Aryzta struggles to stay relevant as it gambles on a frozen food leader

In 1997, the former Irish Agricultural Wholesale Society (IAWS), later to become Aryzta, acquired the Cuisine de France brand for IR£51 million (€64 million).

The French bread firm was credited with introducing Ireland’s newly affluent consumers to the baguette, the fresh kind. Its par-baked concept, where bread is baked till brown and then frozen before a final in-store bake, had transformed the market.

Even so, the price paid by IAWS was considered prohibitive; in fact off the chart, by industry standards. The deal had only come its way after other potential buyers, including Greencore, baulked at the price demanded by Cuisine founders Pat Loughrey and Ronan McNamee.

Aryzta's current boss, Owen Killian, who was second in command at the time, was known to have championed the deal.

It was a big bet on where the market was going. And it ultimately paid off, catapulting IAWS from a mishmash of struggling agricultural businesses into a slick, fast-moving food business,

Buy more

The revenue generated from Cuisine de France funded acquisitions of Delice de France in 1999, La Brea Bakery in 2001, Groupe Hubert in 2005 and

Otis Spunkmeyer

in 2006, as well as an eventual tie-up with coffee and doughnut chain

Tim Hortons

.

Now, 18 years later, Killian finds himself in the eye of a storm over another costly acquisition. And this time the stakes are even higher.

Investors have taken a dim view of Aryzta’s decision to buy, for a hefty €446 million, a 49 per cent stake in French frozen group Picard, not least because Aryzta had earlier signalled an intention to shed its non-core, non-bakery assets.

It funded the acquisition through the disposal of a stake in agri-services group Origin, which was spun out of IAWS just before the merger with Swiss group Hiestand in 2007, out of which Aryzta was born.

Critics maintain the deal does not give Aryzta control of the French firm, nor is it likely to yield a return for at least three years.

Killian rarely delivers a speech without referencing his favourite theme – “relevance”. Staying relevant to the consumer is the key metric he attributes to Aryzta’s annual €3.8 billion turnover.

All of which brings us to the question of Picard’s relevance. It’s pitched as high-end convenience, though an upmarket Iceland might be underselling it a bit.

The French are late converts to frozen food, but the market has grown by 55 per cent to about €11.4 billion in the past 20 years. Undoubtedly this will have appealed to Aryzta’s bean counters.

Nonetheless, many analysts believe the frozen food market is already saturated. "Other food companies have problems in frozen or are even selling these activities, so the market is a bit irritated by [Aryzta's] move," said Patrik Schwendimann of Zürcher Kantonalbank.

The Picard deal, however, does not by itself explain the decline in Aryzta’s share, which has shed nearly half of its value since January, when it was trading at €75.17, to yesterday, when it was trading below €40.

A series of rather opaque company statements about capacity issues in the US hasn’t helped matters.

Three years ago, the company initiated what it called the “Aryzta Transformation Initiative”, amalgamating subsidiaries under one integrated management system. The move delivered big savings and share price gains.

However, Aryzta followed it up with a rationalisation programme in the US, essentially streamlining it operations and reducing its range of products.

Unconfirmed reports suggest this may have been in response to reduced orders from big clients such as McDonald’s, to which it supplies burger buns. The quick-serve sector has been under pressure in the US despite a pick-up in the wider economy.

Whatever the case, the process dented revenues in the US and resulted in a series of profit warnings throughout 2015.

Disappointing year

In its recent full-year results, Killian said that 2015 had been a disappointing year for shareholders, “as underlying revenue growth failed to materialise, resulting in negative operating leverage”.

A side story in all of this relates to a move by US chain Subway, another big client, to shift cookie production for its 4,500 European outlets from the US to Europe.

Aryzta had supplied Subway with 100 million cookies a year via its US subsidiaries.

However, because of new EU rules on GM foods, production is relocating to Europe. From Aryzta’s perspective, this has resulted in under-capacity issues in the US and a need to expand production in Europe, eroding margins across both ends.

The problems have still not washed through the business, judging by Aryzta’s forecast earnings per share (EPS) of 365 cent to 385 cent for 2016, significantly below analyst expectations.

On a brighter note, yesterday Société Générale raised Aryzta’s rating from hold to buy, a move which initially saw its Zurich-listed shares jump 8.9 per cent – the most since June 2010 – before falling back.

SocGen analysts said 2015 had been an “annus horribilis” for Aryzta, noting that market sentiment could not decline much more. Still, it suggested the Picard deal could yet come right for the company.

However, another analyst claimed SocGen has been flip- flopping on Aryzta for some time and was merely trying to call the bottom of the market.

He maintained the market wouldn’t turn until there was greater visibility around Aryzta’s US operations.