Mister Freeze

“He’s a very easy guy to get along with and to talk to,” says Jamie Spreng, an analyst at Canaccord Capital. “But he doesn’t let a lot get in the way.”

Report on Business Magazine
February 1, 2002

Mister Freeze
Now that Yogen Früz’s meltdown is over, Michael Serruya is out shopping for new treats
Tamsen Tillson

MichaelSerruya.jpg

By now he must be right at home in his Armani suit and corner office with silk Persian carpets, but when
Michael Serruya reminisces about opening his first Yogen Früz stand with younger brother Aaron at ages
21 and 19, you can just see him passing your frozen yogurt and change across the counter with an impish grin.

Those days are long gone, but the fact remains that the 37-year-old co-founder of the now-ubiquitous frozen-yogurt franchise Yogen Früz would look fetching in a paper hat. It’s his persona, all boyish enthusiasm and hangdog charm, an élan that the tumult of the intervening years—explosive growth, precipitous decline, resurrection as CoolBrands International Inc.—has not tarnished. “He’s a very easy guy to get along with and to talk to,” says Jamie Spreng, an analyst at Canaccord Capital. “But he doesn’t let a lot get in the way.”

The Serruyas came to Canada from Morocco in 1966, early in a wave of Jewish immigration caused by growing anti-Semitism. To get started in Toronto, Michael’s father, Sam, simultaneously learned English, held two jobs and attended university. Then he built a thriving typesetting business, Computer Composition of Canada. “I knew that I wanted to be a business owner from having been exposed to it through my dad,” says Michael.

Michael and Aaron, who shared a paper route and as teens sold T-shirts together, saw an opportunity in the frozen-yogurt stands that were suddenly popular in the U.S. but virtually non-existent in Canada. Sam agreed to finance their venture on the condition that if it didn’t succeed, “we would give up all these cockamamie ideas and come into his business.”

The name Yogen Früz was settled upon, along with everything else in those days, around the Serruya dinner table. But as with Häagen-Dazs, Yogen Früz doesn’t actually mean anything. The runner-up, “and this one I’m glad we didn’t go with,” says Michael, was Yogi’s Yogurt.

The first Yogen Früz, which opened at the Promenade Mall in suburban Thornhill on a hot August day in 1986, was an immediate hit. Having seen their father struggle to raise capital, Michael and Aaron decided that franchising was the way to grow. Circumventing the saturated American market, Yogen Früz focused on virgin territories such as South America and Asia. In 1995, on the verge of opening its 1,000th outlet, Yogen Früz went public, raising $30 million. That allowed the company to begin a flurry of acquisitions—I Can’t Believe It’s Yogurt!, Golden Swirl, Java Coast Fine Coffees.

The next step—a merger with New York-based Integrated Brands Inc. in March, 1998—marked the end of the original Yogen Früz. While it did franchise, Integrated Brands was mainly in the business of selling frozen novelties to retailers, convenience stores above all. This is a business where one competes with an 800-pound gorilla, Unilever (Good Humor, Breyers, Ben & Jerry’s). But Integrated brought to the deal brands of its own, the fruit of long-term licensing agreements with the likes of Tropicana, Yoplait and Betty
Crocker. It also brought into the company Integrated chairman Richard Smith and managers with far more experience in this game than the Serruyas.

Yogen Früz needed the deal, even at the cost of sharing the reins: The business that had made the company so popular on Bay Street was beginning to wear thin. “Michael got into the frozen yogurt business when it was very fashionable,” says Smith. “Now everyone’s back to eating steak.”

The Serruyas and the Smiths consider themselves one happy family—which was why Yogen Früz caught the eye of corporate governance experts. “We’ve had all sorts of issues with this company,” says Bill Mackenzie, president of Toronto-based Fairvest Corporation, a corporate-governance adviser. The merger created a dual-class share structure that gave 65% of multiple voting shares to an insider group that held just 10% of the equity: Michael and Aaron Serruya, Richard Smith and his brother David, and Integrated Brands executives David Stein and Gary Stevens. “If you liked the merger, you had to swallow the garbage with it,” says Mackenzie. Otherwise the deal was off.

Dual-class structure is not illegal, nor does it necessarily mean that the company is poorly run, notes Mackenzie. Bombardier, Rogers, Shaw and Magna all have similar family-friendly setups. But with CoolBrands, shareholders were blind-sided by the change; this was not what they had bought into. And while regulators favour a majority of outside directors on boards, Yogen Früz’s was made up entirely of insiders. (Today CoolBrands has just one outsider.) Yogen Früz even moved its incorporation to Nova Scotia, where, unlike in Ontario, the majority of a board of directors can be foreigners—the Smiths and Stein have seats alongside Michael and Aaron Serruya. Given this sort of control, all an unhappy shareholder can do is sell.

Which they did, especially when the company hit some turbulence in the 18 months following the merger. A protracted takeover of frozen-novelty pioneer Eskimo Pie seemed a Pyrrhic victory when it finally closed in October, 2000. Some investors felt the $10.25 (U.S.) paid per share was too much. Others complained about Yogen Früz’s lack of transparency and its accounting methods. And losses—resulting from rapid expansion, the Asian crisis and rising butter-fat prices—piled up. Yogen Früz lost $27.8 million in fiscal 2000, and in May, 2000, the company took a $24.5-million write-down. The share price dove from $14.50 in May, 1998, to 70 cents in December, 2000.

Under a cloud, Michael Serruya left his position as co-president and co-CEO to become co-chairman. “We’re big boys, we understand how the market works,” he says. “What Bay Street expects at the end of the day is results.”

Smith and Stein, based in New York, went to work on the transition from franchise to freezer section. They closed unprofitable franchises and corporate-run stores. Yogen Früz—with 5,000 outlets in 82 countries—now accounts for just 2% of business.

This makeover looked good to Seymour Schulich, co-CEO of Franco-Nevada Mining Corp. Schulich is a mentor to the Serruya boys, whom he met when his daughter Debbie began dating third brother Simon (they’re now married). To Schulich, the Serruyas are upstanding, true menschen. Last year, when the stock was cheap, Schulich bought 7% of the common shares. Don’t accuse Schulich of letting filial loyalty cloud his judgment, though. “I don’t put $3 million on the table to do anything but make money,” he barks. “Son-in-law, schmon-in-law. This stock is going up. That’s why I own it.” Jamie Spreng’s target for the stock, which recently traded at about $3.15, is $3.80. Not quite the salad days of $14.50, but as Serruya notes, “It’s a far cry from one yogurt store at the Promenade Mall.”

Serruya may no longer be CoolBrands’ head honcho, but he’s not sitting on his hands. He is on the board of more companies and charities than he can name off the top of his head. And lately he and his siblings have taken stakes in a dozen enterprises, including the fast-food chain Cultures, the Toronto Phantoms indoor-football club and, most recently, a 50% share of Fairweather, the clothing chain that was run aground soon after being sold by Dylex. In Fairweather, “We saw the opportunity to pick up some tremendous real estate, some of the best locations in the country, and a very strong brand,” Serruya says.

Each of these investments is in companies being managed by someone else, he notes. Serruya says that leaves him 80% free to take the long view as CoolBrands’ front man and co-chair. The job gives him the “luxury” of focusing on the overall direction of the company. “My day-to-day functions consist of identifying acquisition opportunities, initiating discussions with those companies and moving it along,” he says. Most recently, he spearheaded the expansion of the Yogen Früz franchise into North Korea, a market best known lately for famine. Serruya is undeterred: “Having this one store means we’ll have our foot in the door before anyone else.” It’s déjà vu all over again.


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