Policy Dialogue on Corporate Governance in
China
Shanghai, China 25 - 26 February 2004
Session 2: Ownership transfer in an efficient and fair
manner
Selecting proper privatisation methods
Adolfo Di Carluccio
Ministry of Economy and Finance of Italy
1
Contents of the presentation
• The key objectives/drivers of the Italian
privatisation program and its scope
• The main privatisation methods in Italy
• The achievements of the program (and the
shortcomings) relative to the stated objectives
2
The key drivers of the Italian privatisation
program and its scope
• The key drivers of the Italian program:
– The need for fiscal adjustment
 a soaring level of budget deficit and public indebtedness with
high government bonds spreads;
 a mounting drag exerted by SOEs on public budget
 the pressure stemming from the EMU
– The need for developing capital markets and equity
culture, also through strengthening institutional
investors and market infrastructures (corporate
governance)
– Improvement in corporate efficiency
3
The key drivers of the Italian privatisation
program and its scope
• The size of the Italian privatisation program
– SOEs’ value added as % of GDP declined from
19 to 2,6% in the period 1990/end-2002
– Over € 120 bl. sold (1992-2003)
– Government ownership’s phasing out
completed in nearly all the commercial sectors
4
The key drivers of the Italian privatisation
program and its scope
Proceeds from privatisations in UE
countries (1992-2000, in billions of US $)
• Italy tops all the other UE
Country Proceeds from % GDP
Public
countries as to proceeds and
privatization
offerings/Total %
the share (roughly 87%) of
state-owned assets disposed
through public offerings
Italy
0,82%
87,30%
111,295
• Development of capital
Spain
59,64%
38,402 0,58%
market perceived as a longGermany
58,03%
25,055 0,10%
medium term objective
France
0,47%
84,63%
75,918
rather than as a constraint
UK
42,808 0,30%
51,26%
Source: IFR Thomson Financial International
5
The main privatisation methods in the Italian
program
Different privatisation methods, serving different
objectives (pros and cons)
•
•
•
•
Trade Sale
Stable core of shareholders
Public offering
Sale to employees
6
The main privatisation methods in the Italian
program - Trade Sale
Pros
 Stronger improvement in corporate efficiency expected (conducive to
stronger governance structure for the company)
 Better outcomes in terms of proceedings (price premium embedded
for control)
 Transfer of technology and managerial skills
 Only minimal restructuring required (weak information asymmetry
between buyer and seller and buyer’s risk aversion to be overcome)
Cons
 Conducive of inefficient allocation of resources and potentially prone
to corruption if not based on transparent competitive bidding
 If based on transparent competitive bidding in strategic sectors it
cannot prevent foreign investors from acquiring the asset
 Misses the potential for capital market development.
7
The main privatisation methods in the Italian
program - Stable core of shareholders
Pros
Promotes strong stable governance
In strategic sectors insures national controll over the
company and protects against hostile take-over
Only minimal restructuring required (weak
information asymmetry between buyer and seller
and buyer’s risk aversion to be overcome )
Cons
All the trade sale’s cons
Possible large discount for the sale price
Potentially damaging to good corporate governance
8
The main privatisation methods in the Italian
program - Public offering
Pros
 It is an open competitive asset allocation process
 It fosters capital market and equity culture development
Cons
 A great deal of preparation and planning and company’s
restructuring required (to address information asymmetry
and buyer’s risk aversion)
 Relatively well-developed and liquid capital markets and
legal infrastructure are required to be already functioning
 Generally not aiming at revenue maximization (underpricing
and discount often granted)
9
The main privatisation methods in the Italian
program - Sale to employees
Pros
 Increased incentives for improved efficiency through
aligning the interests of workers with those of the owners.
 Helps gaining employee support for privatisation.
Cons
 Corporate governance weaknesses (employees as
shareholders, if participating in decision making, are more
concerned about employment level than profit)
10
The main privatisation methods in the Italian
program
How did the Italian government manage to optimise the
underlying tradeoffs?
