Aryzta’s board facing into a summer of discontent
THESE truly are strange times in business when the quarterly figures in a multi-billion euro business mean so little for the future outcome of the venture.
The latest quarterly numbers from bakery goods-maker Aryzta kind of fell into that category. Activist shareholders representing more than 17pc of the stock have called for an EGM to remove nearly half of the board, including the chairman Gary McGann.
Aryzta’s trading performance in its third quarter to the end of April was a predictable train-wreck when it was published on Tuesday. Revenues were down 24pc which dragged nine-month revenues down more than 10pc.
That isn’t management’s fault. The company, like so many others, couldn’t sell its product through food outlets that were closed or while millions of workers in Europe and the US were working from home because of the pandemic.
CEO Kevin
Toland took some positives from the outcome and was able to look forward a little to the possible upside of economies opening up.
He painted a picture of a business that was on target for turnaround until this pandemic got in the way of a good recovery story. “We were on track with five out of six of our key components of that strategy. North America was a work in progress and still had some way to go,” he said.
North America is a big part of Aryzta’s operational mix. Shareholders had already looked at the pre-pandemic performance and balance sheet and didn’t like what they saw.
Aryzta shares were trading at CHF 83c at the end of February before this crisis, giving the company a market capitalisation of just CHF 828m (€777m) some 14 months after it raised €790m in fresh equity at CHF 1 per share.
The North American business had too big a climb to make out of its problems. Organic revenues continued to fall while volume sales fell by 6pc in the first half of the financial year in the American business.
Management has been determined to battle on, given that North America accounts for 42pc of revenues. And then coronavirus hit. Aryzta circled the wagons, cut costs, furloughed workers and temporarily closed plants, just like any other large business.
But unlike other large businesses, it realised the need to hire consultants Rothschild & Co to conduct a strategic review of the group. Everything appears to be on the table in a review that is due to be completed by the end of July, including more aggressive asset disposal, putting itself up for sale or looking at fresh financial acrobatics, like converting CHF 1bn of hybrid debt treated as equity, into something else.
By mid-May the shares had tanked to CHF 33c – a fall of 98pc in five years. This gave the group a market capitalisation of just CHF 329m after raising more than double that amount less than two years earlier.
Management had a real problem. The obvious thing to do should have been to sell off the US business before now but how could that make sense in the middle of a pandemic?
Some unhappy investors decided enough was enough. Cobas and Veraison tabled an EGM motion to clear out the chairman and non-executive directors Dan Flinter, Annette Flynn and Rolf Watter from the board. A third shareholder, J O Hambro, has indicated its intention to vote with the others thereby creating a potential bloc of 23pc.
They also want Mr Toland to step down from the board but remain in the CEO role.
It is worth noting that the five board members these shareholders want gone are the longest serving. McGann’s appointment was announced in September 2016 when the shares were trading at around CHF 9.15. Annette Flynn was appointed in December 2014, Dan Flinter in December 2015 and Rolf Watter in December 2016.
Mr Toland only joined as CEO and a board member in December 2017. The others have had quite a run at it.
It is also hard to envisage so many board members surviving a 90pc share-price plummet.
Aryzta said during the week it will hold the EGM by mid-August.
This gives the board time to marshal the troops, present the best defence it can of its performance and back up whatever new plan it comes up with, by citing the advice of Rothschild and Co.
It wouldn’t be unusual for only 60pc to 70pc of shareholders to vote at an EGM like this, which puts the activists towards half of what they might need with 23pc.
The group needs to get smaller, more focused, rebuild and then hope to grow again further down the road.
Patrick Coveney pulled out of the US with Greencore and retreated back to the UK. Shareholders backed him because he got a good price on the way out the door of North America.
That doesn’t look likely right now for Aryzta. It could be an oven-baked hot summer for the Swiss\Irish group.
It could turn out to be an oven-baked hot summer for the group