2018-11-06

“I don’t enjoy eating humble pie. It never tastes good, but I do appreciate it when it happens”.
Simon Sinek

Sometimes in life (i.e. in the life of a fund manager!) grace comes in the form of a punch in the face and sometimes in life (i.e. in the life of a fund manager!) I eat humble pie.

I need to tell you about Aryzta.

Early last year, we started to put money into the bakery group.  What follows is my reasoning for the investment: 

“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.
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. 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.
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.
In terms of numbers, this is a “special situation” investment textbook case. 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 increase by 50%.
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.”

Well, my optimism turned out to be premature and the turnaround will still take time and effort. 

During the last 12 months, after assessing the situation, visiting 45 out of the 60 bakeries and meeting local managers & employees, the recent management team of CEO Toland & CFO Pflanz, were faced with some serious headwind.  The North American business deteriorated and some cracks appeared in the pricing power of the leading b2b frozen bakery group.  According to Murphy’s law, things have to get worse before they get better. Under the former management crew (wrecking crew!?) Aryzta had become a wounded animal. Former CEO Killien & his acolytes neglected the smooth running of the group’s operations to concentrate on a get rich scheme, consisting of growing Aryzta EPS through piling on debt & gross di-worsification. A classic tale of how to destroy shareholder value. While they were onboard, their outrageous lack of regard for all stakeholders was known, which was enough reason for us not to be invested. But the extent of their mismanagement can only be seen now and is what has driven the share price way down. Consequently, the Board of Directors & new management have come forward to ask for money from shareholders, in the form of a deep discount, highly dilutive capital increase.
As the saying goes: “desperate times call for desperate measures”.

The new management has put in place the “Renew” project, to produce 200 mn Euros in savings over 3 years and 90 mn of run-rate savings from FY 2021 onwards.  The management has also pledged to divest non-core Picard & to de-leverage 1 bn Euros.  The major part of the 800 mn Euros rights issue will go back to the banks.

Everything now seems finally in place for the management to execute on the turnaround & new strategy.  In spite of all its problems the group is currently generating close to 300 mn Euros EBITDA at depressed levels.

For my premature optimism and underestimation of the harm done by the former management of Aryzta and the consequences thereof, i.e. the ensuing weakness of bargaining power with its stakeholders, I must now eat humble pie. 
As a long-term value investor, I do, however, consider Aryzta to be out of the woods and believe that the new management deserves the benefit of the doubt and our trust as shareholders, as the group has some very strong business lines (www.aryzta.com).  I shall therefore participate partially in the rights issue in response to the (new) risk profile of the company. 

And a final food for thought from the above-mentioned Simon Sinek:  “People don’t buy what you do. They buy why you do it”.