When the announcement came on July 28 there were smiles all round. An alliance between industrial group Pirelli and the holding company of the Benetton family empire, Edizione Holding, had just pulled off one of the biggest coups in Italian corporate history. Led by Pirelli supremo Marco Tronchetti Provera, the alliance had persuaded major shareholders at the Luxembourg-based investment consortium Bell to relinquish their 23 percent stake in Olivetti at a major premium to the market price.
Adding in the 1.8 percent of Olivetti already owned by Pirelli and Edizione’s 1.6 percent, the Pirelli-Benetton alliance now had control of over 27 percent of the company, enough to fend off any other would-be predators. Though this is by no means a majority stake, the inactivity of Italian investors ensures that by capturing less than a third of the company, ‘Pirelli-Benetton exercises a factual control on the Olivetti Group,’ explains Elena Tedesco, senior analyst with corporate governance advisor Deminor.
In grabbing Olivetti, Tronchetti Provera and the Benettons also captured the grand prize – 55 percent control of Telecom Italia. The total cost of the operation? A mere E7 bn.
The man who would be king
Most of those involved seemed satisfied. The Benetton dynasty had extended its empire to the telecommunications sector. Tronchetti Provera had become the dashing young turk of the Italian stock exchange. The Berlusconi government could barely hide its delight that Telecom Italia had been saved from the clutches of a foreign predator.
At the beginning of July, Olivetti seemed to be firmly in the hands of CEO Roberto Colaninno and his financial backers from the city of Brescia. In 1999, Colaninno and his allies had organized, with the help of Bell, what was at the time the world’s largest hostile takeover, gaining control of Olivetti, Telecom Italia and, indirectly, TIM (Telecom Italia Mobile) and web provider Seat Pagine Gialle in one fell swoop. But minority investors were left with a bitter aftertaste.
In early July rumors spread of an attempt to snatch control of Olivetti and Telecom Italia. On July 24, Credit Suisse First Boston published a study suggesting that the conditions were ripe for a change of command at Olivetti. This might be achieved in one of two ways: either by buying out Bell’s holding, or by launching a hostile takeover for Olivetti, and therefore TI as well. The latter was highly unlikely, as it would involve an amount of money that would turn even the biggest telecommunications industry players pale. ‘It would have been a bit over-optimistic to hope for a full takeover bid, which would have necessarily involved bids for Telecom Italia and TIM,’ comments Daniele Savare, a fund manager at Milan-based Bipielle.
But any approach to Bell would also be complex. Colaninno had vowed not to give up control of the company without a fight and, on July 25, La Repubblica suggested that he and his Brescian allies were in discussions with Spanish group Endesa, aiming to head off any hostile bids. Deutsche Telekom, Telefonica and France Telecom were also ready to lure Bell’s shareholders with very sweet bids.
Then, on Saturday, July 28 came Tronchetti Provera’s shock announcement: a company formed by Pirelli and Edizione Holding had come to an agreement with Bell’s shareholders to relieve them of their stake in Olivetti at a handsome premium. There was much back-slapping and cork popping, but it took a couple of days for small and medium-sized investors to realize that they hadn’t been invited to the party. ‘As usually happens in this type of maneuver, the parties involved passed straight over the heads of other market participants,’ adds Savare.
Boxed into a corner
So how was it possible, with a stake of just E7 bn, to take control of a group worth more than 15 times as much?
One anomaly of Italy’s corporate structure system is that it still permits a phenomenon known as Chinese boxes, whereby the acquisition by one company of a controlling stake in a second company which has a majority interest in a third gives the acquirer control over the third even if it has no direct stake. Tronchetti Provera has a 100 mn investment and a 60 percent stake in GPI, a private investment vehicle which owns 55 percent of investment company Camfin. The latter has 29.99 percent of Pirelli & Cie (Pirellina), which owns Pirelli, partners in the deal to take Bell’s 23 percent stake in Olivetti. Added to the existing Olivetti stakes already owned by Pirelli and the Benettons, this gave the new alliance 27 percent of the company. Olivetti holds 55 percent of Telecom Italia and controlling interests in both Telecom Italia Mobile and Seat Pagine Gialle.
