EUROMOBILIARE
Parmalat
S.I.M. SpA
Italy – Food & Beverage
HOLD (new listing)
TARGET € 3.0
October 10, 2005
Price €: 2.61
BCI Index: 1,629
N° 412
RELISTING
th
The new Parmalat post-composition has started trading on October 6 with 1,601 mn shares. But
the right remains to PLT shares also for contested, conditional or late creditors in whose favour PLT has a
mandate for further capital increases in ten years. To this must be added the warrants to be given to new
shareholders giving the right to new shares at a ratio of 1 new share per warrant at the price of € 1,
exercisable until December 2015. Total shares fully diluted would thus amount to 2,010 mn.
In 2004 Parmalat generated sales of € 3.8 bn, with EBITDA of € 269 mn (7.2% margin) and net debt of €
542 mn. The restructuring process has already yielded good results (core-business EBITDA margin
up by +200 bp in 2004 and by +50 bp in 1H05). We believe that, once financial restructuring has been
completed, the company’s management will be much more focused on the day-by-day business, thus
enabling Parmalat to achieve an EBITDA margin of 10-11% in 2006-2007. This seems reasonable in
the light of the results of similarly sized companies and of the achievements of another Italian dairy player,
Granarolo. The projections are also consistent with management targets.
By applying the average EV/Ebitda multiple for the sector (around 7x in 2006-07) we get a valuation of €
2.4-2.5 bn. But the highly fragmented shareholding structure leaves room for some speculative appeal,
also in the light of the high cash generation expected by the group and thus the possibility of a leveraged
structure. Specific interests on the part of Granarolo and Lactalis have frequently been rumoured
during the last few months. In the eventuality of an M&A deal, for Parmalat we assume an
EV/Ebitda multiple of at least 8-8.5x for 2006, which would imply an equity valuation of € 2.8-3.0 bn.
The difference vs. current mkt valuation is due to the expected recoveries from legal proceedings:
- claw back actions, for a total of € 7.5 bn (proceeds are tax free)
- Legal proceedings for damages (33% tax rate). The general rule is that the maximum recovery can
not exceed the damage suffered, thus the original maximum Parmalat deficit, i.e. € 14 bn.
We have assumed a 10% recovery ratio from claw-back actions, based on our impression after talking
with major Italian banks involved. Starting from these assumptions, current market prices seem to discount
a 9% recovery on the maximum amount of proceedings for damages.
In our opinion it would be reasonable to think about even higher recoveries (up to 16% of maximum
amount recoverable from damages, which would represent a 0.5% impact on market caps of major banks
involved, implying a € 3.0 fully diluted valuation) but we believe that a wait-and-see strategy is the most
appropriate at this stage. As soon as the first bank clarifies its strategy regarding actions for
damages, the market will factor in the same behavior for all the other banks involved, and it will be
easier to bet on higher or lower recoveries.
STOCK DATA
Bloomberg Code
52-week range
Daily Volumes (mn)
Paola Carboni
+39-02-6204.287
[email protected]
CAPITALISATION
Market Cap.(€ mn)
Latest Net Financial Position
Free Float
Shares Outstanding (fully diluted)
PRICE PERFORMANCE
PLT IM
n.a.
205
4,185
€ -542 mn
60%
1,601
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
Absolute
Rel. to BCI Index
FORECASTS/VALUATION
EPS
ADJ. EPS
ADJ. PE
EV/EBITDA
1M
n.a.
n.a.
12/2004
-11.5
n.a.
n.a.
17.6
3M
n.a.
n.a.
12M
n.a.
n.a.
12/2005E
1.8
n.a.
n.a.
14.6
Parmalat – October 10, 2005
2
THE RELISTING
The new Parmalat has started trading on the Milan Bourse on October 6th.
On October 1st the extraordinary commissioner Mr. Bondi in fact announced the approval of the
composition with creditors, which establishes reduction of non-privileged debts (about € 14 bn direct or
€ 27 bn including guarantees) in proportion to the estimated assets of the companies that form part of the
new Parmalat (PLT) group (total € 1.8 bn), with the definition of different recovery ratios for each company
(and therefore different recovery ratios for bonds issued or guaranteed by different companies).
