Italy: The end of the "shareholder agreements" era ! (if real) a great opportunity for the entire Italian economy. A great article by Frontis Governance (ECGS Italian Partner)

By Sergio Carbonara, Frontis Governance

On last October 31stPirelli announced the termination of the shareholders’ agreement controlling 31.8% of the Company’s share capital. Few months earlier, other agreements controlling major Italian companies were terminated, such as the one related to 58.3% of the publisher of the newspaper Corriere della Sera, RCS Mediagroup (including FiatMediobanca,ItalmobiliareGenerali, Pirelli, Intesa SanpaoloSinpar and Gemina), and the one controlling Telco, the holding company that owns 22% of Telecom Italia’s shares (the Italian shareholders Generali, Intesa Sanpaolo and Mediobanca will gradually sell all their shares to the Spanish competitor Telefonica).

Even the mother of all coalitions, that has been controlling Mediobanca for the last 55 years, recently came under a strong reshaping, with the exit of the direct participations of Groupama, Generali, Fondiaria-Sai (as acquired by Unipol), Poligrafici Editoriale (on February), that were preceded on October 2011 by Tod’s owner Mr.Diego Della Valle (who also terminated his membership in RCS on April 2012, in conflict with the other major shareholders Mediobanca and Fiat), the textile group Ratti and the foreign shareholders CommerzbankSantander and Sal. Oppenheim.

Actually, the insurers Generali and Fondiaria-Sai are still indirect members of Mediobanca’s agreement, through Fin.Priv. srl, the holding company also held by Fiat, Italmobiliare, Pirelli and Telecom Italia. Anyway, the controlling group of the first Italian merchant bank strongly reduced its power during the last couple of years, passing from 45% ownership on October 2011 to the current 30%, that is the minimum threshold to allow the biennial renewal of the agreement.

The salotto buono, literally the “good drawing room”, that is the Italian definition of the elite circle of few industrial and financial groups linked by cross-ownerships in dozens of firms, suffered the first hard blow on July 2012, when the Rome-based contractor Mr. Pietro Salini gained the control of Impregilo through the first real proxy fight on an Italian large-cap. The former controlling shareholder of Impregilo was Gavio Group, one of the most influential members of the salotto. But the real decline of the “Mediobanca system” came true at the beginning of this year, with the approval of Generali’s strategic plan. The Trieste-based insurance group is one of the main hubs of the whole system, but on 14 January 2013 the recently appointed CEO, Mr. Mario Greco, stated that Generali’s job is not being a strategic shareholder, and that the Company should exclusively focus on its core business: insurance. Finally, on June 2013, the end of the “system” was included even in Mediobanca’s strategic plan, where the merchant bank is expected to exit from Telco (Telecom Italia) and RCS (of which Mediobanca still owns 15% of the share capital), and to reduce the holdings in Generali from 13% to 10% within 2016.

Brief history of the salotto buono

The Italian way to shareholders’ agreements was born exactly in Mediobanca, in 1958, when the founding banks Banca Commerciale Italiana (now Intesa Sanpaolo), Credito Italiano and Banco di Roma (both merged in UniCredit) allied with the main partners of the first Italian merchant bank (Lazard, Lehman Brothers, BHF and Sofina) in order to establish a controlling shareholders’ group. Thirty years later, on 1988, the agreement lost its originating financial connotation, through the partial divestment of founding banks’ ownership in favour of the most influential Italian industrial groups. The salotto buono was formally born and its focus moved from safeguarding the stability of the merchant bank to safeguarding the salotto itself, through a complex system of cross-ownerships: the investments’ target is no more the value creation, but the mutual aid of participants against any kind of external threat, through strong economic and political relationships.

Taking into account only listed companies, as of September 2012 at least 65 Italian issuers were connected through direct or indirect cross-ownerships, around one-fourth of the entire Stock Market. Considering also non relevant holdings (less than 2% of the issued share capital) and cross-participations in private companies, almost the entire Italian economy was (is) somehow controlled by the “system”.

Actually, shareholders’ agreements were originally conceived for commendable purposes, aimed at stabilizing the management of industrial companies in a market characterized by a lack of capitals: founders of high growing companies were able to reduce their holdings, unlocking relevant liquidity needed for further investments, without losing the control and the continuity of the company’s management. Nevertheless, the necessary condition for shareholders’ agreements to effectively create value is that all members have real and strong interests in that specific company. The distortion arises when the shareholders join the agreement to safeguard their interests in external companies, thanks to the participation to a powerful network of economic and political relationships.

The decline

A relational financial structure, exclusively based on self-preservation and on the safeguard of external interests, was inevitably doomed to create inefficiency and to destroy value to the whole industrial and capitalistic Italian system. The long-standing financial crisis, that is still far from a real end in Italy, dramatically made such value destroy evident, leading to the collapse of many groups that took part in the “system”, such as the Ligresti family’s Fondiaria-Sai insurance group. For the first time, it is no more possible to hide inefficiencies through the State interventions or through internal reorganizations of the salotto. The last attempts disastrously failed with the “brave captains” that received Alitalia almost as gift, but also with the several, extemporary and ruinous Telecom Italia’s controlling groups that have succeeded over the last sixteen years.

The egregious losses suffered by the main salotto’s players finally persuaded them to reduce their exposure, even if in culpable delay, up to the definitive dissolution of agreements that have been so far considered as crucial for the endurance of the entire “system”. Only with regards to Telecom Italia, the Italian members of the major shareholder Telco, Generali, Intesa Sanpaolo and Mediobanca (two banks and one insurer, whose core businesses have nothing to do with telecommunications) wrote-off more than 1.3 billion Euros over the last two years. In a widespread relational network, losses and inefficiencies propagate as real viruses, making the entire system definitely unsustainable. It is still too soon to mark the definitive end of the Italian relational capitalism, as the (former?)salotto’s members are still linked by many common interests. The risk is that current changes just hide short-term hasty retreats and internal re-organizations. For instance, even if the shareholders’ agreement controlling Pirelli has been terminated, a new agreement has been signed at Camfin, the major shareholder of Pirelli with 26.2%, including some salotto’s participants, such as Mr. Tronchetti ProveraUniCredit and Intesa Sanpaolo, together with the fund manager Clessidra SGR.

If the end of the relational system was real, it would mean that the financial crisis has caused at least one positive effect (the only one, until Italian politics is affected by a long-standing paralysis): major companies may finally be able to release financial resources (or what is left), so far reserved to the mere self-preservation of the “system”, in order to invest in their core businesses. If divestments were real, and not just led by the short-term lack of resources, it would be even possible to imagine a “normal” Italian capitalism, finally ready to face the market competition, where efficiently managed companies create value and are able to survive, regardless the help of more or less good “drawing rooms”.

November 11, 2013

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