The ongoing crisis at Parmalat, the Italian dairy giant, has led to arrests and fiery accusations but it is the long-term outcome of this drama that could have the most lasting impact on the food industry. David Robertson reports.
Parmalat is a vast conglomerate covering 30 countries and employing 36,000 people. But the discovery of a €10-13bn (US$12.9-16.7bn) black hole in its accounts just before Christmas has pushed the Parma-based company to the brink of bankruptcy. The Italian parliament was forced to rush new legislation into effect on Christmas Eve to keep it from going bust and now a government appointed recovery specialist, Enrico Bondi, has taken over.
Bondi is charged with establishing what are real assets and what is fake in a company that only a few months ago was valued at €1.8bn. Many analysts now believe that Bondi will try to protect the Italian core of the company – and the 4,000 workers it employs – because it is politically imperative to do so.
The fate of Parmalat has become a highly sensitive issue in Italy because of the potential impact on jobs and also on the country’s reputation. (It is also important to Prime Minister Silvio Berlusconi that the company survives because he introduced legislation last year that reduced false accounting crimes to “administrative misdemeanours”. His opponents have seized on the false accounting claims at Parmalat and blame the PM for the troubles.) As a result Enrico Bondi is expected to do everything in his power to keep the Parma business alive.
International brands slated for sale
This is likely to mean that a host of business and brands from Ecuador to Russia will be on the market in the coming months, providing rivals like Nestlé, Unilever and Danone with one of the biggest fire sales in the food industry’s history.
But Parmalat has not always been so attention grabbing. The company was born out of a small delicatessen shop and salami factory, which Calisto Tanzi (now 65 and held in jail) inherited from his father at the age of 22.
Tanzi set about building his empire, selling milk in cities like Genoa, Florence and Rome, and established his first international subsidiary in Brazil during 1974 to supply yoghurt and UHT milk to Latin American markets. The South American division’s brands now include Santal, a fruit drink, and the Brazilian brand Etti, which sells vegetables and confectionery.
Parmalat moved into the US in 1982 and now owns numerous brands in North America including Mother’s Cookies, Sunnydale Farms milk and Black Diamond cheese.
During the 70s and 80s, Parmalat was also moving into Germany and France and, in 1990, the family company opened its doors to investors by listing on the Milan stock exchange. This provided Tanzi with even greater access to money in order to fund his expansion programme and in 1993 alone he bought 20 businesses.
In 1995 Parmalat bought the powdered milk business Indaluc in Venezuela and Loseley yoghurt and ice cream in England the year after.
Diverse portfolio vulnerable
Years of acquisitions mean that Parmalat’s tentacles spread into dozens of companies making everything from milk to canned tomatoes. It also owns the Parma football club, has stakes in South American football clubs and employs a number of Tanzi family members including Calisto’s brother and niece.
However, problems are thought to have started when Tanzi began funnelling cash into the family’s ailing travel business, Parmatour. Tanzi admitted last week €500m had been siphoned out of Parmalat for this purpose.
But it was a giant hole in its Cayman Island subsidiary, the Bonlat Financing Corporation, that really blew the lid off this scandal. On 19 December 2003, Bank of America announced that documents proving that Bonlat had €4bn in its Cayman Island accounts were forged. Investigators are now crawling all over Parmalat and they fear that there are several more Bonlats, all hiding similarly large losses. So far two executives at the Italian branch of Grant Thornton, which audited the company, as well as seven Parmalat executives have been arrested – including Tanzi.
Fausto Tonna, the former finance director, added an element of showmanship to the scandal last week when he shouted at the crowds gathering to watch him enter the Parma prosecutor’s office: “I wish you and your families a slow and painful death.”
But as the legal battles get under way, Enrico Bondi, the new chairman of Parmalat, is faced with finding a way to rescue the company. He has already started to investigate the sale of Parmalat’s 99% stake in Parma FC and will also sell its 1.5% stake in McC bank.
But this is expected to be merely the tip of the divestment iceberg with analysts predicting that Parmalat will shed dozens of brands all over the world in order to keep its bankers happy.
Fire sale could spark feeding frenzy
Plans are already in place to sell the European bakery business for about €300m and large chunks of the South American business are also understood to be on offer.
“They have no choice but to sell, the situation is so bad,” an international food analyst said. “Whether they get to negotiate on price will be key – it could become a fire sale which will play into the hands of companies like Danone.”
Another analyst pointed out that the South American dairy operations are more likely to be sold than the European subsidiaries because of the EU’s complex quota arrangements.
Although the Parmalat mess is still in its headline-grabbing infancy this is likely to be a scandal that rolls on throughout 2004. Parmalat’s problems are likely to spark a feeding frenzy among the food giants and private equity firms as they swoop on bargain brands that seem inevitably to be carrying a “For Sale” sign.