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March 24, 2011

In the spotlight: Lactalis interest returns Parmalat to headlines

In 2003, Parmalat grabbed Europe's business headlines after collapsing with a EUR14bn hole in its accounts. It was the continent's biggest bankruptcy. Now, following Lactalis's investment in the business, the Italian dairy giant is once again in the news.

By Dean Best

In 2003, Parmalat grabbed Europe’s business headlines after collapsing with a EUR14bn hole in its accounts. It was the continent’s biggest bankruptcy. 

Now, eight years on, the Italian dairy giant is once again the news – and the story involves a mix of business opportunism and nationalistic fervour.

Last week, French dairy group Lactalis, the company behind brands like President and Galbani cheeses, took an 11.4% stake in Parmalat. 

The investment raised eyebrows. What were Lactalis’s intentions? Lactalis said it wanted to “develop a project which would allow the two groups … to offer a full range of dairy products”. Lactalis and Parmalat, the French company added, had “leading positions in complementary product categories and geographical areas”. 

Intriguingly, Lactalis said it would “consider” buying more shares in Parmalat but insisted it did not plan to reach the threshold of 30% – a level that would mean it would have to bid for the whole of the business.

Five days later, Lactalis moved again, upping its stake to 29%, after buying shares owned by three investment funds that, at the start of the month, were rumoured to be looking to sell their stake.

On 2 March, Skagen, Mackenzie and Zenit Asset Management played down the rumours and said they wanted to work with Parmalat to improve the business’s performance, boost the company at home and abroad – and pursue acquisitions. The funds had also lined up a slate of candidates to nominate to Parmalat’s board at its AGM next month.

But, almost three weeks later, the funds explained that Lactalis’s initial investment – and the French firm’s plan to nominate its own candidates to Parmalat’s board – had led to “an increased risk of a split board and of inefficient governance”. The sale of their shares left Lactalis as Parmalat’s single biggest shareholder and prompted concern from Italian politicians – and some business groups – that a foreign company could soon be in control of a strategic domestic business.

In the wake of Lactalis’s fresh investment, the Italian government began considering possible legal measures to protect domestic companies from overseas takeovers. In recent weeks, there has been much debate over whether foreign firms should be allowed to buy Italian firms. This month, the management of Italian jeweller Bulgari has faced fierce criticism from the country’s media for agreeing to merge with luxury goods giant LVMH.

After Lactalis’s move, the Italian minister for economic development Paolo Romani reportedly said that the country’s government wanted domestic companies and banks to move to keep Parmalat in Italian hands.

Confectioner Ferrero, meanwhile, stated that it was looking at the situation “with interest and sympathy at an industrial Italian solution”. And Granarolo, another Italian dairy company, said it could be interested in joining any consortium that looked to buy Parmalat. Granarolo said it was interested in Parmalat’s domestic assets but did not have the financial firepower to by the whole of the company alone.

Yesterday (23 March), the Italian government made its first move to defend Parmalat by passing a law that allows companies with their headquarters in the country to postpone their AGMs by up to 180 days after their annual accounts are published. With Parmalat’s AGM due on 14 April, the law could give Italian politicians, businesses and the company’s management more breathing space to consider their options.

Romani, meanwhile, said the Italian government had also met with leading food producers in a bid to form an alliance that would see manufacturers and banks build a domestic food company capable of competing internationally.

As the Italian government acted, rumours of talks between Lactalis and Ferrero emerged. Reports in France said the two companies met in Paris to discuss a plan to form a holding company that would control Parmalat; other reports said the two sides failed to reach agreement. Ferrero and Lactalis declined to comment.

Lactalis, however, did respond to some of the criticism over the potential foreign ownership of Parmalat. A spokesperson said Lactalis had been present in the Italian market since 1997, had around 3,300 employees in Italy and had developed its business in the country. In 2006, Lactalis acquired Italian cheese company Galbani and the spokesperson pointed to the development of the Galbani brand outside of Italy. Last year, he said, Galbani’s overseas sales rose by 17%.

“Results”, the spokesperson insisted were “more important” than the “nationality” of a company. “We have been developing the Galbani brand outside Italy. It shows we are working for Italy, Italian brands and the development of Italian products,” he said.

Lactalis’s investment in Parmalat would help both companies, the spokesperson said. A stronger Italian business would be created and, he explained, each company could benefit from the overseas presence of each other. He cited the examples of Parmalat’s presence in Canada and Australia. Lactalis has no presence in Canada and only a fledgling business in Australia. Parmalat, the Lactalis spokesperson indicated, could benefit from the French group’s bigger presence in Europe.

Andy Smith, the head of global consumer equity research at brokers MF Global, says Parmalat could benefit from sourcing milk at a lower cost from the south of France, where prices are lower than in Italy. The analyst tells just-food that Italian regulations would only allow Parmalat to source milk from France for its UHT products – Italian law would prohibit the use of French supplies for fresh milk – but he says the Italian company would be able to make a return from tapping into sources in Lactalis’s home market.

From Lactalis’s perspective, Smith says that, “at a minimum”, the French firm could benefit from combining its Italian operations with Parmalat. However, he agrees that Lactalis could benefit from Parmalat’s presence in certain international markets. Lactalis, Smith says, would be interested in Canada, and he also points to Parmalat’s businesses in South Africa and Venezuela as potential ways that the French group could look to expand in emerging markets.

However, Smith argues that Parmalat is a business where there is much room for improvement. He says, for instance, that Parmalat’s volumes have fallen by an average of almost 1% a year since 2005 when the company re-listed. Chief executive Enrico Bondi “has not been effective at all at developing the underlying operating performance” of the business, the analyst argues. He adds: “My sense is that the company has been mis-managed for a very long time.”

However, that, Smith says, does leave opportunity for Lactalis to extract value through synergies. Parmalat, he argues, “probably has twice as many factories as it needs”.

Nevertheless, should Lactalis be considering making a bid for the entire business? Lactalis’s first investment in Parmalat was accompanied by the statement that it did not intend to make a full bid. When Lactalis increased its stake to 29%, it made no comment and has remained silent.

Smith says that “by dint of its poor performance” Parmalat is “one of the cheapest European consumer stocks”. Parmalat is trading at around 6.5x EV/EBITDA, Smith notes. When Lactalis acquired Ebro Puleva’s (now Ebro Foods) Spainsih dairy business last year, it paid 13.0x EV/EBITDA. Parmalat’s current share price is EUR2.37 but Smith has a fair value on the stock of EUR3 a share.

With Italy’s politicians looking to wrap Parmalat up in the national flag, the volatility around the company’s share price will continue. Should a bid for the business be constructed or a rival suitor emerge, there is likely to be upward pressure on Parmalat’s stock. Lactalis, so far seemingly content with a 29% stake, a potential significant presence on Parmalat’s board and a say in the company’s strategy, may have to pay more if it wants the entire business.

That, as Smith acknowledges, is the “dilemma” Lactalis faces.

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