The total number of post-composition PLT shares will be 1,601 mn. But the right remains to PLT shares
also for contested, conditional or late creditors in whose favour PLT has a mandate for further capital
increases by up to a maximum of 329 mn shares in 10 years. To this must be added the warrants to be given
to new shareholders (up to the first 650 shares per each shareholder), giving the right to new shares (up to a
maximum of 80 mn shares), at a ratio of 1 new share per warrant at the price of € 1, exercisable until
December 2015. Total shares on a fully diluted basis would thus amount to 2,010 mn.
According to the lists of creditors, PLT equity should have been divided between Italian banks (17%),
foreign banks (10%), bondholders (59%), and suppliers (8%). But we estimate that during the last few
months the intense negotiations on the bond market, plus the high volume of negotiations in the first two
days of trading on the stock market (17% of share capital has been traded in the first day, 8% in the
second day), might have changed the equilibrium in the share holding structure. The company has simply
disclosed the list of main shareholders (i.e. owning stakes above 2%) as surfaced by the voting
procedures of the composition with creditors (which however has to be regarded as a provisional and only
partial picture, since not all the creditors admitted to the procedures actually voted). On the basis of the
vote, the free float is 59.70%.
MAIN SHAREHOLDERS (as per voting procedures)
N° shares (mn)
88.55
43.80
36.82
33.71
33.38
33.10
Capitalia
Harbert Distressed Fund
JPMorgan Chase Bank
Intesa Group
Wells Fargo Bank National Association
Buconero LLC
%
5.53%
2.74%
2.30%
2.11%
2.09%
2.07%
Source: Company’s official prospectus (% calculated on the initial number of shares, i.e. 1,601 mn)
THE OPERATING BUSINESS: WHICH FUTURE PROSPECTS?
The new Parmalat focuses on (source: Official Prospectus on 2004 data):
- milk (55% of total sales), yogurt and other chilled products (30% of sales) and fruit juices (7%),
- 30 brands (vs. 110 previously) – of which two global brands, i.e. Parmalat (21.5% of total sales) and
Santal (5% of total)
- and six main markets: Italy (35%), Rest of Europe (9%, mainly Spain), Canada (31%), Australia, South
America (mainly Venezuela) and South Africa (25%).
2004 SALES BREAKDOWN
By Region
By Product
Australia
South Africa
10%
7%
Others
Italy
South America
36%
7%
8%
Fresh
30%
Milk
55%
Canada
Rest of
31%
Europe
Vegetables
9%
7%
Source: Company data
In 2004 Parmalat generated sales of € 3.8 bn, with EBITDA of € 269 mn (7.2% margin) and net debt of €
542 mn.
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
3
GROUP’S STRUCTURE
Source: Company Presentation
The group’s brands, particularly Parmalat and Santal, are still quite strong and well positioned, boasting
leadership positions in all group’s major markets.
LEADERSHIP IN KEY COUNTRIES
Source: Company Presentation. Last available data, refers at least to 1H05
The restructuring process is going well (core-business EBITDA margin up by +200 bp in 2004 and by
+50 bp in 1H05), exploiting:
- renegotiation of contracts with suppliers
- reorganization of production and of the logistic/supply chain
- reduction of distribution costs
- new agreements with the distribution chains
- rationalization of the product portfolio focusing on high value added products
- advertising investments focused on core brands only.
We will have to check how much of the actual and expected improvement in profitability has to be
attributed to a reduction in advertising/promotional expenditure during 2004-05, which clearly would not be
sustainable in the long run.
With the approval of composition with creditors and the relisting of the company, Mr. Bondi is no longer the
group’s extraordinary commissioner but its CEO. On November 7-8 a general shareholding meeting will be
held to renew the Board and on that occasion Mr. Bondi might possibly be replaced by a new manager.
In any case we believe that, once financial restructuring has been completed, the company’s
management will be much more focused on the day by day business, thus enabling Parmalat to
achieve an EBITDA margin of 10-11% in 2006-2007.
