Difficult choices for the owner of Cuisine de France as activists park on the lawn

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Spanish activist investor Cobas Asset Management, the largest shareholder in the Swiss-Irish bakery group Aryzta, is back. And this time, there is company.

Cobas launched a campaign in 2018 against the group’s plan at the time to raise 800 million euros in a sale of relief shares – arguing that the mobilization of shareholders for half of this money alongside a huge program asset sales and debt refinancing should be continued instead.

However, the plan by Aryzta president Gary McGann and general manager Kevin Toland was approved closely by shareholders in November, which gave the company the opportunity to reduce its net debt and start to unhook and restructure a corporate machine that had been built over a decade of transactions by former leaders.

Cobas revealed this week that it had joined forces with another militant, Zurich-based Veraison Capital, which has accumulated a 7.3% stake in Aryzta. The two will use their combined 17.3% holdings to further what they euphemistically call “constructive dialogue”.

“The group of shareholders believes that Aryzta is trading at a significant discount compared to the intrinsic value”, said Veraison in a press release, adding that the market value of the owner of Cuisine de France has “decreased significantly” compared to the global market since the 2018 action. sale.

“Confidence in Aryzta must be rebuilt. The shareholder group believes that the food industry has the potential to create lasting value even in the environment currently shaped by Covid-19, “he said. “The group of shareholders believes that Aryzta should be more focused and significantly reduce the complexity of the group.”

In all fairness, Toland had made progress since taking over a deeply troubled ship in late 2017, overseeing nearly € 400 million in asset sales, reducing net debt and pursuing a cost reduction program to generate 200 million euros in savings in the three countries. years to July 2021.

However, the asset disposal program came at a huge cost. The sale in 2018 of the problematic facilities of Cloverhill Bakery in Chicago was strongly postponed.

At the start of the year, Aryzta finalized the sale of most of its 49% stake in the French frozen food group Picard for € 156 million. By adding the exceptional dividends resulting from Picard refinancing in recent years, the total amount recovered amounts to 247 million euros.

But even if Aryzta retains a 4.5% stake for 16.3 million euros, everything is far below the 447 million euros spent by Aryzta to buy Picard five years ago.

The sale of assets and the increase in emergency capital have enabled the group to reduce its declared net debt to less than twice the profit before interest, taxes, depreciation and amortization (Ebitda), against nearly four times in the middle of 2018. However, this ignores almost 900 million euros. subordinated debt, including deferred interest payments (as of the company’s last annual report in July 2019).

The value of these bonds, which have no maturity date, has fallen sharply in recent months, with 400 million Swiss francs of notes issued in 2013 currently trading at less than 60 cents US for one dollar, against almost 90 cents in February. What does this tell us about the vision of the debt sustainability market?

Aryzta’s shares, meanwhile, have dropped 70% this year and are down almost 85% from their trading level at the time of the 2018 rights issue. The total market value of The company now amounts to around 305 million euros, or around 60% of what had been raised at the time.

Covid-19, of course, had a huge impact on the business. The group said in late April it was cutting costs – including executive salaries – after job closings hit orders from fast-service restaurants and the food service industry. Arizta’s lenders have relaxed its covenants to give it flexibility.

But it was becoming increasingly clear, before the pandemic even looked up, that all was not well. The group revealed in early March that it was reducing margin forecasts for its North American unit and taking goodwill of 437 million euros.

Aryzta went out Wednesday evening – hours after Veraison threw the glove – to announce that he had already hired Rothschild & Co last month to review “all strategic and financial options” by the end of July.

It’s hard to see much appetite for another stock sale to support the group’s finances. This leaves new asset sales as the most likely outcome. Will Aryzta be recognizable when all is done?

ARE DEBT OR EQUITY MARKETS RIGHT ON BANKS?

The Bank of Ireland, whose shares have fallen by almost two-thirds in the past two months amid concerns about Covid-19 over its business and its large capital reserves, has fewer problems in the riskiest part of debt markets.

The bank launched a surprise sale of 675 million euros in subordinated debt, known as additional Category 1 notes (AT1), on Thursday, attracting orders for double the amount of debt being offered. It is the first European bank to venture onto this market in recent months.

These bonds, which bear an interest rate of 7.5%, are the first to suffer losses if the bank’s capital levels risk falling below regulatory requirements.

The Bank of Ireland announced on Monday that it had lost money in the first quarter as it began to take on loan impairment charges for an expected increase in bad debts. Still, he said that even in an unexpected scenario of a 10 to 12% drop in gross domestic product (GDP) this year, his capital levels should be above regulatory requirements.

“We view the ability of the Bank of Ireland to reopen the European market for AT1 issues as a strong statement of support for the credit market and this further highlights the recent divergence between stocks and sentiment in the credit market” said Diarmaid Sheridan, analyst at Davy.

Taxpayers, who own 14% of the bank, hope the debt market is good.

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