Cobas Asset Management (“Cobas”) is negatively surprised by the comments made by Aryzta’s board of directors in its News Release dated October 16, 2018 (“News Release”) with regards to its deteriorating financial condition, loss of customer confidence and increasing liquidity needs.

It was only on October 1, 2018, in its release of the annual results 2017/18, that Aryzta (the “Company”) stated that the business has stabilized.  In the accompanying investors’ call, CEO Kevin Toland said: “Finally, while the business has clearly been challenged, we have a core underlying business which is cash-generative and profitable.”

In this context, PwC, as the Company’s auditor, did not qualify its audit opinion dated October 1, 2018.  If indeed the financial situation was such that the Company’s future is depending on the EUR 800 million capital increase, PwC would have been required to qualify its audit opinion.

Given these reassuring statements issued only 20 days ago, we believe that the Company now is drawing an unduly grim picture of the current situation with the sole intent to convince shareholders to support the excessively large and dilutive capital increase.  Otherwise, one would be led to believe that the market was misinformed on October 1, 2018.

In addition, proxy advisor ISS’ first recommendation dated October 16 was to vote against the capital increase as proposed by the board of directors.  Three days later, on October 19, ISS surprisingly changed its previous recommendation and now recommends approval of the capital increase taking into consideration a potential delay of a reduced capital increase.  Although we are disappointed about this decision, we are comforted by the fact that ISS has not changed its view based on concerns regarding the liquidity situation of Aryzta.

Furthermore, we would like to highlight again our disappointment with the lack of shareholder engagement.  We believe there could have been many opportunities for a more meaningful dialogue leading to a better understanding of shareholders concerns and potentially leading to a more balanced proposal.

Reassurance on the Cobas Proposal

 In its News Release, Aryzta questions the solidity of the Cobas proposal as regards to timing, sufficiency of funds and executability.  Below we would like to further elaborate on our alternative financing plan and demonstrate its sufficiency and executability in time.

EUR 400 million by year-end

 The capital increase of EUR 400 million can be executed with current financial accounts as long as the board of directors complies with its fiduciary duty to act in the best interest of the shareholders and the Company.  In that context, we already requested the board of directors to include our proposal on the agenda of the upcoming annual general meeting (“AGM,”) which the board of directors refused.  However, even under the extraordinary general meeting (“EGM”) as requested by Cobas, there remains sufficient time to execute the capital increase by December 13, 2018, the date required for the financial accounts to be considered current for the purposes of a prospectus.

The timeline looks as follows:

Nov 1: Shareholders reject capital increase of EUR 800 million at AGM
Nov 5: EGM Invitation published for November 26 to vote on EUR 400 million capital increase
Nov 26: EGM, approval of EUR 400 million capital increase
Nov 29: Record Date
Nov 30 – Dec 10: Subscription period
Dec 12: Settlement

Based on our conversation with the largest shareholders, we deem a vote against the capital increase of EUR 800 million at the upcoming AGM as likely.  Therefore, we urge the board of directors to comply with its fiduciary duty to prepare for the likelihood of the reduced capital increase of EUR 400 million and to engage with its underwriting syndicate of banks to ensure that the potential shareholder decision can be executed without any undue delay and costs.  We believe that a substantially reduced capital increase with the backing of the largest shareholders will be underwritten by the current banking syndicate, also given that the preparatory work such as the prospectus or underwriting agreement are already in place.

Sufficiency of Funds and Executability

 With the capital increase of EUR 400 million and the cash balance of EUR 517 million as reported per July 31, 2018, we believe that the Company has sufficient funds to address its working capital needs and time to explore further alternatives as suggested by Cobas.  If this was not the case, we expect a concise explanation, why a cash balance of more than EUR 900 million does not provide for sufficient funds and time to address the following:

  • Working capital management
    As per the Annual Report 2017/18, p 81, accounts payable outflow amounted to EUR 28 million, the previous year inflow into accounts payable was EUR 38 million.  We believe that more than EUR 900 million in liquidity after the EUR 400 million capital increase provides for sufficient funds to finance current working capital swings estimated by the Company to require EUR 100 million thereby reassuring suppliers.
  • Pursue disposal program
    As outlined in our previous communication, we know of several different parties that have already approached or will approach the board of directors of Aryzta with substantiated offers for disposal candidates.  These offers range from EUR 250 million to EUR 900 million in price depending on the respective businesses within Aryzta.  Those assets are identified, and some of the interested parties are known as we have communicated that information to the board of directors.  However, we do not consider it in the best interest of the businesses, nor the interested parties to disclose further information publicly at this stage.In addition, the Company has committed to pursue the disposal of Picard, which we support, that could add another EUR 300+ million of cash.
  • Pursue refinancing options
    We have identified different financing providers that are interested in providing alternative financing to Aryzta which address the liquidity and financing needs of the business and allow for additional financial flexibility for the Company.  These financing solutions can come from private or public markets.  In fact, we have received a term sheet from one of the largest and most reputed private debt organisations worldwide committing to EUR 1.2bn thereby refinancing the bulk of the current term loan and the Schuldscheindarlehen.We reiterate that the lending banks unanimously have agreed to lift covenant levels until October 31, 2019, even without any capital increase.  This leads us to believe that the lending banks do not consider Aryzta to be in a distressed situation, also evidenced by a non-distressed interest rate of 3.5% – 4%.
  • Subsequent capital increase, if required
    If above measures are not executed within 12 months or in case of other unforeseen events, we are supporting a further capital increase of up to another EUR 400 million.  Being the largest shareholder of Aryzta, we believe this is a strong sign of confidence and will help an overall capital increase at that stage.  However, we clearly oppose the request of the Company to agree already now to such a highly dilutive capital increase of EUR 800 million before other measures have been analysed more thoroughly and on the background of the ongoing disposal program which might lead to significant cash inflows.

Customer confidence confirmed

In its News Release, Aryzta states that the capital increase is required to reassure customer confidence implying that otherwise Aryzta would risk losing substantial customer contracts.

To perform our own business due diligence, we have contracted with a reputed strategic consultancy firm.  The first report was conducted in December 2017, followed by an update in September 2018 after the announcement of the capital increase by Aryzta.  The consultancy firm was tasked to conduct a series of interviews with customer and Company experts to assess Kevin Toland’s performance against expectations, Aryzta’s customer standing, and go-forward opportunities.  With regards to customers’ confidence in Aryzta as a business partner, the summary reads as follows:

  • Aryzta’s financial risk is of some concern to major customers across channels but is not viewed as a major risk leading them to quickly pull business
  • Many key customers feel that Aryzta has communicated with them on a commercial and strategic level
  • Customers are generally most willing to stay with Aryzta where they have chosen them to date rather than choose them for new business during the change period

For example, we have been informed that Aryzta was able to contract recently with Mercadona, Spain’s largest food retailer with more than 1’600, stores across Spain.  Also, the fact that Aryzta is building a new factory in Brazil based on customers’ request, such as McDonalds, underlines the business confidence.

The analysis of the consultancy firm, the example of contracting with Mercadona and building a new factory in Brazil leads us to believe that Aryzta’s customer confidence is intact.  The board of directors’ adverse statements seem to be of tactical nature thereby damaging the business of Aryzta.


Based on the information currently available, we continue to believe that a capital increase of EUR 400 million is fully sufficient to provide Aryzta with the necessary means to continue with its turnaround plan, including further asset disposals and refinancing options.  The current proposal of the board of Aryzta is not balanced and should not be shouldered by the shareholders only.

Therefore, we ask fellow shareholders to vote against the capital increase of EUR 800 million at the upcoming AGM on November 1, 2018.  This will enable shareholders to vote on our alternative proposal at the EGM to be convened by the board of directors shortly after the AGM.

We remain available to discuss our points further and invite you to contact us directly at +34 91 755 6800 and/or our proxy solicitor, D.F. King Ltd at +44 207 920 9700.

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