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
4
This seems reasonable in the light of the results of similarly sized food companies (see panel below) and
of the achievements of another Italian dairy player, Granarolo (before integration of the recently acquired
Yomo cheese and yogurt group). This projections are also consistent with management targets as
th
stated during the market presentation on October 6 .
Our 2005 estimates, which are also in line with management indications in terms of sales and
Ebitda, reflect 1H05 performance (sales +1% and EBITDA margin +50 bp). They also incorporate
collection of € 155 mn for the revocation proceedings won against Morgan Stanley, and the further
disposals of non-core assets achieved during 2005 (cash-in of around € 50 mn).
P&L (mn €)
Sales
Incr.
Ebitda
Incr.
2004
3,732
n.a.
269
n.a.
%
2005
3,800
2%
302
12%
Expected disposals/decons.
Litigations
NFP
157
160
-542
54
155
-223
-76
72
Equity value (our valuation)
EV
EV/Ebitda
2,500
3,042
11.3
2,500
3,042
10.1
2,500
2,723
7.3
2,500
2,576
6.0
7.2%
%
7.9%
2006
3,838
1%
375
24%
%
9.8%
2007
3,876
1%
431
15%
%
11.1%
Source: Euromobiliare SIM estimates
Although we believe in the brands’ potential and in the management’s chances of restoring higher level of
profitability and cash flows, visibility for our estimates is still modest, pending more details from the
company regarding:
- tax rate – management has simply stated that, at present, it is impossible to exploit Parmalat SpA’s
losses carried forward
- cost of debt
- restructuring or extraordinary costs expected
- expected capex and working capital absorption (also considering that we are lacking a group’s track
record in this respect, since we only have balance sheet figures for FY2004).
Given this, our model simply reflects our assumptions, pending direct contact with management.
OUR FUNDAMENTAL VALUATION
We have considered a panel of dairy players of a size (sales and market cap) and with a profitability profile
close to what we believe that the new Parmalat could achieve in the next few year thanks to the
restructuring effort underway. We have thus excluded the sector leaders, such as Danone, Nestlè, Kraft,
Kellog and General Mills (which feature Ebitda margin averaging 19% and are much bigger).
The average EV/Ebitda multiple for the sector is at around 7x in 2006-07. Applying this multiple to
Parmalat’s expected Ebitda in 2006 (€ 375 mn), and deducting expected net debt at the end of 2005, we
get an equity value of € 2.4-2.5 bn for the core business (see table above). Visibility for cash
generation, as already said, is still modest, but a valuation of € 2-4-2.5 bn does not appear demanding in
the light of the group’s turnaround phase (already in 2007, the implied EV/Ebitda multiple would be 6x,
offering a discount of some 15% on peers).
MULTIPLE COMPARISON
Name
NORTHERN FOODS
SUEDZUCKER AG
SMITHFIELD FOODS
EBRO PULEVA SA
DEAN FOODS CO
BONGRAIN SA
Average
mkt cap
€ mn
1,089
3,596
2,680
2,234
4,574
751
2,487
sales Sales growth
EV/SALES
€ mn
2006-07
2005
2006
2007
2,175
4%
0.7
0.7
0.7
5,214
-3%
1.2
1.1
1.2
9,584
1%
0.5
0.5
0.5
2,347
2%
1.4
1.3
1.3
8,371
4%
0.8
0.8
0.8
3,795
0%
0.4
0.4
0.4
5,248
2%
0.8
0.8
0.9
2005
6.3
7.6
7.4
9.9
9.6
5.7
7.7
EV/EBITDA
2006
5.9
7.0
6.7
8.8
9.1
5.4
7.2
2007
5.4
7.4
7.1
9.0
8.2
5.3
7.4
EBITDA Margin
2005
2006
2007
12%
12%
12%
15%
16%
17%
6%
7%
6%
14%
15%
15%
9%
9%
9%
7%
7%
7%
10%
11%
12%
Source: Euromobiliare Ibes consensus
However speculative interest may justify application of even higher multiples to Parmalat (see
below).
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
5
SOME SPECULATIVE APPEAL
Although it is still impossible to know Parmalat’s exact shareholding structure, it is quite clear that share
capital will be highly fragmented - thus leaving room for some speculative appeal, also in the light of the high
cash generation expected by the group and thus the possibility of a leveraged structure. Specific interests
on the part of Granarolo and Lactalis have frequently been rumoured during the last few months.
