Picking up the pieces: Parmalat's hugely profitable Latin America division is a tempting target. Investors aim to keep the company whole--if they can.

It may be hard to imagine, but it was not long ago that Italian dairy giant Parmalat was the envy of much of the world business community. The company boasted a Horatio Alger success story that started with a family salami store in the 1960s and eventually stretched around the globe with a product line as old-fashioned as milk and cookies. As recently as late last year the company polled among consumers as one of" Italy's five most-respected brand names, ahead of global stalwarts like fashion house Versace and tire maker Pirelli.

Of course, that all came tumbling down just before the start of 2004, when an Italian court rifled Parmalat insolvent and the company's estimated US$18 billion accounting scandal soon came to light. Less clear is what the future holds for the company, which in 2003 employed more than 36,000 people in 30 countries. Nearly half of those workers--16,341--are in Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay, Uruguay, and Venezuela, in Parmalat's huge South American division, where the company operates 32 production plants.

More than 1,300 additional Parmalat workers are in Cuba, the Dominican Republic, Mexico, and Nicaragua, which the company considers part of its North American division. The Italian headquarters in late January lined up $192 million in financing to keep operations open across the world, and a report from auditor PriceWaterhouseCoopers estimates that company revenues through the first nine months of 2003 were $5.1 billion.

Parmalat operations in Brazil, the company's most important market and one that reports sales higher than in Italy, also filed for bankruptcy protection after falling behind on pennants to suppliers. It has two years to reorganize.

"Most of the thousands of dairy farmers in Goias state who, until recently, supplied Parmalat are now in very tough financial shape because Parmalat hasn't paid them since December and because they are now being forced to sell their output to other milk processors, like Nestle, at up to 30% lower prices," says Maurivan Siqueira, head of the dairy commission of the Agricultural Federation of Goias, Brazil's No. 2 milk-supplying state. Parmalat's only plant in the state closed during the first week of February, so none of the 600 big dairy farmers who directly supplied the Parmalat plant nor any of the 5,000 much smaller ones who sold to it via daily cooperatives now do business with the Italian company.

The Brazilian arm of Parmalat also soon returned a tomato and pulp factory it bought from Dutch and U.K. consumer products giant Unilever when it couldn't find enough funds to close the deal. There are reports of late payments in Chile and Uruguay as well. And trouble could be brewing in Ecuador, where Parmalat founder Calisto Tanzi visited just before the scandal broke, something investigators there speculate could be related to the trouble. Parmalat officials in Quite say operations in Ecuador are too small for it to have played a significant role in the scandal.

Meanwhile, judges around Brazil are pouncing on Parmalat assets. In early February, a judge in southern Parana state ruled that Parmalat Brasil had to give up its 51% stake in milk producer and processor Batavia to other company shareholders because, the judge wrote, "its disrepute and pre-bankruptcy situation puts Batavia's activities at risk." Batavia accounts for 33% of Parmalat Brasil's annual revenues. Soon after, a judge in southeastern Silo Paulo state ordered the removal of the entire executive board of Parmalat Brasil, including CEO Ricardo Goncalves, The same judge appointed former Brazil Central Bank Director Keyler Carvalho Rocha to oversee the company's Brazilian operations.

Many have focused on Brazil, where Parmalat chiefs argue that losses related to devaluation there spun out of control Some believe that led to a Barings-Bank style series of cover-ups gone bad, with underlings doubling and tripling down losses hoping to turn things around. But a Brazilian executive told a court that operations there have lost $1.6 billion, far less than the total of money gone missing, and offshore accounts alleged to hold $4 billion bear more scrutiny first, investigators say.

Regardless, the company's assets across the region could soon become attractive takeover targets for global food rivals Nestle, Kraft, and Unilever. Though no such offers took place in Latin America during the first weeks after the scandal broke, interest has been reported in several countries in the region, especially in Venezuela--one of the most troubled of Parmalat's Latin American units--where new director Rafael Miranda told reporters that the company's main goal in the country is to hold its operations together.

Fallout. According to experts close to the prosecution, the Italian government also believes that the best course one that would save many of the 4,500 Parmalat jobs in Italy at least--is to keep the company in one piece. That means that although government prosecutors are aggressively tracking down Parmalat executives, hankers and consultants presumed to be guilty (1 I, including Giovanni Bonici. the former head of Parmalat's Venezuelan operations, were jailed in the four weeks after the scandal was revealed), the regulatory fallout in terms of sanctions and fines against the company itself is likely to be relatively mild.

