How Europe's Bank Crisis Swamped Pescanova Seafood Empire
REDONDELA, Spain—The downfall of Manuel Fernández de Sousa, who built
Pescanova SA
PVA.MC -19.26%
from a provincial Spanish fishing company into a multinational giant,
is a cautionary tale of the still-rippling European banking crisis.
His
troubles began at a Feb. 27 board meeting where Pescanova's two newest
directors grilled him about the company's proposed financial results.
wo days earlier, Mr. Fernández had convened the new directors and other
big shareholders to warn the company faced a €50 million ($65.6 million)
cash crunch. Why, the new directors demanded at the board meeting, was
Pescanova preparing to release 2012 results that showed a big profit and
lots of cash? "The numbers didn't make sense at all," said one of the
two, François Tesch, whose firm held almost a 6% Pescanova stake. The
two directors refused to sign off on the numbers, and Mr. Fernández
didn't release them.
That confrontation triggered events that led Pescanova to seek
bankruptcy protection. Authorities later stripped Mr. Fernández—who is
being investigated for allegedly falsifying accounts and selling shares
before the bad news broke—of operating control. On Wednesday, Mr.
Fernández resigned.
Mr. Fernández said he didn't want to "represent an obstacle for the
bankruptcy administration ahead of the negotiations that have to be
carried out with creditors."
Drilling deep into the scandal at one of the world's largest seafood
companies is like a core sample from the depths of corporate distress
across southern Europe as the continent's credit dried up. The layers
show companies that borrowed heavily and grew rapidly before the credit
bubble burst. Some of these companies are now enmeshed in investigations
over allegedly illegal practices.
Former executives of
Monte dei Paschi di Siena SpA,
BMPS.MI -1.36%
a 541-year-old Italian bank, are under investigation for allegedly
fraudulent derivatives transactions carried out to ease financial
pressures after the costly acquisition of a rival bank.
Greek tycoon Lavrentis Lavrentiadis enjoyed a rapid rise before 2008,
but the government recently jailed him on fraud charges related to
loans a bank he controlled allegedly made to financially stressed
companies in his empire. Mr. Lavrentiadis has said he is innocent.
Lawyers for one of the three ex-Monte dei Paschi executives under
investigation, Gianluca Baldassarri, denied wrongdoing, and lawyers for
the other two didn't return messages seeking comment.
In the case of Pescanova, a recent KPMG audit claimed the company
secretly amassed a debt of €3.28 billion, about twice the amount it had
disclosed in financial statements. An investigative judge called it a
scheme to present "an unreal image of [the firm's] economic and asset
situation."
In a June interview, Mr. Fernández, who served as executive chairman,
acknowledged the debt was higher than previously reported and said
there were flaws in how Pescanova and its auditors, BDO España, kept the
books.
"Management did produce mistakes. BDO did produce mistakes," said Mr.
Fernández. He acknowledges selling some of his shares, but says he then
lent more than €9 million in proceeds to help the company out of a
liquidity crunch. In a later court filing, Mr. Fernández said none of
his actions were part of any "deliberate fraudulent scheme," and were
done in good faith to keep his company afloat. BDO declined to comment.
With Mr. Fernández gone, who will end up running the company is
unclear. The board of directors didn't name a new chairman. Daily
operations remain in the hands of the bankruptcy administrator,
Deloitte. Meanwhile, some of the company's affiliates in Latin America
have entered into bankruptcy proceedings in local jurisdictions, putting
prime assets at risk of being sold off to pay creditors.
Mr. Tesch, one of the directors, said the board meeting lasted seven
hours without a lunch break. He said the audit left Mr. Fernández with
no other option than to leave. "It was just a devastating report," Mr.
Tesch said. Mr. Fernández retains a seat on the board.
Pescanova's fall, the third largest bankruptcy in Spanish history,
comes as the country is reeling from a wave of alleged financial crimes
that have inflicted heavy costs on shareholders and taxpayers. As
elsewhere in Europe, allegations of corporate misdeeds are hindering the
country's efforts to regain the confidence of financial markets and
climb out of recession.
Besides the Pescanova affair, Spanish prosecutors are conducting
investigations of alleged irregularities at seven banks that lent
aggressively during the real-estate boom in the early 2000s then needed a
total of more than €30 billion in government bailouts when the economy
contracted. All the banks have denied wrongdoing.
Pescanova's decline was especially jolting because it is a global
player with more than 10,000 employees in 26 countries and 2011 sales
reported at €1.67 billion. Its retail mascot, a tango-dancing prawn
named Rodolfo Langostino, is as familiar to Spaniards as Charlie the
Tuna is to Americans of a certain age.