Granarolo
Granarolo is an Italian dairy player, with annual sales of € 852 mn (mainly milk, cheese and yogurt),
€ 70 mn Ebitda and around € 380 mn net debt (including the cash-out for composition with Yomo
creditors, an Italian yogurt producer which went bankrupt in 2003 and was acquired by Granarolo in 2004).
The management of Granarolo has repeatedly stated its interest in Parmalat during the last two years and
has recently confirmed that its Board is studying the deal. According to the draft integration plan reportedin
the press, Granarolo would only be interested in the pure dairy business of Parmalat, avoiding all the
litigation uncertainties. Consequently the project would involve a fund specialised in distressed situations.
More specifically, still according to the press, the deal would allegedly envisage launch of a cash
PTB on Parmalat shares with a valuation of € 2 bn for the pure business, plus a swap on shares of
a listed vehicle (Vercelli Specialità Gastronomiche, controlled by Granarolo and due to go public soon in
the Expandi Segment of the Milan Stock Exchange) which would collect all litigations and would be
possibly spun-off once the deal was completed.
At the same time, however, any PTB by Granarolo might be hindered by the Antitrust Authority since
the new entity would retain 60% of the Italian market for fresh milk and 40% of the Italian market for
pasteurized milk.
On the top of that, there is a mix of different political lobbies behind the deal.
On a one side there is Mr. Bondi, who would be against this merger, considering the already high
level of indebtedness of Granarolo (starting from a valuation of € 2-2.5 bn for Parmalat’s operating
business, the new entity would have to manage an initial Debt/Ebitda ratio of 6-7x, even although
able to exploit the high FCF expected from Parmalat in the following year and the improvement expected
in Granarolo thanks to the ongoing integration and turnaround of Yomo). Newspapers reports have in fact
not excluded that Granarolo would have to dispose part of the business (ex: the Cooperative Association
of Farmer of the Lazio Region have already expressed interest in buying Centrale del Latte di Roma,
which would bring the deal closer to Antitrust requirements, whilst a foreign players such as Nestlè –
according to press rumours – might be interested in some foreign business such as those in Canada or
Australia). Clearly Mr. Bondi is against this hypothesis of break-up or of high leverage, which would mask
all the results of the hard job done during the last two years.
On the other side, however, some political quarters might push for an Italian solution for Parmalat, in
order to hinder the entry of a foreign player, particularly of a French player (such as Lactalis) after the
protectionist attitude already shown by France (suffice it to remember the rumoured bid of Pepsi on Danone,
which immediately triggered a strong adverse reaction from the French government). In addition Italian
Banks, some of which is already involved as a lender to Granarolo (such as Banca Intesa) favour this project:
they would reinvest the amount of money collected after the PTB on Parmalat in the new entity.
Lactalis
Lactalis is a French dairy player with annual sales of € 5.7 bn, of which 2/3 in the French Market. It is
already present in Italy, in the cheese segment with the President, Invernizzi and Locatelli brands. Lactalis
has confirmed its interest in Parmalat, although it is not clear whether this would refer to the whole group
or to some specific asset (such as Parmalat Canada, which might eventually be sold by Granarolo).
Granarolo management itself has not ruled out the possibility of a joint Granarolo-Lactalis bid, although no
contacts have started yet between the two groups.
Press rumours have also speculated that the heavy purchases of Parmalat bonds on the bond market
during the last few months might have been mainly the work of hedge funds collecting shares on behalf of
Lactalis itself or of foreign banks close to it and favourable to a bid on Parmalat (such as Deutsche Bank,
which is also Lactalis’ advisor for the deal).
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
6
M&A multiples
Looking to the historical M&A multiple of the sector in the 2000-2003 period, we get a median 1.2x
EV/Sales multiple. As a more recent example, we also show the implied multiple of Pepsi’s rumoured offer
for Danone (EV/Ebitda of 11-13x EV/Ebitda for 2006).