The Italian government and a few key Parmalat shareholders subsequently appointed Italian turnaround artist Enrico Bondi to oversee the troubled firm and rebuild its finances. Since taking over the post in early January, Bondi has turned deem interviews about his plans for the company, instead issuing a statement saying his goal is to "keep Parmalat as whole as possible" under the circumstances. He said he is against efforts to place foreign subsidiaries into bankruptcy citing his concerns that the company's creditors could lose a chance to recover losses, "Mr. Boudi will oppose anyone who tries to take action that is against the interests of the majority of creditors," says a Bondi spokesman.

"In these kinds of cases, government officials always weigh three main concerns: catching the bad guys, fixing the system so it can't happen again, and preserving jobs and money," says Massimo Barreca, a retired Italian Ministry of Justice investigator associated with a similar but smaller scale probe into satellite television service Freedomland in 2000 and 2001. "The most important of these priorities depends on the specifics of the case, but I would speculate that in this case jobs are a very high priority."

The trouble is that the global nature of a company like Parmalat limits the extent to which Italian authorities can protect the company's foreign workforce. Even investigators succeed in coordinating investigations and action within the European Union--an unlikely development nonetheless reported to be under discussion--that still leaves 4 out of 5 Parmalat workers worldwide out of the Italian government's roach.

The immediate risk, according to business experts, involves the company's image in foreign markets, where suppliers may demand more frequent payments or charge more for credit, cutting into profitability. That started almost immediately in several Latin American markets: In Argentina, the General Dairy Farmers Union demanded weekly payments from Parmalat in the wake of the crisis rather than allowing payments every 20 to 50 days, as in the past. Similar developments were reported in Brazil, the Dominican Republic, Uruguay, and Venezuela, where in some cases key suppliers defected to rivals.

But the biggest risk may come from lawsuits filed oil behalf of investors, suppliers, or creditors who say they were defrauded by Parmalat's questionable accounting. So far the most important lawsuit in the case is being filed by California class-action law firm Milberg Weiss Bershad Hynes & Lerach. The Parmalat lawsuit alleges that insiders, together with legal, accounting, and financial advisors, "concocted a massive scheme" to defraud investors in the Italian company of $5 bill ion.

If successful, the lawsuit likely will recover only a fraction of the money the firm says was illegally raised. Yet it is still very dangerous for Parmalat because that money comes from assets left 'after other creditors are paid off--the same funds the company would use as part of a restructuring effort aimed at keeping the company whole after the dust: settles.

It must seem like a nightmare to the company that made its mark by popularizing the process that makes shelf-stable milk--a process that requires briefly heating to 140 degrees Fahrenheit and then storing it in special containers and then made itself famous by sponsoring sports events, first snow skiing and then soccer.

Tanzi, the company's founder, expanded the company beyond Italy's borders for the first time in 1974 when he acquired an agricultural holding company in Brazil. The company made its mark beyond milk to include fruit juices, baiting products, soups, yogurt, mineral water, and cookies. Parmalat's influence and reputation was instrumental in the European Food Safety Agency establishing its headquarters in Parma.

Latin America became more important at the same time, with the subsidiaries in the region seeing growth as fast as 50% annually in the mid-1990s, making the region a second capital in the Parmalat empire. The eight-country South American division became tire company's largest and most profitable by 1998, the year after Parmalat launched into China from company headquarters in Silo Paulo rather than from Parma.

But it was also in Brazil where the trouble started, at least according to some. Darren Robbins, the lead attorney in the class action suit against the company, says that the pattern of cover-ups appears to trace back to significant losses in 1998, when the Brazilian real was devalued. "No doubt that it started small and then just grew every quarter after that," Robbins says. "Several years later, you end up where we are today."

That's a view shared by Fausto Tonna, the company's chief financial officer was jailed for his part in the scandal. Tonna reportedly told Italian investigators that a key reason behind the fraud the company committed was "the need to cover up the weak points in the South American companies."

Economist Carlo Altieri, a consultant for the Italian Chamber of Commerce it, Rome, says the view that the scandal started in Latin America is a popular one. "It is reasonable to believe that Parmalat's problems would not have occurred if the company had not expanded beyond Europe, where regulations are more strict," he says. But Altieri adds that speculation along those lines is of limited value, since without that expansion Parmalat would have attracted little investor attention in the first place.

In Latin America. Parmalat officials familiar with the case bristle at the suggestion that they are to blame for the company's troubles. Current and former Parmalat executives in Argentina, Colombia, the Dominican Republic, and Mexico contacted for this article most of whom asked not to be named--say that the level of autonomy among Parmalat's Latin American subsidiaries is too low for them to he held responsible for the catastrophe.

"It is simply unacceptable to say that Parmalat's investments in Italia America led to the company's bankruptcy," says Francisco Makes, a government official from the Colombian region of Cundinamarca, home to a Parmalat plant. "As always, the Europeans are trying to pin the dirt on Us."