Bakkavör from the brink?

In his spare time, Ágúst Gudmundsson can be found scaling treacherous inclines in the French Alps. It must feel like a walk in the park compared with the peaks and troughs of Bakkavör.

Over 22 giddy years, with the help of his brother, Lydur, Ágúst built Bakkavör into an international ready meals and produce giant. He then spent five even more frantic years salvaging Bakkavör from its near collapse in 2008, hammering out deals with bondholders and shareholders to keep it afloat, as the Icelandic banking crisis and the company’s crushing debts threatened to submerge it, while also contending with high commodity cost inflation and weak consumer demand.

Now, he claims, the financial restructuring is finished. And with the parent company re-domiciled last month from Iceland to the UK, it marks a new era for Bakkavör, he says. “With the new deal, and moving the parent to the UK, we’re in a position for the first time in a while to be able to do what we would really like to.”

It’s not out of the woods yet. Ratings agency Standard & Poor’s downgraded Bakkavör to a B- credit rating in August and said serious concerns remain about its ability to service its debts. So is Bakkavör back from the brink? And what exactly would it “really like to do”?

The financial restructuring has taken a substantial chunk of debt off the Bakkavör balance sheet. It successfully negotiated with bondholders to turn £400m of debt into equity in May this year. “It leaves the balance sheet significantly stronger,” says Gudmundsson, although it did almost wipe out his and his brother’s share in the company. They plan to build it up again in the coming weeks by buying a 25% stake for £20m.

With net debt down to £589m and net debt/EDITDA at 5.4x, just shy of its banking covenants of <5.75, the level of borrowing is still an issue, he admits. “We would like to have lower debt than we have today”. But he insists there is no danger of Bakkavör defaulting. “We were quite disappointed by the downgrade. We have no liquidity problems at all, we have good headroom and we’ve seen constant growth in our margin and good underlying growth,” he says. And he attributes the downgrade more to macro economic conditions than systemic issues for Bakkavör. “S&P’s view of the UK consumer is so bleak that it feels it has to downgrade companies dependent upon the UK consumer.”

His optimism is partly a function of the market. In August, the categories that Bakkavör operates in, including ready meals, salads and sandwiches, grew by 6.9%, which is “very decent growth”. Bakkavör’s own financial performance is less impressive, although it is still growing sales and profits, reporting a 3% increase in like-for-like sales to £853m and a 5% improvement in EBITDA to £55m in the first half of 2012.

And it has one big advantage when it comes to long-term viability. “Our competitors’ balance sheets have hundreds of millions of pension debt. We have none,” he says. By re-domiciling from Iceland to the UK, it has strengthened its financial position, he adds. It triggers an extension of its net debt:EBITDA covenant levels and gives Bakkavör more financial options long-term.

“To attract finance and deal with financial institutions it is important to be British-domiciled,” he says. “This is a market that financial people understand. They don’t have the same understanding of Iceland.”

Investment levels are rising. After the 2009 crisis, Bakkavör had to reduce capex to £22m to protect profits. Since then, it has risen, reaching £45m in 2011, and Gudmundsson foresees a similar figure for 2012, including further investments in China and the US.

Two new 25,000 sq ft factories, opened in China this year, are expected to deliver £10m of sales. And eight further sites in the People’s Republic are making salads, sandwiches and cut fruit, mainly for multinational fast food chains such as KFC, “China is a massive opportunity,” . And in another move that contrasts with Bakkavör’s acquisitive past, he adds: “We want to grow organically.”

Its business with UK supermarkets remains the heartbeat of the business, however, accounting for 84% of group sales, and 33 of Bakkavör’s 57 facilities. And it has had to up the pace of innovation to meet the supermarkets’ demand for novelty. In 2011, it developed and relaunched more than 1,400 products compared with 1,200 in 2007. It’s also investing in technologies to bring new ideas to fruition. In April, for example, Bakkavör opened a new facility making healthier, higher-quality fried versions of products such as samosas.

In the meantime, he is also looking to work with more non-retail partners. After making pizzas for Pizza Express under licence, it launched a range of Hairy Bikers ready meals in Tesco last year and brought out a range under the Carluccio’s brand in Sainsbury’s. Gudmundsson is open to new partnerships. “We’ll work with anyone who can help us grow the market.”