M&A MULTIPLES
Pepsi bid on Danone (rumours)
Minimum
maximum
2006
EV/Sales
2x
2.2x
Historical M&A 2000-2003
minimum
average
median
maximum
EV/sales
0.5
1.5
1.2
3.6
2006
EV/Ebitda
11x
13x
Source: Euromobiliare SIM estimates
We clearly have in mind the different profitability and size compared with Parmalat, and also the riskier
profile of the Parmalat turnaround compared with the already stable Danone business.
We nevertheless believe it would be reasonable to assume for Parmalat an EV/Ebitda multiple of at
least 8-8.5x for 2006, which would imply an equity valuation of € 2.8-3.0 bn (thus adding € 0.4-0.5 bn
to our fundamental valuation already explained). The corresponding EV/Sales multiple would in fact be
0.8-0.7x, which also seems reasonable in the light of the historical median for M&A deals in the sector.
THE VALUE OF LITIGATIONS
Starting from our € 3 bn valuation for the operating business, the difference vs. market valuation is
explained by the expected amount of recoveries from legal proceedings initiated by Mr. Bondi:
-
Claw-back actions, for a total of € 7.5 bn (no further claw back actions can be initiated once the
composition with creditors has been approved), involving more than 45 financial institutions. According
to Italian law, if a creditor recovered its credit against a company in the 12 month before the latter went
bankrupt, the administrator of the bankruptcy procedure can sue the lender, initiating a claw-back
action. Should the action be successful (the plaintiff has to prove that the defendants were aware the
insolvency situation) the lender has to repay the money he had recovered unfairly and becomes part of
the group of outstanding creditors eligible for reimbursement in shares, the same as for all the other
creditors. Any proceeds possibly recovered thanks to the claw-back actions are tax free.
-
Legal proceedings for damages: in this case Mr. Bondi has initiated legal actions against several
financial institutions, both in Italy (we estimate for a total of around € 41 bn) and USA (in excess of
USD 10 bn), suing them for having lent money or managed bonds issues concealing from the market
the group’s true financial difficulties and thus contributing to ever larger default.
The general rule, however, is that damage awardable to the plaintiff company can at the most march
the total amount of damage suffered meaning, in this case, the original maximum Parmalat deficit, i.e.
€ 13-14 bn. This in turn means that:
1) regardless of the specific amounts that the commissioner Mr. Bondi has demanded from each
single defendant, the maximum total amount recoverable is € 14 bn, and
2) if the action brought against a defendant results in a payment, the amount payable by all the other
defendants will have to be reduced by a corresponding amount.
There can be some exception to this general rule only in some cases in the USA.
The proceeds possibly recovered thanks to the proceedings for damages are subject to the
normal Italian tax rate (33%).
Lawsuits for compensation for damages involve, among others: in USA, Citigroup, Grant Thornton,
Deloitte, and Bank of America (for a total in excess of $ 10 bn); in Italy UniCredito and two other banks (€
4.4 bn in total), Deutsche Bank and UBS (€ 2.2 bn overall); Banca Intesa and UBM (€ 1.9 bn overall),
Credit Suisse (€ 7.1 bn), Banca Monte dei Paschi (€ 1.6 bn), Banca IMI (€ 1.3 bn), and, in Switzerland,
Banca dei Grigioni (€ 13 bn).
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
7
What recovery ratio might appear reasonable?
It is obviously impossible to predict the total amount recoverable and the timing of the settlement. Just as
an example, the first hearing for the US trial is scheduled for April 2007, whilst the first hearing for the
lawsuit against Unicredit and JPMorgan in Italy is scheduled for May 2006. Considering also that the
Parmalat default is the first listed company crash of magnitude in the Italian panorama (involving also retail
investors as creditors through listed bonds), there are no historical references in terms of percentage
recovery ratios.
US scandals, such as the Enron case, cannot be taken as a yardstick either, considering that, in the Enron
case, the legal proceedings were initiated by creditors themselves (class actions) and not by the company.
We have therefore simply tried to factor in a success ratio which might appear reasonable at this stage.
