the EU table.

Donohoe could point to global competition for tech investment and how it could go outside the EU. This won't be convincing.

He could also point to how countries like France are playing the tax card themselves to win post-Brexit jobs from London.

France and Italy are offering the best deals on personal taxation for London bankers to move there. France is offering income tax breaks of up to 50pc of salary for British bankers who move.

They will also exclude foreign assets and properties from their wealth tax. A London banker on €1m salary could increase his take-home pay from €542,000 in London to €732,000 in Paris if he moved. The figure for Dublin is €672,000.

When it comes to tech giants and tax, the jig is up on this one. This isn't about how much tax these companies pay in Ireland. It is about how Ireland has facilitated them in making sure they pay relatively little tax anywhere. It isn't just about different countries competing to win FDI. It is about allowing those companies to pay less somewhere else and less than their fair share.

The best we can hope for is that Donohoe at least secures something else in return. Maybe an extra couple of billion for the national rural broadband plan? After all, that is how the EU works.

Sunday Indo Business

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