Session V
OECD: 14th Session Advisory Group on Privatisation
Managing Commercial Assets under State Ownership
Governments in the Market: Case Studies
by
Prof. Vittorio Grilli
Director of the Italian Treasury
Budapest 20 September 2000
Summary

Government’s new role in the market has made the underlying tensions
among possibly conflicting roles and objectives more acute
Multiple roles:
Multiple objectives:

Reducing public debt ,deficit and
Pusuing “national interest”(public)
Set economic policy (public)


Share holder (private)
Liberalisation & fostering competition
(public)

Reduce State’s role in economy (public)

Granting licences (public)

Max value of assets (private)

Client Publ. Procurement

Sell at best conditions (priv)

Improve efficency and transparency of
financial mkts (priv)

Facilitate change in control and protect
minority share holders (public)

Regulator (public)

(public/private)
Actions

Possible solutions to conflicting roles:separate as early as possible,
roles and agencies responsible for them:
1 Regulator
Independent Authority
2 Set economic policy
Line Ministry
3 Shareholder
Treasury
4 Granting licences
Prime Ministerial committee
5 Client
Transparent public procurement
6 Improve financial mkts efficency
Privatise banking and Stock Exch
7 Transparency change in control,
protecting minority shareholders
New corporate governance
Despite clear roles, conflicts are probably inevitable. (ie 6 and 7 are not due to conflicting
objectives , but from vested interest groups)
Usual
clash refers to: 4 and 5 vs 2 and 1
1 vs 3
Corporate Governance and Transparency

Insider trading

Takeover rules

Retail investment

Minorities’ rights

Change of corporate control

Privatisation rules and procedures

Listing requirements
Corporate Governance Mechanisms
Special
Shareholding
Voting List
Proxy
Powers
Limits
System
Voting
CREDIT

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BCI

IMI


INA



ENI

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
TELECOM IT .

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AUTOSTRADE



ENEL




FINMECC.

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Development of Competition for Corporate Control
TENDER OFFER RULES

Notice by bidder/target

Offer document

Passivity rule

Mandatory offers

Competing offers

Shareholders Agreements
Evolving Ownership Structure for Privatised Companies
FOLLOWING PRIVATISATION (*)
UNICREDITO
IMI
14.5% Core Shareholders
85.5% Free Float
37% Banking foundations
3% Allianz
60% Free float
41% Compagnia di San
Paolo and other
core shareholders
59% Free float
18% Core Shareholders
82% Free Float
85% Generali
9% San Paolo
6% Free float
BANCA COMMERCIALE
ITALIANA
100% Free Float
70% Intesa
30% Free float
SEAT PAGINE GIALLE
61% Controlling Shareholders
39% Free Float
TELECOM ITALIA
10.6% Core Shareholders
89.4% Free Float
INA
(*)
100% Free Float
TO DATE (*)
% ownership refers to ordinary share capital; (**) Pro-forma merger with tin.it
64% Telecom Italia (**)
36% Free float (**)
55% Tecnost - 3.9% Treasury
41.1% Free float
Selected Case Studies

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Privatised in November 1997 through:

Public offering

Private placement with core shareholders
Tender offer on TI shares launched by Olivetti in Feb 1999
Privatised in June 2000

Recapitalisation in April 1998

Merger with MEI (23% of STMicroelectronics) in Dec 1999

30% held by Treasury following privatisation
Privatised in July 2000

IPO in July 1997

Sold majority to trade buyer

Tender offer on ADR market float to be launched in Oct 2000
Privatisation Process and Following Events
1996


Spin off of mobile business
1998 - 2000
1997

Merger STET/TI
(TIM)

Management change
STET transferred from

Removal of holding
IRI to Italian Treasury

shares

company discount

SEAT demerger

Sale of SEAT through a
TI privatisation
Management change
following completion of
tender offer

competitive auction

Olivetti’s tender offer on TI
Spin off of Internet division
(tin.it)

Merger SEAT/tin.it
TI’s Privatisation: Facts and Figures


PRIVATISATION METHODOLOGY

Public offering + private placement with
core shareholders

84% sold to Italian retail investors (10%
to TI employees)
16% sold to institutional investors
PUBLIC OFFERING (EURO 9.6 BN)



PRIVATE PLACEMENT
(EURO 2.2 BN)




CORPORATE GOVERNANCE


10% TI’s ordinary share capital sold to
core shareholders
No formal concert among core
shareholders
Lock-up provisions
Special powers granted to Italian
Treasury
3% shareholding limit for 3 years
Voting list system
Olivetti’s Tender Offer on TI
FEBRUARY

Olivetti announces its intent to launch a tender offer for 100% of TI’s
ordinary share capital at e10 per share, valuing TI at e52.6 bn

TI responds with its defence plan (financing package + cash tender on TIM
minorities shares)
Olivetti raises its bid to e 11.5 per ordinary share
MARCH


APRIL



MAY

TI’s Extraordinary Shareholders Meeting summoned to approve the defence
plan fails to reach the required 30% quorum
TI and Deutsche Telekom announce that they have agreed to a e 76 bn
“merger of equals”
Olivetti’s tender offer is officially launched with the offer period to last
17 working days
TI announces that, in case Olivetti’s tender offer is unsuccessful, it would
implement the buy-back program on ordinary shares at e9.5 per share
Olivetti’s tender offer closes with Olivetti reaching a 52.1% acceptance
level
Olivetti’s Tender Offer on TI – Issues Faced by Treasury

