Aryzta – hands in the dough

2017-12-05

Aryzta – hands in the dough

Once upon a time, more than a hundred years ago, in Ireland, a country of myths & legends, began the story of a single bakery that gave birth to a worldwide corporation, driving bakery & frozen bread innovation forward.  Much later, in 1988, IAWS Group plc was floated on the ISE, the Irish Stock Exchange. Several key acquisitions – Cuisine de France, La Brea Bakery, Tim Horton, Otis Spunkmeyer – followed. In 2008, the fresh-baked 20-year old Irish IAWS married Hiestand, a passionate Swiss baker, with a zest for artisan baking and an innovative spirit. Hiestand was born in Heidi-land in 1967, and was floated on the SIX at its 30th birthday.

And from this union, Aryzta (www.aryzta.com) was born.

“Growth in the speciality bakery market has outstripped the global food market as a whole between 2008 and 2015. Over that period, ARYZTA has almost doubled its market share to 11%, with revenues totaling €3.8bn in 2015” writes the young Aryzta on its website. Everything looked hunky dory, except that the Irish management that was in place grew more debt than business, so that Aryzta’s leap forward was not a pretty sight.

To cut a long story short, a few “wrong” acquisitions later (di-worsification like Picard!), the debt, both straight & hybrid, ballooned from EUR 1.5 bn 5 years ago to EUR 2.6 bn today, similar to the Aryzta market capitalization.  Mr. Market smelled a few rats in the bakery and the stock halved during 2015. But it didn’t reach rock bottom. To an Irish problem, there is an Irish solution and in December 2016, Gary McGann, a new Chairman came on Board. Gary is a legendary Irish entrepreneur who was at the helm of Smurfit Kappa.

A few weeks later, came THE (negative!) profit warning, and the stock lost another 30%. For Aryzta shareholders, their ears were aching, as if they were listening to Brutal Truth, the American grindcore, death metal band, whose albums “Extreme Conditions Demand Extreme Responses” and “Need to Control” provide rather appropriate titles.

“Sometimes, Grace comes in the form of a punch in the face.” Said Mary Elder.

Last March, together with a few angry Geneva investors, I got the chance to meet Gary and ask him how much due diligence he applied before accepting the Aryzta Chairman mandate. “Not enough!” was his honest reply.

“Honesty is the best policy.” Said Benjamin Franklin.

Then, he went on to tell me in a few exacting words how the group now needs to be manned, restructured, streamlined, deleveraged.

In terms of numbers, this is a “special situation” investment textbook case. We started to initiate a small position. If the group loses non-core activities and its debt reduces by EUR 1 bn, and if the American business stabilizes, the instrinsic value per share could reach CHF 50 midterm vs. 32 today.  In the meantime, CEO Kevin Toland (ex-Glanbia, a US nutrition group) and CFO Frederic Pflanz (ex-Tchibo & Remy Cointreau) have joined the company, and Q1-FY2017/18 seems to be on track.

The new management is hands on and is kneading the dough to make the bread rise.