VideoCollecchio is a classic company town. Not far from Parma, in Italy's Emilia Romagna region, its modest streets and squares sprout from a large dairy factory on its western outskirts. In 2003, on Christmas Eve, this unlikely village gained international fame when Parmalat, the factory's multinational parent company, declared bankruptcy after its owner's audacious accounting fraud came to light.
At its height, Parmalat operated in more than 30 countries, employed 36,000 people and reported annual revenue of nearly €8 billion. However, the company had lost money every year since listing in 1990, concealed by aggressive international expansion and heavily doctored accounts. From Parmalat's nondescript head office on a quiet side street in Collecchio, founder and CEO Calisto Tanzi and CFO Fausto Tonna conspired to hide €14 billion of debt — eight times more than reported on the corporate balance sheet. The two executives, in addition to dozens of other former managers, auditors and bankers, are now the subjects of numerous criminal investigations.
Like Enron, WorldCom and others, Parmalat triggered a host of hasty changes to corporate law, as the shocking scale of the fraud jolted regulators into action. (See "The Silver Lining" at the end of this article.) But there is an important difference between Parmalat and many of the scandal-ridden companies that imploded around the same time, explains Pier Luigi De Angelis, Parmalat's CFO. "Enron died. WorldCom died. Parmalat is still alive."
Indeed, not a single day of production was lost during the ordeal. Enrico Bondi, the company's government-appointed administrator, used the powers granted by new bankruptcy laws to keep creditors at bay. Following divestments, closures and write-downs, in the summer of 2004 he transferred the group's assets, such as they were, into one of the previous regime's many dormant shell companies — Cimabue, named after a 13th century Florentine painter — and renamed it Parmalat. The new company with an old name returned to the Milan stock exchange in 2005, less than two years after it became Europe's largest-ever bankruptcy. Though a shadow of its former self, Parmalat today is not only alive but thriving, in a sense.
Above the Law
While more than 12 billion glasses of Parmalat milk are consumed every year, the reborn company's fortunes rely only partially on its dairy business. Bondi and Nicola Palmieri, Parmalat's head of legal affairs, run a lucrative side-business suing the banks, auditors and other advisers that they allege were accessories to the fraud, turning a blind eye to the previous management's schemes. After its bankruptcy, Parmalat retained 95 law firms in 32 jurisdictions, drawing on more than six million documents to launch hundreds of cases against former business partners around the world. "We keep the courts here in Italy quite busy," Palmieri joked in an earnings call last month.
The company has collected €1.2 billion in legal proceeds to date, with banks settling to pay around 10% of the initial claims filed against them. Last year, Parmalat made €755m from these settlements, more than double the €367m in operating profits generated by its dairy business. With around 100 cases still pending, claiming notional damages of €50 billion, bank executives in Milan, Manhattan and other financial capitals continue to live in fear of the sleepy corner of Italian farm country where Bondi, Palmieri, De Angelis and other Parmalat executives unravel the old regime's web of deceit.
But while investors cheer the firm's legal victories — the proceeds largely flow to the bottom-line tax free — some are starting to doubt the current management's ability to run its food business effectively. The euphoria following Parmalat's triumphant relisting faded fast, and its shares have consistently underperformed others in the sector. (See "Milk Dud" at the end of this article.) On an enterprise value to Ebitda basis, Parmalat is trading at around a 10% discount to food and beverage benchmarks, and 20% more cheaply than competitors such as Nestlé, Danone and Unilever.
Court hearings due this year on Parmalat's most important remaining cases — suits filed in American courts claiming $10 billion (€6.8 billion) of damages against Bank of America and Citigroup — should provide visibility on the company's legal endgame. Then what? Many doubt that Bondi, one of Italy's most respected turnaround specialists, would be satisfied with life at an ordinary, medium-sized food group. If he goes, the long-time associates he brought to the company, including CFO De Angelis, are likely to follow. Some even suggest that unless current management present a clearer vision for Parmalat's core business soon, investors may field rival lists of directors when shareholders gather to vote on the board's renewal next month.
"Today, Parmalat is a semi-finished product," De Angelis admits. "We need to become a global company, as in the past, but this time balancing business and geographic risk." Despite the success that Parmalat's seasoned crisis managers have had fighting legal battles and unwinding a legacy of fraud, getting to grips with the milk business may prove just as much of a challenge.
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