 Large resort to:
 mixed procedures
 public offering of minority stakes of large SOEs
 Strong long-lasting ownership structure for newly privatised
companies (NPC) but the controlling stake not to be
indefinitely shielded from competition for corporate control (no
cross-shareholdings or other shareholder agreements required)
 Multiples tranches to maximize proceedings
 Involvement of both retail and institutional investors (including
foreign ones)
 No strong underpricing
 Golden share to protect against take-over of a NPC where the
industry is deemed to be of strategic or public interest.
11
The main privatisation methods in the Italian program
Typically the Italian Government resorted to 2
schemes of privatisation methods
 Mixed sale procedure typically combining trade sales
with a public share offering, involving both retail and
institutional investors (plus sometimes a sale of stakes
to employees)
 public offering of minority stakes of large SOEs,
involving both retail and institutional investors
(generally through multiple tranches), while retaining a
controlling stake
12
The main privatisation methods in the Italian program
Privatisation methods in Italy - 1992-2003 on a revenue basis
(Treasury -managed transactions)
Employees
3,5%
Others
2,6%
Trade sale
22,3%
Public offering
(institutional)
29,5%
Stable core of
shareholders
4,0%
Public offering
(retail)
38,1%
13
The main privatisation methods in Italy
Mixed sale procedure
 It serves well the goal of capital market development
 But also insures a strong governance structure
 A long-lasting ownership structure for newly privatised
companies envisioned
 But the controlling stake not to be indefinitely shielded
from competition for corporate control
 No resort to a stable core of shareholders in its “strong” variant
14
The main privatisation methods in Italy
Public offering of SOEs’ minority stakes
while retaining public controlling
 Protecting the company from hostile take over and
ensuring protection of public interest by retaining
government control over the company while putting it
under the discipline of financial markets
 Gradual disposal of State-owned companies through
multiple tranches over a period of time as a sale
strategy to maximize total proceeds
 But also a policy device to take time and allow financial
market institutions and equity culture to develop
15
Retail participation in the program and promotion of
equity culture

Public offerings often designed to attract individual
investors, and sometimes favour the employees of companies
being privatised, with preferential share allocations and
other incentives
 bonus shares (typically after 1 or 2 years )
 money back guarantee (i. e. in ENI 1 transaction)
 price discount

Market surveys undertaken before the offering media awareness

Strong advertising efforts before the offering
Creating
16
Retail partecipation in the program and promotion of
equity culture
2.023.000
Finmeccanica June '00
Autostr.Dec. '99
Enel Oct. '99
Acea July '99
BMPS June '99
BNL Nov. '98
AEM July '98
ENI 4 June '98
Telecom Italia Oct. '97
ENI 3 June '97
San Paolo May '97
ENI 2 Oct. '96
ENI 1 Nov. '95
INA June '94
BCI Mar. '94
IMI Feb. '94
Credito Italiano Dec. '93
1.500.000
3.800.000
1.250.000
2.120.000
1.600.000
438.000
1.700.000
2.100.000
830.450
404.962
383.000
190.000
420.000
1.000.000
375.000
304.000
-
500.000
1.000.000
1.500.000
2.000.000
2.500.000
3.000.000
3.500.000
4.000.000
17
Retail participation in the program and promotion
of equity culture
No strong underpricing; equity culture not promoted at the expenxe of
proceeds
November October
June
October
June
November
October
December
1999
1999
Weighted
1995
1996
1997
1997
1998
1998
ENI 1 (*)
ENI2
ENI3
Telecom
ENI 4
BNL
Underpricing (excluded bonus share)
4,38%
7,91%
8,69%
2,28%
3,10%
8,37%
0,32%
-0,55%
2,92%
Underpricing (including bonus share)
4,43%
12,73% 13,65%
6,50%
14,34% 17,32%
4,04%
6,86%
9,02%
Underpricing
ENEL (*) Autostrade
Stocks requested (in ml)
819
743
1.578
2.922
1.466
2.600
4.748
903
Stocks assigned (in ml.)
