Merry Xmas to Everyone

Just to wish everyone a merry xmas, and what better way to do it than by blogging this walking disaster. The piece from Forbes is interesting, as it focuses on the international dimension of the thing. I am off on holiday now till 1st January. No more blogging from me till then (although others please feel free to do so, and if you really are bored, I just left a pretty tangled xmas riddle down in the comments on the Joseph Bosco post). I am sure I'll have more, much more, to say on this when I get back.

Parmalat will soon have protection from its creditors, but that may not be enough to keep the global milk and cookie empire from crumbling. With $11 billion in reported debt, a black hole in off-balance sheet obligations and $5 billion in cash missing, Parmalat will have to sell either a lot of milk or a lot of assets.

Parmalat's Italian dairy business will likely remain intact -- especially after Prime Minister Silvio Berlusconi's weekend pledge to save jobs and factories. But Berlusconi won't see it as a priority to save jobs and factories in Brazil and North America, two of Parmalat's biggest markets. The most likely scenario: The global empire that Calisto Tanzi assembled will eventually be broken up and sold to the highest bidder, much as Europe's other global disasters: Vivendi Universal (nyse: V - news - people ) and Ahold (nyse: AHO - news - people ).

In the 40 years he ran the company, Tanzi made over a hundred acquisitions and borrowed billions to do it. Parmalat is a global brand, but most of its businesses remain local. The company, with sales of $9.4 billion last year, still markets scores of acquired brands in 30 different countries. Even Parmalat's signature long-life milk tends to be procured, processed and sold as close to the source as possible.

Now, with Tanzi under investigation, Parmalat's debt is trading for 20 cents on the dollar and its shares have fallen 95% in the last week. It's difficult to see how Parmalat will hold together. As auditors discovered late last week, the company's cash pile was a mirage.

The dairy silos, bakeries and juice businesses are real, but valuing them now is difficult. If the company's balance sheet was a sham, why should anyone trust cash flow or earnings reports? Parmalat's assets could be marked down to distress levels and that will bring out the vultures.

The first assets on the block will be of the non-dairy variety. Even before the hole was discovered in Parmalat's balance sheet, the company had been laying off workers and closing down bakery plants in the U.S. for the past year, preparing its business, which will have an estimated $1 billion in sales for 2003, for sale.

The company paid $250 million for Mothers Cake & Cookie Company and Archway Cookies three years ago. Citigroup (nyse: C - news - people )'s Citigroup Smith Barney values the bakery business, including a few Italian brands, at $531 million, but it could fetch much less than that.

One former Kraft (nyse: KFT - news - people ) executive says that the Illinois-based company should look at Parmalat's Mothers brand of cookies, which is strong in the western U.S. states where Kraft is weak. But how much appetite will Kraft have for junk food given its own troubles?

Eventually, Parmalat's dairy business could end up on the block as well. National Foods of Australia said last week that it would be interested in Parmalat's business down under. Dean Foods (nyse: DF - news - people ), America's largest milk processor, grew to a $9 billion-a-year company by consolidating dairies across the country. The Parmalat brand may not be worth what it once was, but the Italian dairy company owns some expensive European packaging lines that Dean may find interesting.

Creditors may wish to see Parmalat -- and their investments -- rescued and intact, but that is an unlikely scenario. Its also unlikely the company could be swallowed whole. Andy Smith, an analyst with Citigroup Smith Barney in London wrote in a December 17 report: "We could see a strong strategic fit between parts of Parmalat with either Kraft, Nestlé or Danone ... But which potential trade buyer would be prepared to countenance any form of due diligence when the company is in so much apparent distress?" Nestlé (otc: NSRGY - news - people ) and Groupe Danone (nyse: DA - news - people ) have said publicly they are not interested in Parmalat, at least for now.

Private equity buyers may be more willing to take the risk on a tarnished brand, providing the cash flow is there. Hicks, Muse, Tate & Furst is among the most aggressive in the food business. In Europe, PAI Partners has a stable of food investments, including Panzani and United Biscuits. Doughty Hanson, which holds U.K. baking and milling group Rank, Hovis, McDougall, and BC Partners with Galbani are two British private equity firms that like food brands.

Good thing the holidays are a time for over-eating.