ÃO PAULO, Brazil, Jan. 12 - Was South America the
problem with Parmalat?
The company's founder, Calisto Tanzi, who is in police custody in
Italy, has hinted to investigators that the accounting fraud uncovered at
Parmalat was driven partly by a need to hide huge losses at the company's
South American operations. A lawsuit by an
American pension fund accuses Citigroup
of helping Parmalat cover a gap in its balance sheet created by a
Brazilian subsidiary. And an important figure in the
widening investigation, Giovanni Bonici, returned to Italy and surrendered
to the authorities last week after briefly hiding in Venezuela, where he
once ran Parmalat's local unit.
But many analysts doubt that Parmalat's operations in South America,
unprofitable though they are, could possibly have brought down a giant
dairy and food company with operations in 31 countries.
Senior executives of the main South American unit, Parmalat Brasil,
said they were "flabbergasted" and "overwhelmed" by assertions that it had
helped propel Parmalat's sudden dive into insolvency. As they fight a
daily battle to keep Parmalat Brasil running, they expressed fury at the
bad news from the home office in Italy. "What we are reading in the papers
should not even be on the business pages, but in the crime section," fumed
one executive, speaking on condition of anonymity.
Parmalat went on a buying spree here in the 1990's that some in the
Brazilian business community called aggressive and others said bordered on
reckless, highlighted by a 1998 deal to acquire Batavia, a major dairy
cooperative, for $160 million. With little thought given to synergy or
economies of scale, the company's empire grew to 17 plants across the
country. By splashing out heavily on advertising and marketing, including
some prominent sports sponsorships, Parmalat built a strong brand name and
rose to second place in the Brazilian dairy industry.
What it did not build was profitability. Parmalat Brasil has lost money
every year since 1998, when it first began publishing results. But the
company's managers insist that they have been making good progress under
Ricardo Gonçalves, who took over as chief executive in late 2001 -
streamlining operations to seven plants, putting more emphasis on
higher-margin products like yogurts, cheeses and fruit juices, and
narrowing the net loss to $28 million in the first three quarters of 2003,
down from $76 million for 2002.
Those losses come nowhere close to explaining the parent company's
woes, analysts and executives said. And the units in Argentina, Chile,
Colombia, Ecuador, Paraguay, Uruguay and Venezuela are all considerably
smaller operations than the one in Brazil.
"Yes, part of the problems could stem from Latin America, but we're
talking about billions of dollars that have disappeared," said Rafael
Guedes, director in Brazil of the Fitch credit-rating agency. "It would
seem hardly probable that a Latin American unit could produce such a big
hole.
"And even if it were true, surely action should have been taken to
close a business that was hemorrhaging so much money. Better a horrible
end than endless horror."
Even so, Parmalat Brasil depended on cash injections from the parent
company that stopped coming when the group's financial problems became
evident late last year. In December, Parmalat Brasil failed to pay $17
million due to about a fifth of its milk suppliers. The unit has
approached its banks about renegotiating $200 million in loans, and has
even resorted to barter with some suppliers, paying them off in processed
powdered milk instead of cash.
The Brazilian Securities and Exchange Commission has said it is
rechecking last year's financial reports from Parmalat Brasil, which is
listed on the São Paulo Stock Exchange. But a spokesman for the
commission, Ricardo Gontijo, said it had no jurisdiction over two other
holding companies in Parmalat's complicated corporate structure that are
incorporated in Brazil, because the two are not publicly traded.
Parmalat's copious use of such holding companies and subsidiaries - it
reportedly has more than 100 around the world - appears to be at the heart
of its troubles, especially its Cayman Islands-based Bonlat Financing
subsidiary, which was also run by Mr. Bonici.
One of the two Brazilian holding companies is Parmalat Emprendimentos e
Administraçao, which holds Parmalat's 99.9 percent stake in the Brazilian
operating company. The other is Parmalat Participações do Brasil, which
holds an 82 percent stake in Emprendimentos - the rest is in the hands of
institutional investors - and which has at least three bond issues
outstanding that are guaranteed by its parent, Parmalat S.p.A., based in
Italy. That company, in turn, is owned by Parmalat Finanziaria, the
publicly traded main company in the global group, which fell into
bankruptcy Dec. 24.
Parmalat Participações in particular is the vehicle through which most
of Parmalat Brasil's big moves have been financed, including its
acquisitions and its sponsorships of Nelson Piquet, Brazil's former
Formula One racing world champion, and Palmeiras, a top São Paulo soccer
club.
The two holding companies were created by Parmalat Brasil's former
chief executive, Gianni Grisendi, who arrived from Italy in 1976 as a
24-year-old salesman with a background in physical education and close
ties to Mr. Tanzi, the group's founder. Mr. Grisendi's aggressive
expansion strategy in the 1990's seemed to be paying off after the Batavia
deal in 1998, when the Brazilian economy was booming, the currency was
strong and Parmalat Brasil contributed almost 40 percent of the Parmalat
group's global revenue.
According to a former banker who did business with Parmalat Brasil, the
rapid expansion was "an open invitation for big spending with not much
accountability." He said that while the news media in Brazil put the cost
of Mr. Grisendi's dash for growth at $350 million, the figure was probably
closer to $800 million, and there sometimes seemed to be little more than
hunches behind some of the nearly 30 deals he did. Parmalat Brasil
executives declined to comment for this article on the purchase prices of
acquisitions and said they had no access to financial details of the
holding companies.
When the Brazilian currency fell sharply in value in 1999, foreign
companies like Parmalat that had invested in Brazil were hit hard, and
Parmalat Brasil's sales in dollar terms fell by half. Today it accounts
for 18 percent of the group's global revenue, and Mr. Gonçalves and his
new management team are straining to keep the unit afloat and its 5,800
workers employed.
The Brazilian agriculture minister, Roberto Rodrigues, who met with Mr.
Gonçalves last Thursday, said he was worried about a "domino effect" if
Parmalat Brasil shut down and stopped buying milk from suppliers, hurting
milk prices and threatening to drive thousands of dairy farmers out of
business. The government is considering plans to set up special credit
lines for farmers and to buy up the powdered milk some of them got from
Parmalat in barter for their milk.
"This month will be critical for us," one company executive said. "We
are doing everything we can to avoid receivership."
