Crying over spilt milk: Spotlight on Parmalat

The implosion of the dairy giant Parmalat was one of the biggest corporate fraud cases ever seen in Europe. Indeed, as the true scale of the scandal became apparent over a period of several months, the case threw up debt defaults, insolvency and almost 30 arrests. In January this year, the group disclosed that its actual debts were more than €14bn, nearly eight times more than the bankrupt company's former executives had admitted. Magistrates launched an investigation in December after Parmalat admitted that a €4bn bank deposit did not exist, forcing it into insolvency and triggering a huge financial scandal. The collapse of the world’s seventh-largest dairy company sent out a series of shockwaves which swamped everyone who was involved - whether directly or indirectly - with the group.

In mid-March this year, prosecutors brought formal charges against Parmalat’s founder Calisto Tanzi, other members of his family and an inner circle of company executives for their part in the affair. The prosecutors named 29 individuals and the Italian branches of the Bank of America and accountants Deloitte and Grant Thornton. The charges include market-rigging, false auditing and regulatory obstruction. Calisto Tanzi is currently residing in Milan’s San Vittore prison.

Headquartered in Parma, Parmalat was launched as a family business. The firm started life as Calisto Tanzi & Sons - Salamis and Preserves, selling salami, prosciutto and other cured meats. After the death of his father, Calisto Tanzi made a strategic decision to re-focus the company’s activities on milk. He set up a small pasteurisation plant in the town of Collechio to supply milk to the city of Parma and its surrounding areas. The company grew rapidly through door-to-door sales, expanding to Genoa, Florence and Rome. Parmalat was the first such firm to use the Tetra Pak, which was more hygienic and prolonged the life of milk for more than three days. With the development of UHT (ultra-high temperature) milk, long-life milk products became the firm’s core product, making it the world’s largest UHT milk producer. By the 1990s, Mr Tanzi had transformed Parmalat into a food giant with interests in fruit juices, vegetable sauces, baking products, soups, yoghurt, cream and mineral water. It owned companies in 30 countries including the US, Brazil and Mexico and employed 36,000 people. However, despite the group’s rapidly-expanding size, Calisto Tanzi consistently refused to relinquish his tight grip on the reigns of power, brushing off family advice to take on external managers. Parmalat was in dire need of an institutional owner to professionalise the management of the firm, and many believe that if Tanzi had not been intent on playing the role of tycoon, the internal corruption could have been nipped in the bud.

The key event leading to Parmalat’s exposure was a meeting in December 2003 between Calisto Tanzi, his son Stefano, and the US private equity firm Blackstone Group. During discussions on selling the family’s 51% interest in Parmalat, the Tanzis inadvertently admitted that the cash on hand was somewhat less than the €3bn listed in the company’s annual report. They also admitted that there were hardly any liquid assets, and the company was €10bn in debt.

Parmalat’s victims are wide-ranging. The collapse is threatening some 36,000 jobs around the world. The dairy farmers who produce the raw materials for the firm’s products are also waiting for payment. The firm’s investors are left with now worthless stock, as well as $1.5bn of outstanding bonds. The Tanzi family had previously deposited the receipts from one such bond issue - controlled by Citibank - in an account ironically called ‘Buconero’ or ‘black hole’.

Another victim of the fraud is the football club AC Parma, which effectively faces ruin. The club is 98%-owned by Parmalat, with Stefano Tanzi as president. With the Tanzi’s money, AC Parma rose from being a provincial side to a leading force in European football. However, the club is now faced with having to scrape together enough money to see it through this season. According to Parma's managing director, Patrick Nebiolo, one possible rescue plan could involve Parmalat waiving the debts owed by the club, the entry of new shareholders, or a recapitalisation.

Lured by Parmalat's falling share price, which plunged around 60% between April 2002 and March 2003, a number of private equity firms considering bidding for the company, including Texas Pacific Group, CSFB Private Equity, BC Partners, KKR and Hicks, Muse, Tate & Furst. The beleaguered Parmalat is still attracting considerable private equity interest, as firms start to assess which of the food company’s brands could be most profitable as part of a debt for equity restructuring plan. According to a senior London banking source: ‘Financial sponsors are starting to look at Parmalat's divestment plans in anticipation of strong interest in the products on offer. Parmalat’s new chief executive office, Enrico Bondi, recently outlined restructuring plans for the group, announcing plans to concentrate on 30 core brands. Six of these brands currently generate 80% of Parmalat’s sales meaning that the firm is running about 90 under-performing brands, which could provide a solid source of turnaround transactions for private equity firms. Several private equity firms could potentially be interested in Parmalat’s forthcoming divestment plans, with Hicks, Muse and PAI Management, as they have particularly strong track records in the consumer food sector. Hicks, Muse owns Weetabix, whilst PAI owns United Biscuits.

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• Topics
• Southern Europe