In the case of the claw-back actions, we have assumed a 10% recovery ratio, based on our
impression (after talking with major Italian banks involved) that financial institutions are ready to accrue
10% of the amount requested and seek a transaction. The two claw-back actions already settled (€ 160
mn with Nextra and € 155 mn with Morgan Stanley) actually featured a 100% recovery ratio, but we would
not take this as a benchmark, considering also the low amount requested.
In the case of proceedings for damages, we have instead assumed that the major banks involved
(both Italian and foreign ones) might be ready to go for a transaction, paying an amount that would not
be too punitive for them but that, at the same time, would allow them to close the Parmalat “case”, and
maintain their reputation with their retail customers (this is particularly true probably for Italian Banks,
considering the explosive impact of the Parmalat default on the press and public opinion).
Here we show an example, assuming payment from banks equal to 0.3% of each respective market cap
as an “affordable and reasonable” amount.
RECOVERY FROM LITIGATIONS: TRANSACTIONS FOR DAMAGES AT 0.3% OF MARKET CAPS
mkt cap
(bn €)
payment (as a %
of the mkt cap)
payment
(€ bn)
Amount asked
by Mr. Bondi
Implied
recovery ratio
29
21
10
26
0.3%
0.3%
0.3%
0.3%
0.09
0.06
0.03
0.08
0.26
2.42
1.30
1.60
0.95
6.27
4%
5%
2%
8%
4%
Rest of Europe
Credit Suisse
Deutsche Bank
UBS
Total
37
37
80
0.3%
0.3%
0.3%
0.11
0.11
0.24
0.46
7.10
1.10
1.10
9.30
2%
10%
22%
5%
US
Citigroup
Bank of America
JPMorgan
Total
194
141
119
0.3%
0.3%
0.3%
0.58
0.42
0.36
1.36
2.08
2.08
1.47
5.63
28%
20%
24%
24%
Total recovery for damages (€ bn)
2.08
49.33
4%
Claw-back (€ bn)
Total recovery (€ bn)
Total recovery net of taxes (€ bn)
0.75
2.83
2.14
7.46
10%
Proceedings for damages
Italy
Unicredito
SPI
MPS
Intesa
Total
Source: Euromobiliare SIM estimates
The table below show the overall valuation of Parmalat stemming both from operating business (where we
assume a € 3 bn valuation, factoring in some speculative appeal as already explained) and from expected
recovery from litigations (where we assume 10% recovery on claw-back actions, as already explained, an
payments for damages equal to 0.3% of banks’ market cap).
The implied recovery ratio on total litigations (based on the maximum amount recoverable) implicit
in these assumptions is 9%.
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
8
PARMALAT VALUATION
2006
2007
Business valuation
Avg. EV/Ebitda peers
EV/Ebitda
Ebitda (2006 figures)
NFP (2005 year-end)
Equity
7.2
8.5
375
-223
2,968
7.4
8.5
375
-223
2,968
Recovery from litigations
Claw-back actions
Recovery ratio on claw-back actions
Recovery on claw back actions
7,458
10%
746
7,458
10%
746
Compensation for damages
of which
In Italy
(maximum amount recoverable in Italy)
US
Recovery ratio for damages (on max amount recoverable)
Recovery on actions for damages
49,333
49,333
41,000
14,000
8,333
9%
2,079
41,000
14,000
8,333
9%
2,079
Total amount of recovery (before taxes)
Implicit recovery ratio (on maximum amount recoverable)
Total amount net of taxes
2,825
9%
2,139
2,825
9%
2,139
Total valuation
Initial number of shares
Further capital increase (for late or contested creditors)
Warrants
Fully diluted number of shares
Value per share (fully diluted)
Value per share (outstanding shares)
5,107
1,601
329
80
2,010
2.54
3.19
5,173
1,601
329
80
2,010
2.57
3.23
Source: Euromobiliare SIM estimates
As the table above shows, these seem also to be the hypothesis currently discounted by the market, since
the valuation we get is quite close to current stock market prices.
In our opinion it would not be unreasonable to think about even higher recoveries from proceedings
for damages. But we believe that a wait-and-see strategy is the most appropriate at this stage,
focusing on newsflow from banks (rather than on newsflow from group’s operating results which would
change to the overall valuation very little). We believe that as soon as the first bank clarifies its strategy
regarding actions for damages, the market will factor in the same behavior for all the other banks
involved, and it will be easier to bet on higher or lower recoveries.
