By Tim McLaughlin
BOSTON (Reuters) - A slew of major U.S. corporations are likely to announce in the next few weeks whether they will take big writedowns for their troubled Venezuela operations, and some may say they are leaving the country altogether.
The companies may decide to slash the valuations of their businesses and take charges based on declines in some of the oil producing nation's four exchange rates for the bolivar currency, of which three are official and one black market, and then deconsolidate the operations on their balance sheets, Wall Street securities analysts said.
They may have more reason to accelerate the process after the socialist government on Friday declared a 60-day economic emergency, which would give President Nicolas Maduro wider powers to intervene in companies or limit access to already scarce dollars in Venezuela.
It also disclosed that the nation's economy contracted by 4.5 percent in the first nine months of last year while the official annual inflation rate was the world's highest at 141.5 percent in that period, as plunging oil prices, and what critics of Maduro see as policy missteps, took an increasing toll.
Venezuela's Information Ministry did not immediately respond to an email seeking comment.
The Reuters analysis shows that U.S. companies with exposure could face total writedowns of more than $3 billion if they revalue their assets in Venezuela using the less preferential Simadi exchange rate of nearly 200 bolivars to the dollar. In the past, many companies valued their assets using the main official rate of 6.3 bolivars per dollar.
But even that change may not reveal the full extent of the problem given that the black market exchange rate has worsened to about 878 bolivars to the dollar from about 190 bolivars a year ago, according to dolartoday.com, a website that tracks the rate.
MONITORING DAY-BY-DAY
Increased government regulations and lack of access to U.S. dollars at lower rates could force companies such as Goodyear Tire & Rubber Co to deconsolidate if they lose further control over their operations.
Goodyear said in recent financial disclosures that a deconsolidation move would trigger a one-time, pre-tax charge of more than $500 million and what it termed "derecognition" of $293 million of cash on its balance sheet.
Goodyear was not immediately available for comment. At a Jan. 12 investor conference, Goodyear Chief Financial Officer Laura Thompson described Venezuela as "a very volatile environment."
"The outlook is pretty uncertain. Our visibility is unclear, but we continue to monitor the situation day-by-day, quarter-by-quarter, as we go," Thompson said.
Deconsolidation under U.S. accounting rules allow companies to treat a subsidiary in a volatile foreign market as an investment rather than an operating unit, while writing down the market value of that subsidiary largely insulates the parent company from future hits to its financial results.
So far, blue-chip companies that have deconsolidated in Venezuela and written off nearly all of their investment there include Procter & Gamble Co, Pepsico Inc (N:PEP) and Ford Motor (N:F) Co. Among those who have departed altogether is cleaning products maker Clorox Co.
One major pressure point could be drug companies. Abbott Laboratories (N:ABT), Abbvie Inc, Merck (N:MRK) & Co Inc, Pfizer Inc (N:PFE) and Zoetis Inc (N:ZTS) have about $1.8 billion in combined net monetary assets exposed to the bolivar, recent U.S. regulatory filings show.
Zoetis, which declined to comment for this story, began scaling back operations in Venezuela several months ago, executives have said previously.
Pfizer, Merck and Abbvie did not return messages seeking comment. Abbott declined to comment.
These companies' preferential access to dollars at the official exchange rate has become more difficult, even as the government has made availability of drugs a priority. But the economic crisis has worsened so much that now less business is being done at the official rate, even for essential food and medicine.
The government also has another lower official rate known as the Sicad rate – that has been at around 13 bolivars to the dollar – but there are also very few dollars available at that rate. The last Sicad auction was in September. Meanwhile, it is not uncommon for U.S. companies to have currency exchange settlements pending with the Venezuelan government for years, U.S. regulatory filings show.
SUSPENDED SHIPMENTS
Other companies selling sensitive products, such as baby formula maker Mead Johnson Nutrition Co, have had to adjust their practices because of constraints placed by the Venezuelan government on the release of U.S. dollars to repatriate cash back to the United States.
Mead suspended shipments to Venezuela temporarily, the company said during an October investor day presentation. The company was not available for comment.
Consumer products maker Newell Rubbermaid Inc (N:NWL) has been identified by some Wall Street analysts as the next major U.S. company that will likely take action to protect itself from Venezuela's crumbling economy.
"We continue to view a deconsolidation (in Venezuela) as a likely event" when Newell reports fourth-quarter results on Jan 29, analysts at Jefferies Companies said last week in a research note.
If Newell were to deconsolidate it would take a one-time charge of $111 million, according to company commentary in recent U.S. regulatory filings. Newell declined to comment for this story.
Such a move would largely protect the company from taking further Venezuela-related hits to its financial results in the future.
Among U.S. companies, Oreo cookies and Cadbury chocolate maker Mondelez International Inc (O:MDLZ) has one of the largest remaining exposures to Venezuela, with $617 million in net assets, according to the Reuters analysis of corporate disclosures.
"We would expect to provide an update on Venezuela and other markets when we announce our (fourth quarter) earnings on Feb. 3, but I'm not able to provide comment before that time due to quiet period," said Mondelez spokeswoman Valerie Moens.
Besides Newell and Goodyear, 3M Co, Colgate Palmolive Co and Herbalife (N:HLF) Ltd have at least raised the specter of insulating their financial results from Venezuela. In U.S. regulatory filings over the past three months, the companies have talked about deconsolidation if conditions in Venezuela continue to deteriorate.
Toy maker Mattel Inc (O:MAT) has said it may consider ceasing operations in Venezuela.