Fernando Ruiz Lamas, a finance professor at the University of La
Coruña in Pescanova's home region of Galicia, said Pescanova "never made
the transition from family business to public company."
Mr. Fernández, son of the founder, put his son and his brother on the board. Both are under investigation, authorities say.
In April, Pescanova commissioned accounting firm KPMG to do a
forensic audit. It said it found the fishing company hid debt in
far-flung affiliates whose books were never consolidated within the main
holding company. It also found that Pescanova used bogus invoices from
shell companies to obtain short-term financing from banks or factoring
firms, which buy invoices and then collect payments.
Founded in 1960, Pescanova pioneered the use of factory ships, which
freeze the catch on board. Over the past 15 years, Mr. Fernández
launched a costly diversification into aquaculture, building seafood
farms in Portugal, Ecuador and Chile.
Banks "were offering more money to you than you could develop," Mr.
Fernández said. He said credit dried up after Europe entered crisis in
2008, and it has been a struggle to fund his company.
In mid-2011, a savings bank from Galicia, retrenching due to Spain's
recession, sold off a stake in Pescanova and gave up two slots on the
board. Taking the bank's place were Mr. Tesch, representing
Luxembourg-based investment firm Luxempart, and José Carceller,
representing Barcelona-based brewer Grupo Damm.
"All the lights were green from the banks, from the financial
analysts, from the auditor," Mr. Tesch said. But Messrs. Tesch's and
Carceller's early enthusiasm would soon change.
In the middle of 2012, Mr. Fernández surprised the new directors with
a plan to raise capital by issuing more stock. They said they agreed on
the condition that Mr. Fernández appoint them to the board's auditing
committee.
After the €125 million stock issue was completed in August, Mr.
Fernández told the directors they would have to wait until shareholders
could vote on a proposal to expand the committee at the April annual
meeting. Mr. Fernández said in a recent interview that was because he
didn't want to force a current auditing committee member to resign. Mr.
Tesch had doubts: "There was strong resistance, and I found it a little
bit strange."
Things would soon get stranger. Mr. Fernández came to Luxembourg for a
meeting with Luxempart's board on Feb. 15, and projected a 2012 profit
approaching €40 million, better than prior estimates, Mr. Tesch said.
But then on Feb. 25, Mr. Fernández called Messrs. Tesch and
Carceller, along with other large shareholders, for an emergency meeting
to discuss the €50 million liquidity squeeze. Mr. Fernández said in the
interview the shifts in the outlook were a consequence of volatile
negotiations with lenders and firms to which he was trying to sell some
of Pescanova's Chilean assets.
Finally came the Feb. 27 board meeting, which Mr. Carceller said
produced the "bombazo," or bombshell, that would bring Pescanova's
problems out into the open.
Messrs. Tesch and Carceller spent the morning debating the 2012
financial statement with Mr. Fernández, who sat at the center of a
horseshoe-shaped table. The statement showed strong earnings and nearly
€150 million in cash—without any suggestion of the liquidity crisis Mr.
Fernández had briefed them on two days earlier, participants in the
meeting said.
Messrs. Tesch and Carceller said they faced a dilemma. If they agreed
to sign the report, they might have been subject to prosecution for
attesting to false information. But refusing to sign could expose the
company's troubles and hurt the value of their investments.
They refused. "If we had signed those papers, this would have gone on
and on with more debt and more problems," Mr. Tesch said later.
In retrospect, Mr. Fernández said, the financial statement should
never have been presented to the board. Part of the blame was BDO's, he
said, but "management is supposed to produce the right figures and to
avoid that anybody makes mistakes." BDO isn't being investigated,
authorities say.
Late on Feb. 28 Pescanova sent a communiqué to the stock commission
saying it would put off filing its 2012 financial statements, until it
either sold the Chilean business or sought bankruptcy protection.
The stock commission halted trading in Pescanova, allowed it to
resume a few days later, and then halted it again, with the stock having
lost 66% of its value. Luxempart and Damm estimate losses of €52
million and €28 million, respectively, on their Pescanova investments.
In mid-March, Mr. Fernández announced that there were discrepancies
"that could be significant" in the previously reported size of its debt,
and several weeks later Pescanova filed for bankruptcy.
Besides Mr. Fernández, five current or former members of the board,
including Mr. Fernández's son and brother, are being investigated by a
national court judge for allegedly falsifying accounts. Some top
executives also are under investigation. Mr. Fernández, two other
directors, and the father of a third ex-director, are being investigated
for insider trading allegations. With the exception of Mr. Fernández,
the executives and directors couldn't be reached for comment.