VALUATION SENSITIVITY TO THE NUMBER OF SHARES AND THE EXPECTED RECOVERIES
The table below shows a sensitivity of Parmalat’s per-share valuation to the number of shares and to the
expected amount of recoveries. We are taking our 10% recovery assumption on claw-back actions as
a constant figure, while changing the expected recovery on the maximum amount recoverable from
actions for damages (€ 14 bn in Italy plus, eventually, USD 10 bn in US).
PARMALAT: PER SHARE VALUATION SENSITIVITY (€ P.S.)
Number of shares (mn)
1,601
1,701
1,801
1,901
2,010
16%
3,466
10%
745
3.8
3.5
3.4
3.2
3.0
Recovery from proceedings (before taxes): % ratio and absolute amount (€ mn)
9%
6%
3%
0%
12%
Proceedings
for damages
2,773
2,079
1,386
693
0
10%
10%
10%
10%
10%
Claw back
actions
745
745
745
745
745
3.5
3.2
2.9
2.6
2.3
3.3
3.0
2.7
2.5
2.2
3.1
2.8
2.6
2.3
2.1
2.9
2.7
2.4
2.2
2.0
2.8
2.5
2.3
2.1
1.8
Source: Euromobiliare SIM estimates
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
9
The most conservative assumption (zero recovery from actions for damages) is, in our opinion, a very
prudent scenario, considering the major importance of the Parmalat default in Italy for public opinion and
for the reputation of the banks involved.
A the same time, however, we would not use simply the number of outstanding shares whilst assuming
some amount of recoveries. Whilst it is indeed true that the foreseen capital increase and the subscription
right given by warrants have a time horizon of 10 years, it is also true that also for legal proceedings there
are big uncertainties in terms of the timing of settlement (which might even take several years).
We believe that the most reasonable valuations at this stage are the ones highlighted in the shaded cells
of the table above, which support out NEUTRAL recommendation on the stock in the light of the great
uncertainty surrounding legal actions’ outcome and timing.
Taking a different point of view, and looking for a plafond value, we can avoid any speculative appeal
on the operating business (thus assigning only a € 2.4-2.5 bn fundamental valuation) and simply discount
a 10% recovery on claw-back actions, with zero recoveries from proceedings for damages. The plafond
value per share would be between € 2 (outstanding shares) and € 1.6 (fully diluted shares).
MAIN FIGURES (€ mn)
2003
%
2004
%
2005E
Sales
3,801 100 3,765 100 3,800
Change
n.a.
n.a.
5.5
2006E
%
2007E
100
3,838
100
3,876 100
1%
269
7.1
302
COMPANY VALUATION (€ mn)
%
1%
7.9
375
%
1%
EBITDA
210
Change
546%
28%
12%
24%
9.8
15%
431
EBITA
n.a.
n.a.
n.a.
n.a.
n.a.
11.1
Change
EBIT
210
5.5
106
2.8
Change
957%
-50%
Pre Tax Inc.
n.a.
-174
Change
Net Income
n.a.
Free cash flow
n.a.
Change
3.1
12%
-4.6
n.a.
Change
119
59
-4.9
29
n.a.
n.m.
n.a.
34
n.a.
n.a.
6.9
124%
1.6
-134%
-185
266
226
136
5.9
161
375%
315
3.5
189
216
34%
FINANCIAL FIGURES
8.5
Ebitda (2006)
375
NFP (2005 y ear-end)
-223
Valuation
2,968
Recoveries from litigations
2,825
Claw -back actions
7,458
10%
8.1
Recov ery on claw back actions
4.9
Proceedings for damages
Maximum amount recoverable in Italy
US
5.6
Recov ery on max imum amount recov erable
9.3%
Total recov ery from damages
2,079
39%
4.2
EV/Ebitda
Recov ery ratio on claw -back actions
39%
368%
0.9
8.3
20%
284%
0.8
320
Operating business
746
49,333
14,000
8,333
Total recovery from litigations (before taxes)
2,825
Total recovery from litigations (net of taxes)
2,139
Total valuation
5,107
2003
2004
2005E
2006E
2007E
Cap. Exp.
n.a.
