Parmalat's results show deterioration

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The finances of Parmalat, the Italian dairy group, hit the
headlines again last week with the announcement that it planned to
liquidate its €496.5 million investment in the Cayman Islands-based
Epicurum fund - an investment which no-one outside the company knew
about until early last week.

The decision was announced as the company reported its nine month figures and the departure of its second chief financial officer in six months.

Family-owned Parmalat has worried investors and analysts alike in recent months with its increasing debt levels. After a number of bond issues in recent years, the company owes around €6 billion, some €5 billion of which is due within five years, but appears to have little to show for its attempts to raise finance.

Moreover, the company has liquid assets in excess of €4.2 billion, but seems unwilling to use this to pay off its debts.

The peculiar state of the company's finances had most analysts scratching their heads last week, all the more so after the group's latest results showed a clear deterioration in its core business.

Consolidated group sales for the nine months to 30 September were €5.3 billion, down 7.1 per cent compared to the same period a year earlier, despite organic growth of 4.1 per cent. An 11.2 per cent negative impact from exchange rates was the main cause of the decline.

EBITDA for the period was also lower, dropping 5.7 per cent to €650.5 million, while EBIT of € 438.8 million was down 3.2 per cent.

Parmalat defended the decision to keep a high level of liquidity rather than paying off some of its debts. While it confirmed that just €190 million would be needed to pay off debts maturing by the end of 2004, it said that a further €246.4 million would be necessary to cover the possible early redemption of other bonds during that same year.

In addition, it could be required to invest around $400 million in the acquisition of an 18.18 per cent stake in its Brazilian subsidiary, Parmalat Empreendimentos e Administracao, currently owned by North American institutional investors should the planned listing of the company's shares not take place by the end of 2003.

The company in fact increased its debt levels during the third quarter as a result of more bond issues during the period. "These bond issues are held to be in line with the group's financial strategies,"​ the company said in a statement.

"Such issues have enabled us to raise new funds at advantageous conditions to be used to refinance a part of our short-term debt over the medium to long term, and to give us greater flexibility in meeting our short-term financial commitments."

The company is also seeking approval from shareholders this week for a capital increase of €400 million to help "strengthen the balance sheet of the group's principal operating company"​ It is also set to receive €400,000 from the sale of its French mozzarella production facility in Normandy.

But Parmalat's insistence that its financial strategy is the right one was significantly undermined by the announcement that the chief financial officer Alberto Ferraris was to stand down after just a few months in the post. He will be replaced by Luciano Del Soldato, who will combine this function with that of general manager, a move which is hardly likely to improve investors' confidence in the company's ability to effectively manage its finances.

De Soldato said that he would move to simplify the company's financial structure, reducing both the debt burden and the cash pile, although analysts clearly remain sceptical.

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