PricewaterhouseCoopers in LatAm Hot Salsa

Wednesday, June 21, 2006

PricewaterhouseCoopers LLP appears to be getting into a little bit of Latin American hot sauce, following their Japanese misadventures which landed them into miso soup

Carrefour SA, the French retailer is suing PwC and Argentine Exxel Group for purported fraud when it bought Supermercados Norte SA from Exxel in April 2001. Carrefour says it overpaid
Exxel by nearly $120 million when it bought the 49% of Norte that it did not own earlier for $252 million….indicating the price paid should have been $132 million.

Carrefour claims that Exxel, in cahoots with PwC committed fraud by changing 1,020 account payables bills in an attempt to portray a better financial situation. Carrefour agreed to pay a multiple of Norte’s 2000 operating income, so getting a true picture of costs was very critical.
The agreed number was 9 times EBITDA, so we figure that EBITDA was higher by $120/9 or $13.3 million, indicating that each bill was lessened by about $13,000.

So why five years later? Apparently, Carrefour had filed the lawsuit in May 2003 in Argentine federal courts, but was reported only recently by local media.

PwCs’ local associate firm, Hartneck, Lopez and Co., Exxel Group’s auditor agreed to the supermarket chain’s accounts in 2001. This brings in PwC since an accountant for the affiliate, Gabriel Rolando Martini, who signed off on 2001 numbers, later admitted in a 2004 hearing for the initial case that “certain irregularities” occurred in the bookkeeping before the sale went through. Since that time, apparently PwC moved Hartneck Lopez’s clients over to itself. Carrefour is alleging that this was a fraudulent with motive to make Harteneck Lopez an insolvent “shell” to protect it from liability, this point being the center of the lawsuit.

PricewaterhouseCoopers press office in Buenos Aires would not commment, nor did Exxel group.
From the Carrefour website, we note that Carrefour and Exxel signed an agreement on April 11, 2001 to transfer ownership and management of Norte in Argentina to Carrefour. The price at that time was not dislcosed, but now we know the number.

PwC’s Japanese affiliate ChuoAayama was recently sactioned in Japan. PwC reacted swiftly to create its own parternship under the name PwC Aarata. This lawsuit just shows that the risks of operating internationally (especially through an affiliate) are equal to the risks of operating in the US. Litigiousness has spread globally and companies are not reticent to sue their auditors for real or perceived negative impact on their financials or value.

Further from the 2001 Carrefour press release….

Norte operates 139 supermarkets across the country and achieved net sales of 2.037,2 m$ (2.202 m€) in 2000.Carrefour already held 70% of the capital and 51% of the voting rights of Norte, which had been fully consolidated in Carrefour’s accounts in 2000. The initial agreement included a sale option of Exxel to Carrefour – concerning the remainder of shares and voting rights and the management of Norte – to be exercised between January 1st 2001 and September 30th 2002.

With the current agreement replacing the exercise of that option, Norte and Carrefour will benefit this year of the first exchanges of know-how between the two groups and the setting up of a common organization. The Exxel Group will cooperate with Carrefour to assure an optimum integration of Carrefour Argentina and Norte-Tia operations. With their well known reputation for their knowledge of the retail business in Argentina, the teams of Carrefour and Norte should together reinforce their expertise in hypermarkets and supermarkets. However, no synergy has been forecast for this year: this transaction has therefore no new impact on the current profit forecasts of Carrefour in 2001.

The price of the transaction has not been disclosed and provides for a payment by Carrefour to Exxel in the 1st quarter 2002. The merger of Norte and Carrefour Argentina has already been approved by the Argentinean authorities in May 2000 and the current transaction is not suspended to any further approval.

The combination of the Carrefour hypermarkets, Norte supermarkets and Dia hard discount stores gives Carrefour Argentina a clear leadership in the sector. Beyond the current crisis in Argentina, this will allow Carrefour to reinforce its discount strategy and commercial offer in the second biggest retail market in South America.