Can Parmalat Be Saved?

Some units are still making money. Now creditors have to buy a turnaround plan

Italians call turnaround expert Enrico Bondi "the Sphinx" for his enigmatic style. Since Bondi was appointed by the government as administrator of bankrupt milk giant Parmalat last year, anxious creditors holding some $18 billion in debt have been waiting for the inscrutable business leader to clarify their fate. The moment of truth is near. On June 21, Bondi will present his turnaround plan to the government, including much-awaited formulas for a proposed debt-to-equity swap. The hope is that the plan will put the scandal-wracked company back on track, but so far bondholders are in the dark. "We really don't know how it's going to turn out," says Barry G. Russell, a London lawyer with Bingham McCutchen who represents an investor group. "The amount of information available has been disappointing. We can't get a good sense of the value of the business."

While the principal details of the restructuring plan are being worked out behind the scenes by Parmalat's interim management team, the central issue that Bondi faces is simple: how to cope with the crushing debt load that sent the company into bankruptcy. The Parma milk giant collapsed in December following the discovery of a $4.8 billion fictitious bank account on its balance sheet. Auditors examining Parmalat's books in January found a total of $18 billion in debt -- $15 billion more than the company had reported -- making it one of the biggest frauds in corporate history.

Many observers questioned whether even basic operations could be salvaged, given the huge debt. But Bondi has moved swiftly to sort through the financial wreckage and keep profitable production lines running. In a meeting with creditors on June 4, Bondi's team forecast 2004 revenues of the company's core business at $4.6 billion, down 32% from still unaudited 2003 revenues, but showing a pretax profit of $69 million. They plan to get there by focusing on the company's strengths -- its dairy and fruit juice products -- in markets around the world, including Italy, Canada, and Australia, where it is a dominant player. "The business is growing," says Parmalat Marketing Director Alberto Grignafini.

To bolster profitability, Bondi is working to sell off loss-making businesses and noncore subsidiaries, such as the Parma soccer team, and slash poor-performing brands. A handful of businesses already have been sold, including the company's operations in Thailand. What remains will be a streamlined corporation comprising some 16 milk and juice-based businesses around the world and 30 strong global and regional brands, including Santal juices, Bonlat milk, and Kyr yogurt. That will be just one quarter of the ungainly stable of 120 brands that the company has struggled to manage in recent years.

Bondi's goal is to install a new management team by November, to which he hopes to hand over a sound operating business. According to a review of Bondi's business plan by consultancy A.T. Kearny, Parmalat should generate $4.8 billion in revenues by 2006 and show a gross margin of 11% -- the food industry average. But Bondi's main task before he leaves the scene is persuading creditors to back a debt-to-equity swap. The approval is crucial to eliminating the massive debt load that forced Parmalat into bankruptcy. Sources close to the company say Bondi is likely to offer 10% to 30% of the value of the original debt held by some 100,000 bondholders and other unsecured creditors, including banks.

Bondi's argument to the creditors will be that he needs their cooperation if they want Parmalat to reemerge from bankruptcy as a going concern with the prospect of future growth. To provide creditors with a market valuation of a restructured Parmalat as rapidly as possible, Bondi aims to re-list the company on the Italian stock exchange in early 2005. That would offer creditors the chance to cash out or bet on future growth. What's more, Bondi plans to make the perpetrators of the fraud pay. One individual close to Parmalat said several teams have been working on preparing lawsuits that will seek to recover some $18 billion from institutions and individuals that were allegedly complicit or negligent. Among those said to be in Bondi's crosshairs: Citigroup (C ), Bank of America (BAC ), accountants Deloitte & Touche and Grant Thornton, and investment bank Morgan Stanley (MWD ). The banks and accounting firms named in the suits have repeatedly denied wrongdoing.

Parmalat must also wade through a thicket of its own shareholder lawsuits -- a liability the restructured company will have to deal with for years, unless Bondi can convince plaintiffs to remove the restructured milk company from the list of the accused. Experts say it may take at least until spring to re-list the shares, if not longer.

If creditors support Bondi's plan, Parmalat could be out of bankruptcy by November, less than a year after the implosion that rocked financial markets around the world. The pressure is on to revitalize Parmalat as quickly as possible, since the conglomerate's sudden collapse put the failings of Italian corporate governance and market regulation under a harsh international spotlight. Government officials, regulators, and corporate leaders are eager for Parmalat to become a paragon of corporate transparency. "Parmalat must emerge from the ashes. The symbol of bad behavior must become a symbol of virtue," says Carlo Alberto Carnevale Maffè, a professor management at Bocconi University in Milan.


To meet those lofty expectations, Bondi's team has designed a corporate governance framework for a new Parmalat modeled on recommendations of market regulators and the Italian Stock Exchange. The biggest changes include setting up a board of directors with a majority of independent members and instituting a "code of self-discipline" that sets out regular reporting obligations for all board committees. Advocates of better governance say those reforms mark a watershed for Corporate Italy. "The most important issue is a professional, independent board of directors that has independent oversight and control over management," says Stephen Davis, president of Davis Global Advisors Inc., a Boston corporate governance advisory.

The 69-year-old Bondi hopes to walk away from a cleaned-up Parmalat by the end of the year. If he succeeds, the Sphinx will have revealed one secret: that of turning a scandal-plagued company into a model for the rest of Italy Inc.

By Gail Edmondson in Frankfurt with Maureen Kline in Milan

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