401
700
858
1.450
891
662
2.425
491
Stocks requested / Stocks assigned
2,04
1,06
1,84
2,02
1,65
3,93
1,96
1,84
(*) IPOs
18
Significant Participation of Foreign Investors
• Italian privatisations targeted international investors, especially at the
beginning of the process, thus attracting an increasing number of them
• Most Italian privatisations were offered to US investors (SEC registered
or 144a)
– discipline of exposure to world’s largest capital market seen as necessary for
privatisation program's credibility
• Italy is now firmly established as an integral part of all European equity
portfolios
Rest of the World
7%
Europe
13%
Domestic
30%
US and
Canada
Rest of
9,9%
Europe
Rest of
the World
4,8%
8,5%
Italy
40,5%
Switz
8,0%
UK
23%
UK and
US
27%
Eni 1 Nov. 95
Ireland
France
5,9%
Enel Oct. 99
Germany
8,0%
14,4%
19
Significant Participation of Foreign Investors


Foreign investors have played an important role, particularly at the early stage of the process
International credibility has been a priority target to ensure success of privatisation program
ALLOCATION BREAKDOWN IN ITALIAN PRIVATISATION OFFERINGS (AVERAGE)
OPV
INSTITUTIONAL
ITALY
INTERNATIONAL
1993-1994
40%
10%
46%
1995-1996
46%
15%
39%
1997-1998
52%
20%
28%
1999
64%
14%
22%
20
Significant Participation of Foreign Investors
ITALIAN M&A MARKET
Foreign bidders have been an important component of the M&A activity in recent years
80
Volume in Euro billions
70
16%
60
50
40
84%
19%
30
17%
20
10
0
22%
26%
45%
55%
1993
74%
38%
62%
1994
1995
Italian bidder
78%
81%
83%
1996
1997
Foreign bidder
1998
1999
21
The Italian privatisation program: its impact
on capital markets
Graph 6 - Market value of partially and fully privatized companies
as % of total market capitalization (as to end-2003)
55%
45%
Increase in stock market capitalization (1979-2003)
Market value of partially and fully privatized companies
% GDP (LH)
in milions of euros (RH)
0,80
0,70
0,60
0,50
0,40
0,30
0,20
0,10
0,00
900.000
800.000
700.000
600.000
500.000
400.000
300.000
200.000
100.000
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
22
Source: Italian stock exchange
The Italian privatisation program: its impact
on capital markets
Trading volume (LH) in ml. of euros
Turnover ratio (RH): trading volume-prior yearend total market capitalization ratio
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
Source: Datastream and Italian stock exchange
23
The Italian privatisation program: its impact
on capital markets
# of traded shares of private companies on the Italian stock exchange
# of traded shares of partially or fully privatised companies
160000000
140000000
120000000
100000000
80000000
60000000
40000000
20000000
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: Datastream
24
Corporate ownership patterns of
privatised firms
Method of sale
# of changes in control
Golden share
% of equity sold to strategic -industrial
investors (*)
% of equity sold to instit. investors
% of equity sold to retail investors
% of equity retained by strategic industrial investors
% of equity retained by instit. investors
% of equity retained by retail investors
airport
July 2000
mixed (trade sale + PO)
1
no
55,0
30,7
14,3
100
0,0
0,0
motorway
Dec. 1999
mixed (stable core of
shareholders + PO)
0
no
30,0
14,0
56,0
62,2
0,7
37,1
BNL
banking
Dec. 1998
mixed (stable core of
shareholders + PO)
0
no
25,0
30,5
44,6
32,7
9,0
58,3
CAPITALIA
banking
energy
Nov. 1997
Nov. 1999
PO
PO
1
0
no
yes
50,0
68,3
12,0
11,7
38,0
20,0
30,4