On the Monday after the announcement, both Pirelli and Olivetti tanked on the Italian markets, respectively losing about 17 percent and 16 percent of their value. A number of analysts judged that the price paid for control of Olivetti was too high. The company still has E18 bn in debt, stemming from the acquisition of its 55 percent stake in TI early in the Colaninno era. Tronchetti Provera protested that if the same multiples were applied to Telecom Italia as to its competitors such as DT and France Telecom, TI would have a much higher valuation, and hence the price paid for Olivetti was fair. The objective now, he added, was to produce value for shareholders. The question is, to which shareholders is he referring?
Show me the money
It is thought that the financing for the deal will be conducted through a rights issue, with Tronchetti Provera reportedly seeking E5.2 bn. Some of the same shareholders, so disgruntled at not themselves being offered the same premium for their Olivetti shares as Bell, will now be ‘invited’ to put their hands in their pockets to help Pirelli’s refinancing plan. Investors are not happy, but their cause is not helped by Italy’s lack of proxy consultants or shareholder activists. In an e-mail letter to La Repubblica, one shareholder lamented: ‘How is it possible that not one private shareholder organization or institutional investor has asked for proxies in order to put forward an alternative plan at the annual meeting? I’d give them my vote immediately, and I’m sure that many others who hold the 60 percent of Olivetti on the market would do so too.’
But opportunities for Olivetti shareholders to make themselves heard are available, notes Deminor’s Tedesco: ‘Institutional investors and minority shareholders can still attend the next shareholder meeting or appoint a proxy holder in order to prevent major changes in the structure of the group without their approval. Furthermore, a group consisting of a 10 percent stake between them could call a general meeting themselves, and also create a shareholder association to lobby through proxy solicitation. This could be a trial of strength for minority shareholders, a real step in the direction of shareholder activism,’ she concludes.
In a further cash-raising exercise, Tronchetti Provera has announced the intention to sell off Pirelli’s truck tire and energy cable businesses, cutting the company’s debt by a further E4 bn. It is possible that Seat Pagine Gialle, currently valued at E13 bn, will also be sold off.
Well-informed & well-rewarded
The Pirelli-Benetton maneuver came as a surprise to most of the market, but the bombshell was not news to everyone: some well-informed individuals in Milan had spent the days preceding the shock announcement speculating against Pirelli. On August 4, Il Sole 24 Ore reported that Swiss financier Matin Ebner, who still retains an interest in Telecom Italia, exercised an option to sell 2.5 percent of Pirelli SpA to Pirellina at E3.5 per share. Not bad, given that the price was by mid-August below E2.6.
Sources at Consob, the Italian market regulator, have confirmed that they are investigating trading in Pirelli securities on the day before the announcement. No doubt some of those questioned will protest that they had been betting against the company on the back of its disappointing second quarter results, an argument which might be difficult to refute.
Italian Industry Minister Anthony Marzano has already said that the government is not planning any changes to the corporate governance laws requiring a company to launch a full takeover bid for another only if it accumulates more than 30 percent of the company. This seems fair enough, since similar rules apply in most other mature markets and seem to work perfectly well. What seems unacceptable is that small shareholders’ interests can be swept aside by what effectively amounts to a leveraged buyout. But as pointed out by Paolo Volpin, JP Morgan Chase research fellow at the London Business School, the previous Olivetti management team hardly treated shareholders well. He highlights the purchase of Seat Pagine Gialle under CEO Roberto Colannino. ‘Olivetti paid a very high price for a company already 5 percent owned by Colannino. The value of his stake shot up,’ he says. He concludes that though there may be new faces in the ranks of Olivetti management, ‘all we are seeing is a reshuffle of power, using the same structure as before.’
In the furor that has ensued, small and medium shareholders have continued to ask how their rights might be protected in the future. What are the chances that the stock market barons will strike once more, leaving small shareholders little to show for their investments apart from a bundle of overpriced share certificates? The chances are it will happen again… and again and again. At least until the Italian lawmakers finally take it upon themselves to remove the hinges from those Chinese boxes.