Special Powers
Veto right on mergers and purchases of
TI’s shares over 3%

Olivetti’s tender offer on TI

Proposed merger with Deutsche Telekom
(controlled by German State)


Share Ownership (3.0%)
Attendance to shareholders meeting

“30% rule” for bid defences
Preserve Treasury’s economic interest

Decide on acceptance to tender offer

Applicability in case of acceptance level
Shareholding Limit
3% limit lapses if tender offer is
launched on 100% of ordinary share
capital
below 50%
Treasury adopted a neutral stance toward the tender offer,
leaving to market forces the success or failure of the bid
Privatisation Process
1997

Consolidated losses
Euro 1.2 bn

Turnaround plan

23% stake in STM
1.0 bn

Euro 1.1 bn cash

Very diversified business

Strategic alliances
portfolio

Corporate streamlining/
sector peers
cost rationalisation

Divestiture of non core assets
(EBPA, ASI)

Merger with MEI

Net debt Euro 5.1 bn
Low market share vis-à-vis

Recapitalisation Euro


2000
1998 - 1999
Restructuring of Energy and
Transportation

Privatisation
Finmeccanica’s Strategic Alliances

Prior to privatisation Finmeccanica formed several strategic alliances in each of
its core businesses:
 Joint Venture partner has been selected for its specific skills in the sector


Strategic equity interest supported by shareholders agreement and
management deployment
Key objectives of the joint ventures were:
 Transform Finmeccanica from a conglomerate into an industrial holding
company

Create new companies able to play a major role in a consolidating sector

Enhance shareholders value
Finmeccanica’s International Joint Ventures
BUSINESS SECTOR
COMPANY
PARTNER
EQUITY INTEREST
DEFENCE
AMS
BAE Systems
50%
HELICOPTERS
Agusta-Westland
GKN
50%
MISSILES
MBD
BAE Systems/EADS
25%
AERONAUTICS
EMAC
EADS
50%
SPACE
Astrium
EADS
Pending
Finmeccanica’s Privatisation: Facts and Figures




PRIVATISATION METHODOLOGY
RETAIL OFFERING
INSTITUTIONAL OFFERING

Public offering on Italian and
international markets (Euro 5.7 bn)
Concurrent convertible offering (Euro
0.8 bn) launched by Finmeccanica

1.9x oversubscribed

1.2 million requests

76% of total offer allocated to retail

2.0x oversubscribed

26.3% to US investors

29.3% to Italian investors

44.4% to RoW investors
Corporate Governance post Privatisation

Considering Finmeccanica’s presence in the defence sector, the Italian
Government decided to keep a significant equity stake in Finmeccanica (30%)
and retain a “Golden Share”

Voting list system for retail and institutional investors have been introduced in
the Company’s by-laws


SPECIAL POWERS



SHAREHOLDING
LIMIT

Approval of material acquisitions of shares (3%)
Approval of material shareholders’ agreement (relating to 3%
or more of Finmeccanica’ share capital)
Appointment of members of the Board of Directors and
Statutory Auditors
Veto powers (dissolution, transfer of business, mergers)
No more than 3% of the company held by any natural and
legal person for a period of 3 years
Limit can be exceeded if a tender offer is launched on 100% of
the company’ share capital (Law 474)
Privatisation Process
1997
1995

COFIRI and a group of
financial investors acquired
ADR from Alitalia

Successful IPO of ADR
shares, priced at the top of
the announced range (Euro
5.68 per share).
Total consideration equalled
approximately Euro 307 mn
for 45% of ADR’s capital
1999 - 2000




DPCM establishing the
regulatory framework for the
privatisation procedure
Local Authorities exercised their
option to acquire a 3% stake
IRI and Consorzio Leonardo
signed the contract for the sale of
IRI’s 51.2% interest in ADR
IRI transferred its ADR shares to
Consorzio Leonardo
Privatisation Objectives and Options

The objective of the privatisation was to maximise the proceeds from the sale
as well as to preserve public interests relating to the Rome airport system

The alternatives considered included:
 Public offering
 Public offering with core shareholders
 Trade sale

A trade sale procedure was identified as the best option to maximise value and
allow for a stable shareholder base for ADR
Privatisation Issues
ISSUE
ACTION
 Put in place a “real” privatisation
 No more than 2% of ADR to be held
by State-owned companies
 Conflicts of interest
 Airlines excluded from sale procedure
 Maximise proceeds
 Two-stage competitive auction
 Support from Local Authorities
 Option to 4 Local Authorities to
acquire a 3% stake in the company
 Stakeholders’ interests
 Detailed business plan to be presented
by final bidders
 Minority shareholders
 Mandatory public tender on market
float
Privatisation Results



The divestiture method selected for the privatisation of ADR proved to be
successful
The auction process proved to be very competitive, for the benefit of IRI and the
minority shareholders
The price paid to IRI by the winning bidder (10.8 Euro per share) implied a
significant premium to ADR’s pre-bid market price

In compliance with the tender offer rules the price that will be paid to the minority
shareholders (9.13 Euro per share) is equal to the average between the weighted
average price of ADR shares over the last 12 months and the price per share paid to
IRI

Several contractual obligations have been undertaken by the acquiror:

Launch of a tender offer on the remaining ADR share capital

5 years lock-up period for the shares acquired from IRI

Maintenance of employment levels for 3 years

Implementation of business plan and financial viability