Parmalat to seek administration

Parmalat's underlying business remains sound

Italian food company Parmalat said it will go into administration after it revealed a 4bn euro (£2.8bn; $5bn) hole in its accounts.

Italy's government earlier amended its laws to make it easier to rescue the company now labelled "Europe's Enron".

The government has asked the EU to waive its rules on state aid to prevent Parmalat's woe from creating a wider dairy sector crisis.

A criminal investigation also has been launched.

Undecided

Following an emergency board meeting, Parmalat said it still has to decide on what form of administration it will seek.

Under the government's new legislation, a specially appointed commissioner would be asked to draw up a rescue plan requiring state approval.

New Chief Executive Enrico Bondi is thought to be the front runner for the post and will have to decide whether or not to put parts of the company up for sale.

The company, however, can eschew that and decide to follow another earlier form of bankruptcy-protection.

Milk shortage

The government has said the firm, which employs 36,400 people, is important to the Italian economy.

Italy said the change in bankruptcy laws are designed to safeguard jobs rather than help shareholders or management.

EU RULES ON HELPING BUSINESS Direct state handouts banned Short-term bridging loans permitted, but only if promptly repaid with interest Longer-term restructuring must be at market rates Grants are banned under all but the most exceptional circumstances Italy wants the Commission to grant its milk industry "crisis status", allowing support funds and direct state aid

The government is primarily concerned to minimise any wider fall-out from Parmalat, which plays a crucial role as Italy's biggest food company - purchasing alone 8% of the country's milk production, for example.

Many milk producers have already cut off supplies to Parmalat, a move that threatens shortages in some areas.

The fear of shortages has led the government to ask the EU to be allowed to give money to either Parmalat or the suppliers.

Such a hand out would normally be forbidden under rules which prohibit state aid.

Under investigation

Going into adminstration will give the company protection from its creditors while it tries to restructure.

The process became almost a certainty after the launch of the criminal probe.

PARMALAT: KEY FACTS Founded in 1961 by Calisto Tanzi Tanzi family still main shareholders Employs 36,400 workers in 30 countries 2002 revenues were 7.6bn euros Owns Parma football club in Italy, and Palmeiras in Brazil Why Parmalat's muddy finances have worried the markets

Talks with bankers over fresh financing for the business - which is believed to remain fundamentally sound - have been hampered by the uncertainty surrounding the company's legal position.

Four men, including three ex-finance directors and Calisto Tanzi, the company's founder, are reported to be under investigation for financial irregularities.

The probes focus on Parmalat's Cayman Islands subsidiary, Bonlat, which was last week accused of providing documents falsely showing some 4bn euros in assets.

Bank of America, which blew the whistle on the Bonlat document, has reportedly filed a lawsuit against the firm, alleging forgery.

Analysts have long been concerned about the company's fondness for complex international financial arrangements, and its heavy use of off-balance-sheet transactions in derivatives such as swaps and options.

According to Jacques Bernard, chief investment officer at Swiss bank Ferrier Lullin, Parmalat's plight may trigger a number of similar cases as investors and regulators pay closer attention to company accounts.

Looking forward

Parmalat chief Mr Bondi, an expert in corporate restructuring, is looking to salvage a viable company from the financial fall-out.

Parmalat is a ubiquitous brand in Italy, and now has operations in 30 countries worldwide, especially Eastern Europe and Latin America.

Potential acquirers have already started to eye different parts of the company, which grew extremely rapidly during the 1990s.

But while most analysts feel the fundamental business is sound, its shares have been hammered by recent events.

A couple of weeks ago, Parmalat was trading at close to 2.5 euros; on Monday, it fell to 11 cents, and is currently suspended.