67,6
4,2
3,0
65,4
20,9
Company
Date of privatisation (1st transaction)
Ownership structure as
of end-2003
Industry
Ownership structure
just after privatisation
(**)
Aeroporti di Roma
Autostrade
ENEL
IMI- SAN PAOLO
INA -GENERALI
SEAT
Telecom Italia
Alitalia
Average (Aereporti di
Roma excluded)
Average (only financial
institutions)
banking
Feb. 1994
mixed (trade sale + PO)
0
no
37,1
22,6
40,3
39,8
11,1
49,2
insurance
June 1994
mixed (trade sale + PO)
1
no
18,4
49,4
32,3
20,7
6,4
72,9
media
Nov. 1997
trade sale
1
no
64,7
16,5
18,7
62,5
1,0
36,5
telecom
Nov. 1997
mixed (trade sale + PO)
2
yes
6,6
8,8
84,6
17,0
5,7
77,2
1st half 1998
sale to instit.investors+ shares
to employers
0
no
53,0
26,5
20,5
64,3
18,3
17,4
39,2
21,3
39,4
44,1
6,6
48,3
32,6
28,6
38,8
30,9
7,7
61,4
air transport
Average MIB30
5,4
Average MIB30 (only
financial institutions)
5,0
PO: public offering
(*) Retained by the State in the case of Enel and Alitalia
(**) In case of several tranches figures refer to ownership structure at the time of the last one
Source: Bloomberg and the Ministry of the Economy and Finance of Italy
25
Corporate ownership patterns of
privatised firms
The large number of shareholders created by public offerings
proved to be an unstable pattern of corporate ownership
1. Share ownership structure in partially and fully
privatised companies has showed a trend towards
concentration
2. In non-financial industries strategic/ industrial investors
have substantially expanded their controlling stake in the
companies after privatisation
3. Stickiness in the ownership of the controlling stake
4. Corporate ownership of privatised firms has shifted away
from institutional towards retail investors
26
Corporate ownership patterns of
privatised firms
Larger shareholders
over 2%
Company
Date of
privatisation (1st
transaction)
# of industrial
investors in the 1st
quartile (25%) of the
ownership structure
Number
Ownership
share (%)
1
1
100
1
2
69,5
3
8
40,1
Aeroporti di Roma
Industry
transport infrastructure
Autostrade
transport infrastructure
Dec. 1999
Banca Nazionale del
Lavoro
banking
Dec. 1998
Method of sale
mixed (trade sale +
PO)
mixed (stable core
of shareholders +
PO)
mixed (stable core
of shareholders +
PO)
CAPITALIA (formely
called Banca di Roma)
banking
Nov. 1997
PO
6
11
39,5
energy
Nov. 1999
1
1
67,6
banking
Feb. 1994
2
10
55,5
insurance
June 1994
PO
mixed (trade sale +
PO)
mixed (trade sale +
PO)
6
3
20,7
media
Nov. 1997
1
1
62,5
telecom
Nov. 1997
trade sale
mixed (trade sale +
PO)
1
2
19,3
1st half 1998
sale to institutional
investors +shares to
employers
ENEL
IMI- SAN PAOLO
INA -GENERALI
SEAT
Telecom Italia
Alitalia
air transport
July 2000
Average
1
1
64,3
2,3
4
53,9
4,3
8,0
38,9
1
1,3
63,9
of which
Financial institutions
Non-financial institutions
PO: public offering
Source: Bloomberg and the Ministry of the Economy and Finance of Italy
27
Corporate ownership patterns of
privatised firms
However
1.
2.
3.
the average share of equity owned by institutional investors in
newly or partially privatised companies (6,6 percent) still
higher than the corresponding average share for the stocks
included in the Milan stock exchange MIB 30 index (5,4
percent).
in the financial industry ownership structure more dispersed
relative to that prevailing in non-privatised companies
in the financial sector the controlling stake of newly privatised
banks fragmented among a larger number of “industrial
investors” (manly other banks, jointly managing the
companies).
28