The battling Viking spirit of the Gudmundsson brothers revealed itself again last week as rumours emerged that Bakkavor is laying the ground for a potential stock market flotation. It would represent a remarkable turnaround from 2008, when the financial crash left the chilled convenience food giant on its knees.
“Bakkavor is an amazing story,” a senior ready meals source says. “If someone said, when Iceland blew up, that these guys would not only survive but be on the verge of considering a flotation, you would say it was a movie.”
How did Bakkavor emerge from its zombie state as an IPO contender? How likely is a float - and why now? Can the City stomach the legal problems surrounding the Gudmundssons?
Bakkavor today employs 18,000 staff at 50 sites across the world - the majority in the UK - generating revenues of £1.7bn. But its origins are more modest. Founded by Agust and Lydur in 1986 to export fish roe to Scandinavia, the group grew sales to £4.6m and its employee count to 65 over the next decade. Then came the boom.
Viking raids
A listing on the Icelandic Stock Exchange in 2000 preceded a debt-fuelled acquisition spree as the Gudmundssons raided the UK ready meals market, including the 2001 £100m takeover of Katsouris Fresh Foods, the biggest supplier of Greek dips to Tesco, and the transformative £485m acquisition of listed ready meals maker Geest (which added about £800m to sales in 2005).
That growth came at a high cost, though. Excessive borrowing from Iceland’s banks left Bakkavor on the verge of collapse when the country went into meltdown. A precarious restructuring in 2010 - and a delisting from the Iceland Stock Exchange - greatly reduced the Gudmundssons’ stake, but its creditors controversially left the pair in charge.
The brothers finally retook control of the group a year ago this week after teaming with US hedge fund Baupost to buy back the 51% held by Icelandic financial institutions, giving them an 89% stake. Bakk AL Holdings, the vehicle set up for the deal, snapped up the majority of the remaining shares owned by individual retail investors and other institutions by March.
“They’ve had to wrestle with the lifestyle choice of moving from £2bn net worth to significantly less than that, but their very survival was remarkable,” says the senior ready meals source. “And, actually, they’ve done a very good job of cleaning it up and restoring it to good shape.”
Ratings agency S&P upgraded its corporate bonds to B+ in recognition of the work done deleveraging the group, with net debt to EBITDA ratios now at more manageable levels.
A senior City dealmaker agrees: “Its issues were purely financial and it has always been a very solid business operating in growth categories, with strong relationships with its customers and a strong consumer pull for its products. It has always had a strong business proposition and its operational execution has always been pretty good.”
Legal problems
After fighting for eight years to hold on to Bakkavor, the Gudmundssons would never contemplate selling the group, another corporate finance adviser adds. “Bakkavor will probably end up floating because the brothers have firmly committed to retaining control for the long term. A sale would be a complete non-starter to even speculate over.”
However, legal problems stemming from the Gudmundssons’ involvement in Iceland’s Kaupthing bank, via a 45% holding in its largest investor, Exista, and their tooth-and-nail battle to hold on to Bakkavor, casts a shadow over any potential IPO. Lydur Gudmundsson, who is still chairman of Bakkavor, was sentenced to eight months in prison by Iceland’s Supreme Court in March 2014 for his financial manoeuvring at Exista, although he never actually spent any time in prison, completing community service instead.
“An IPO is great but I’m not sure they can withstand the scrutiny,” a senior industry source says. “Public markets will need full disclosure on the awkward legal issues and it will put some investors off.”
Another dealmaker argues a return on investment is the most important consideration for the City, pointing to the controversial figure of Mike Ashley as an example. “Ashley has had his fair share of problems but he was able to float Sports Direct, retain full control and still attract investors.”
Bakkavor has already gone some way to addressing concerns, appointing two creditable non-execs in December. Denis Hennequin and Simon Burke have extensive executive experience, including listed companies, McDonald’s and Hamleys, as well hotel group Accor and Virgin. Hennequin is currently a non-exec at Eurostar, John Lewis and SSP Group, while Burke sits on the boards of the Co-op Group and the BBC.”The appointments look to have been made to provide the City with acceptable faces ahead of the IPO,” the City source adds.
But why would the shy brothers want a high-profile flotation? The senior City source says Baupost always wanted a swift exit. With the stock market trading at record highs, it sees a significant arbitrage opportunity.
“Listed chilled food rival Greencore is trading at a pretty fancy multiple of about 14x earnings, so even if Bakkavor sold shares at a 15%-20% discount to generate investor interest, the float price would likely be significantly higher than Baupost paid last year.
“If they can pull it off, it would be a remarkable end to a rollercoaster ride.”
● The original was corrected to say Lydur Gudmundssons elected to undertake 120 hours community service instead of an eight months prison sentence.
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