Europe's Enron? Italian food giant faces bankruptcy over missing £3bn

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The Independent Online

It has been dubbed "Europe's Enron" and has propelled Italy's Prime Minister Silvio Berlusconi towards another head-on confrontation with the European Union.

Parmalat, the Italian food group which makes Loseley ice cream and the eponymous brand of long-life milk, was on the verge of bankruptcy last night following a €4bn (£2.8bn) accounting scandal.

The crisis immediately raised the prospect of a major political row between the Italian government and the European Union over illegal state aid after Mr Berlusconi yesterday issued a decree rewriting the country's bankruptcy laws in a desperate attempt to salvage Parmalat's assets. The company said yesterday that it would seek protection under the new laws.

The Parmalat scandal is deeply embarrassing for Mr Berlusconi because he has liberalised Italy's accounting rules since coming to power in 2001. He has also reduced the penalties for false accounting, a move that resulted in the controversial rescinding of an 11-month prison sentence given to Cesare Romiti, the former Fiat chairman.

Bank of America, one of Parmalat's main banks, last night said it had filed a criminal complaint over the affair with the Italian authorities. Prosecutors have already opened an investigation into the food group.

The Italian premier, who has often courted controversy in his own political and business career, suffered an immediate backlash yesterday from political opponents who claimed that Mr Berlusconi's more relaxed stance on accounting rules were at least partly to blame for the affair.

Parmalat and its founder, Calisto Tanzi, are now embroiled in an ever-widening criminal investigation into the €4bn "black hole" at the dairy company which was described as "Europe's Enron" by Giulio Tremonti, Italy's Finance Minister. There were fears last night that the scandal could eventually cost Parmalat creditors and shareholders close to €10bn.

The scandal has not only dragged in senior figures from the Italian political and business world but also involves the UK accountancy firms Deloitte & Touche and Grant Thornton, which are Parmalat's auditors. However, unlike Arthur Andersen, the Enron auditor, the two British companies have acted as whistle-blowers, highlighting their concerns over Parmalat's finances.

Another crucial player in the affair is Bank of America. It first alerted the company to the €4bn black hole in its accounts.

Antonio di Pietro, a member of Italy's centre-left opposition, said yesterday: "The political responsibility of the government is revealed by a law that decriminalises false accounting to protect false balance sheets and leave thousands of investors in their underpants."

The Italian government was also forced yesterday into the humiliating act of pleading with the European Union to recognise crisis status for its dairy industry as a result of the scandal. Italian milk producers have not been paid since August by Parmalat, which buys 8 per cent of the country's milk output.

Italy also said that it would ask Brussels for special dispensation from EU rules on state aid to help the industry, and would also be requesting "support measures" from the EU.

However, Mr Berlusconi's new bankruptcy laws and Italy's request for special treatment could be rebuffed by the EU which is concerned that the measures could be used by Italy to disguise illegal state aid to Parmalat.

An EU spokesman said: "The bankruptcy decree will have to be assessed by us. The key point is fiscal neutrality."

Parmalat is one of Europe's biggest food groups and makes dozens of Europe's household name brands.

The company was built up by Mr Tanzi who inherited his father's salami business in Collecchio, a village near Italy's culinary capital, Parma.

He started a dairy plant in 1961 to challenge the country's milk monopoly, and grew the business to become Italy's first producer of branded milk, including the long-life ultra heat treated milk for which Parmalat has become famous.

Parmalat came to stand for everything that was solid and reliable about the hard-working inhabitants of industrial northern Italy.

In typical patrician style, Mr Tanzi splashed out on extravagant sports sponsorships, with his company name becoming familiar to millions of Formula One racing fans after he signed deals with Niki Lauda and Nelson Piquet. Not satisfied with mere sponsorship, he eventually bought Parma football club in 1991, a year after Parmalat floated on the Milan stock exchange.

However, Mr Tanzi has now been forced out of the company he built up and faces ruin as most of the Tanzi family fortune was tied up in Parmalat shares. He has been replaced by Enrico Bondi, one of Italy's toughest company doctors.

The Parmalat affair dwarfs previous continental accounting controversies such as Ahold, the Dutch retailer, which was hit by a €1bn scandal earlier this year.

At the centre of the Parmalat scandal is a phantom bank account set up by a company offshoot which was purported to contain €4bn. However, on Friday the account was shown to be fictitious, sparking panic among Parmalat shareholders and fears of an immediate collapse of the industrial giant, threatening 35,000 jobs.

Problems at Parmalat first surfaced earlier this month after the company admitted that it had been unable to cash-in a €500m investment in an obscure, Cayman Islands-registered investment fund called Epicurum.

On 8 December, the company was due to repay €150m of debt but could only meet the repayment with the help of its lending banks which eventually repaid the money four days late.

The company then failed to pay the first instalment on a $400m (£228m) agreement to buy out fellow investors in a Brazilian joint venture due on 17 December.

But the real scale of the crisis only became apparent on Friday when the company admitted in a statement posted on its website that documents from Bank of America, supposedly showing that the company had €3.95bn deposited in one of its Cayman Islands bank accounts, were false.

The phantom account had been set up by a Parmalat subsidiary called Bonlat Financing Corporation.

It is believed that a scanning machine was used to cut and paste letterheads and company names to create the false Bank of America documents.

These documents were then used to persuade auditors at Grant Thornton that Parmalat had billions in cash and shares that, in reality, did not exist. The criminal investigation now under way into the affair will want to establish the motives behind the false accounts and ascertain whether any Parmalat employees benefited personally or whether the accounts were designed as a way of disguising the company's financial position.

Bank of America said it has passed its evidence to the Italian prosecutors who are now looking into the affair.

The news of the phantom €4bn stunned investors and the company's share price crashed, eventually leading to Parmalat's suspension from trading yesterday by the Milan Stock Exchange.

The company has said it has €7bn of debt outstanding to a variety of Italian and international banks, but now has no obvious means of repaying it unless the company is broken up and the brands sold off to other European food groups.

The wide world of Parmalat

Parmalat is Italy's largest food company and specialises in dairy, milk and bakery products. It built its reputation on selling two of Italy's staples, cured ham and parmesan cheese. Its brands now dominate Europe's supermarket shelves after rapid expansion over the past 40 years.

Its main milk brands include the Parmalat long life milk which is ultra heat treated and which the company has become best known for. It also owns the Sunnydale Farm range of products and the Cacaolat drinking chocolate brand.

Its dairy products include the company's ice cream brands, of which the most famous is Loseley ice cream. Its other brands include Clesa, Malu and the Lactantia range of dairy products. Over the years, Parmalat has branched out into beverages and owns some of Europe's top-selling names in soft drinks including Santal and the Aqua mineral water brand.

Its bakery operations include the Archway ginger snaps brand and Mother's Cookies. Other products the company makes include Pomi tomato sauce and Aylesbury ice cream. More recently, Parmalat has branched out into publishing and launched Food and Well Being, a magazine that focuses on the latest thinking in the field of nutritional studies. The company also funds research and development and in the 1970s established a research centre in Collecchio, near Parma, where the company is based. The research centre is where the company develops its new products.

Parmalat's financial demise will arouse the interest of its food company rivals who are to pounce should the company be broken up to try and repay its debt of seven billion euros. Companies likely to be interested include Nestlé, Unilever and Danone.

A fiercely contested auction to sell Parmalat's brands can be expected as it is rare for a company of Parmalat's size with its wide range of brands to come up for sale. The fire sale of assets to foreign companies will be a severe blow to Italy's corporate pride.