44.0
80.0
80.0
80.0
Value per share (outstanding)
3.19
Net wkc.
n.a.
319
341
344
348
Value per share (fully diluted)
2.54
Net Fin. Pos.
n.a.
-542
-223
-76
72
D/E
n.a.
0.4
0.2
0.1
0.0
Cap. employed
n.a.
1,909
1,619
1,593
1,567
ROCE
n.a.
6%
4%
10%
12%
Sales break-down by region (2004)
Australia
South Africa
PER SHARE DATA (€ cent)
Eps
2003
2004
2005E
2006E
2007E
n.a.
-11.5
1.8
8.5
11.8
n.a.
n.m.
368%
39%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0.9
4.2
5.9
Change
Eps Adj.
South
Italy
36%
America
7%
Change
Dividend
10%
7%
Canada
Rest of
31%
Europe
9%
MARKET RATIOS
2003E
2004
2005E
2006E
2007E
PE
n.a.
-22.6
144.3
30.8
22.1
PE Adj.
n.a.
n.a.
n.a.
n.a.
n.a.
Others
PBV
n.a.
3.1
3.0
2.8
2.6
8%
Yield ord.
n.a.
n.a.
0%
2%
2%
FCF yield
n.a.
n.a.
1%
4%
5%
Sales break-down by product (2004)
Milk
55%
Fresh
30%
EV FIGURES
2003
2004
2005E
2006E
2007E
EV/Sales
n.a.
1.3
1.2
1.1
1.1
Vegetables
EV/EBITDA
n.a.
17.6
14.6
11.3
9.6
7%
EV/EBIT
n.a.
44.6
37.0
16.0
12.8
EV/CE
n.a.
2.5
2.7
2.7
2.6
Source: Euromobiliare SIM estimates
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA
Parmalat – October 10, 2005
10
DISCLAIMER
This publication has been prepared by Paola Carboni.
In the past Euromobiliare SIM has not published studies on Parmalat.
Euromobiliare SIM is distributing this publication to some 500 qualified operators and to unqualified operators by mail and electronic
communications systems as from December 9, 2005
Euromobiliare SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semiannual frequency and, in any case, with a frequency consistent with the timing of the issuer’s periodical financial reporting and of any exceptional
event occurring in the issuer’s sphere of activity.
The information contained in this publication is based on sources believed to be reliable. Although Euromobiliare SIM makes every reasonable
endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy
or exactitude of such information
Euromobiliare SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules
of conduct for them.
However, it is pointed out that Euromobiliare SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative
Decree no. 58/98. Given this, Euromobiliare SIM might hold positions in and execute transactions concerning the financial instruments covered by
the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered
by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the
subject of the present publication.
As on today’s date it has been ascertained that, as regards the listed companies covered by the present publication, the Credem group (to which
Euromobiliare SIM belongs) does not have relationships of control or major shareholdings, either direct or indirect, with/in the same.
However, Credem group could provide them with corporate finance services, could have issued financial instruments linked to the issuers’ stock
and could have directors who are members of the issuers’ corporate bodies.
The Credem Group provides, or has provided in the last 12 months, corporate finance services to the group to which the issuer
belongs.
In addition, it is pointed out that, within the constraints of current internal procedures, Euromobiliare SIM’s directors, employees and/or outside
professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on
their own account and that of third parties.
The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not
represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or
to execute any operation whatsoever concerning such products or instruments.
Euromobiliare SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts
no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions.
Each and every investment/divestiture decision is the sole responsibility of the subject receiving the advice and recommendations, who
is free to decide whether or not to implement them. Therefore, Euromobiliare SIM and/or the author of the present publication cannot in
any way be held liable for any losses, damage or lower earnings that the subject using the publication might suffer following execution
of transactions on the basis of the information and/or recommendations contained therein.
The estimates and opinions expressed in the publication may be subject to change without notice.
IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
EUROMOBILIAR E
S.I.M. SpA