Aryzta's Main Shareholder Cobas Opposes Share-Sale Plan

(Bloomberg) -- Aryzta AG faced a call from its largest shareholder to abandon its plans to sell as much as 800 million euros ($929 million) of stock after the struggling Swiss maker of McDonald’s buns forecast its first earnings increase in four years.

Cobas Asset Management, led by Spanish investor Francisco Garcia Parames, said Monday it plans to present alternative ways to boost Aryzta’s finances soon after the company said it expects mid- to high-single-digit percentage growth this fiscal year.

“This morning’s news confirms that the company does not require such a highly dilutive capital increase,” Cobas said. “We are pleased to see that the business has stabilized and the management has set realistic midterm targets.”

The stock surged as much as 36 percent on signs that Aryzta is making progress reducing leverage after setting a target for a reduction of 1 billion euros last year. The share gain is the biggest since the formation of Aryzta a decade ago.

Cobas said it will present an alternative proposal either through Aryzta’s board or via an extraordinary general meeting. The fund owns almost 15 percent of the company.

Debt Rise

Aryzta's Main Shareholder Cobas Opposes Share-Sale Plan

The baker’s debt ballooned under former Chief Executive Officer Owen Killian, who led a series of more than 10 acquisitions. Aryzta’s planned sale of as much as 800 million euros of new shares will make it easier for the company to shed its 49 percent stake in French frozen-foods retailer Picard, according to Kevin Toland, who became CEO last year.

“Such disposals will be pursued under normal business conditions, rather than being perceived as distressed sales,” the company said.

Aryzta’s planned capital increase would dilute its earnings per share by about 25 percent, Zuercher Kantonalbank analyst Patrik Schwendimann has estimated.

Star Investor

Before starting his own fund-management firm in 2016, Garcia Parames managed Bestinver, where he earned 16 percent annual returns over two decades. The investor’s prowess caught the eye of Warren Buffett, who in 2007 asked Parames to find him Spanish investment opportunities. Cobas started building up its stake in Aryzta in early 2017, when the stock traded at more than double its current value.

Aryzta shares have lost two-thirds of its value this year as it’s been the target of short sellers, who have bet against more than a fifth of Aryzta’s freely traded shares, according to IHS Markit data.

Even as the company forecast growth for this year, the earnings outlook remains limited amid declining volumes, said Fintan Ryan, an analyst at Berenberg. Aryzta is the world’s largest maker of frozen pre-made bread dough, which restaurants and food-service companies heat up, and it makes buns for McDonald’s Corp. in several markets including Australia.

Twinkie Pain

Rival Hostess Brands Inc., the maker of Twinkies, lowered its full-year earnings forecast in August amid inflationary pressures. Higher costs of raw materials such as butter have been weighing on Aryzta’s profitability.

Activist shareholder Larius Capital AG said last month that Aryzta should sell assets including its North American business instead of raising capital. Toland said that wouldn’t make sense.

“It would be absolutely crazy to sell that business, and even more crazy to sell it at a time when the value would be very low,” the CEO said at a press conference in Zurich. North America is key to Aryzta because it’s the company’s largest market and is growing, he said.

Other highlights:

  • The company said it expects mid- to high-single-digit percentage growth in earnings before interest, taxes, depreciation and amortization on an adjusted basis this fiscal year.
  • Aryzta wouldn’t have met its covenants at the end of July were it not for 91 million euros in dividends from Picard, Chief Financial Officer Frederic Pflanz said on a call with analysts.
  • The company forecast annual cost savings of 40 million euros this year as it automates processes, such as using machines rather than employees with razor blades to score bread dough.
  • The company is forecasting Ebitda margins of 12 percent to 14 percent in the medium term, compared to 8.8 percent last year. That will happen once Aryzta reaches its target of annual cost savings of 90 million euros, which it’s targeting in fiscal 2021, executives said on the call.
  • Debt was 1.5 billion euros at the end of July, down 13 percent.
  • Of the 800 million euros Aryzta plans to raise, 500 million would be used to pay down a term loan and 150 million euros would be used for a cost-cutting program. The rest would be to boost liquidity and pay investment banks, Pflanz said.