Who doesn´t remember the Parmalat logo on the front of the F.C. Parma kit? Or the gigantic bankruptcy that ended that sponsorship deal? Well, Parmalat is back. After serious restructuring the company as returned to profitability and with a very strong balance sheet, it seems like an interesting investment. In the first quarter of 2011 the Third Avenue International Value fund aquired 10,496,839 shares of Parmalat common. Third Avenue is known for its own version of the Graham net-net valuation approach and exstensive due diligence. In the words of mr. Whitman himself:
Knowledge refers specifically to a bottom-up understanding of companies and the securities issued by companies. Price consciousness refers specifically to a security being demonstrably cheap against relative metrics. Relative metrics in the TAM portfolios mostly focus on discounts from readily ascertainable net asset values (“NAV”) for the common stocks of well-financed companies. We believe these companies also have reasonable prospects of enjoying compounded double digit growth in NAV (after adding back dividends) over the next three to seven years.
Source: First Quarter 2011 Letter to Shareholders, Third Avenue Value fund
In the same letter, Amit B. Wadhwaney, portfolio manager of Third Avenue´s International Value fund comments on the position initiation in Parmalat:
Having been ejected from Italian market indexes despite its reasonable market capitalization, the stock is not widely held by Italian institutional investors, presumably because of the stigma of the earlier bankruptcy. As a result, it has languished at discounted valuations – roughly at midsingle- digit multiples of cash operating profit – representing a significant discount to publicly-traded industry peers, in addition to a roughly 50% discount to comparable cash transaction values.
Such bargain pricing belies several attractions of the business, most notably Parmalat’s ownership of one of the world’s pre-eminent consumer product brands, with products including milk, dairy (e.g., yogurt, cheese) and fruit juices. The businesses have proven to be quite resilient over time, with stable demand and raw material costs which have generally been passed through successfully over the years. The company boasts leading market share positions in developed markets such as Italy, Canada, and Australia, in addition to footholds in a few fast-growing emerging markets.
As a result of Parmalat’s transformation to a profitable business with a large cash hoard (cash and short-term investments exceed total debt by over A1.3 billion), the company has a number of attractive strategic options. The company could continue operating its current portfolio of profitable, cash-generating businesses; it could use its cash hoard to acquire complementary operations; it could return the cash to shareholders; or, it could divest some or all of its operations at valuations well above those implied in its market price.
Another catalyst is a possible takeover of Parmalat. Lactalis is a French consortium with a 30% stake in Parmalat, but the Italian government is fighting against a French takeover, probarbly by defining the company as ” strategic” for Italy. Other companies have been mentioned, such as Pepsi Co, Danone, Intensa Sanpaolo and Ferrero.