- Italy is experiencing an M&A boom that is bringing volumes closer to those of the golden years (2005, 2006 and 2007).
- The acquisitions wave includes deals from both strategic investors and private equity. Infrastructural funds are now investing in Italy, where they find opportunities at prices more attractive than in Northern Europe, in a context that is regarded as politically safe.
- There has also been considerable growth in the real-estate market.
- There are many reasons that can explain this major shift: some are common to other European countries such as the quantitative easing, the low oil price, the favourable euro/dollar exchange, the solution of the Greek crisis, etc.
- The country is finally pulling out of recession, its debt is finally due to begin decreasing next year, treasury bills pay negative real interest rates, and the government has finally begun implementing the privatisation
- Foreign investors appreciate the relative stability brought by Prime Minister Renzi, after many years of political turmoil. The government has shown determination in addressing various issues that traditionally put foreign investors off.
- Reforms include the Jobs Act that streamlined the Italian labour market by introducing clearer rules on hiring and firing, and the civil justice system that was traditionally considered one of the main reasons for limited investment, slow growth, and a difficult business environment.
- Italy counts myriads of profitable small and medium-sized companies, still family-owned which often face the inevitable problem of generational change.
- The country has always had a favourable attitude towards foreign investors. In particular, Chinese companies considered it one of the preferred entry points to the European market and a gateway to the Mediterranean area.
Although we have been hearing much about the latest M&A wave around the world, it may come as a surprise to some that the boom has reached Italy. In the last year and a half, the country, which for a long time was labelled “the sick man in Europe”, has become one of the most attractive M&A markets to invest in. To quote a line from the famous Broadway musical “The Producers”, we are wondering “where did we go right?”. In other words, what are the reasons underlying this unexpected boom that is bringing M&A levels closer to those of the golden years (2005, 2006 and 2007), especially given that only a few years ago Italy seemed on the brink of a forced exit from the euro.
But before attempting any analysis, let’s review the data available. According to the 2014 KPMG Corporate Finance Annual M&A Report (the latest available), the Italian market went into a deep decline after its golden years, with M&A levels in 2013 sinking as low as those in 2004. More precisely, 2007’s exceptional EUR 148 billion result drastically decreased to EUR 56 billion in 2008, and continued to decrease in 2009 and 2010 (with a record low of EUR 20 billion) before stabilising at EUR 30 billion in the following three years. Things picked up in 2014, with volumes almost doubling to approximately EUR 50 billion and the number of transactions increasing by 43%.
No official data is yet available for 2015, but all the reports indicate further substantial growth. According to a Reuters’ report, after the first quarter, with deals for EUR 20 billion, Italy became the third most targeted country in Europe, accounting for 11.6% of European M&A. And according to Dealogic, compared to the first nine months of 2014, Italy’s volume for the same period in 2015 almost doubled (EUR 60.5 billion). Even without definitive numbers, deal-making in Italy is clearing gaining momentum.
Also from a qualitative point of view there has been a step up in pace this year, with major strategic investors clearly targeting the Italian market. To mention but a few deals announced or closed this year, it suffices to cite ChemChina’s acquisition of the tyre company Pirelli, Dufry’s acquisition of World Duty Free, Hitachi’s acquisition of Ansaldo STS and Ansaldo Breda from Finmeccanica, the merger of Yoox and Net-à-Porter, and Mitsubishi’s acquisition of DelClima.
The private equity funds did their part too. For instance, Mercury Italy S.r.l., a consortium owned indirectly by funds advised by Bain Capital, Advent International and Clessidra SGR signed an agreement to acquire Istituto Centrale delle Banche Popolari (ICBPI), a leading player in the Italian financial services market with strong market positions in payment services, interbank clearing and securities services; Clessidra, an Italian private equity house, acquired a 90% shareholding in the well-known fashion house Roberto Cavalli; and BC Partners, that had previously abandoned the Italian market, came back to acquire a majority stake in Cigierre, a casual dining chain. Last but not least, it is worth noting that infrastructural funds are now investing in Italy, where they find opportunities at prices more attractive than in Northern Europe, in a context that is regarded as politically safe.
With but a few notable exceptions (e.g., Fiat Chrysler, Luxottica, Enel, and Unicredit), Italian entrepreneurs have been less than adventurous in the last few years in terms of investing abroad. This seems to be less the case now, partially because the European market is shrinking, thus making it necessary to have a presence in other promising markets, and partially to diversify risks and opportunities. In 2015, for instance, GTech, controlled by Lottomatica, completed its acquisition of US-based International Game Technology; Exxor (the Agnelli family holding company), following the sale of Cushman & Wakefield, acquired a 43% holding in The Economist and PartnerRe (a large reinsurance company); Ferrero completed its acquisition of Thorntons (a UK chocolate company); and Salini Impregilo announced its acquisition of Lane Industries (a leading US construction company).
The real-estate market
There has also been considerable growth in the real-estate market. The transaction volumes recorded in the first half of the year are double those recorded for the same period in 2014, with 80% involving foreign investors. Among the most notable acquisitions, it is worth noting a sizeable investment by the sovereign fund of Qatar in a large Milan project. And by the levels of investment at year end are expected to return to pre-crisis levels. Moreover, recent reforms of the REITs regulations, rendering them more advantageous also from a tax perspective, will likely lead to more IPOs of such vehicles.
The European context
There are certainly many reasons that can explain this major shift: some are common to other European countries, other are peculiar to Italy. To begin with, an important role has certainly been played by the concurrence of general factors such as the quantitative easing, the low oil price, and the favourable euro/dollar exchange. At European level, the risk of the Euro area breaking up seems, at least for the moment, behind us. Even the third (and most dramatic) Greek crisis has been overcome and the fears of Brexit, although serious, are still distant.
Privatisations are back
Returning specifically to Italy, the country is finally pulling out of recession (we expect GDP to grow by 0.8 or 0.9 % this year), although its debt is still huge, amounting to 132% of GDP (but it is finally due to begin decreasing next year). Treasury bills pay negative real interest rates, and the government has finally begun implementing the privatisation plan that had been requested for so long. The end of 2014 saw the IPO of Ray Way (the Italian public broadcaster’s subsidiary that owns the signal transmission and broadcasting network), followed by the sale earlier this year of around 40% of Poste Italiane (the Italian Post Office). According to the Privatization Barometer of the Mattei Foundation and KPMG, Italy came in at the third place, behind the United Kingdom and Sweden, for the privatisations carried out in the first eight months of this year. Next in line are Grandi Stazioni (which manages 13 of Italy’s largest railway stations), Enav (which provides air traffic control services) and Ferrovie dello Stato (the Italian state railway group). To be sure, it is not these IPOs that will enable Italy to cut its humongous public debt, but it is nevertheless a positive sign of the State’s commitment to reduce its presence in the market economy. And it goes without saying that their going public will contribute to a more dynamic and competitive market.
Political stability and reforms at last
Certainly the relative stability brought by Prime Minister Renzi, after many years of political turmoil, has been appreciated by foreign investors. As the next elections are not due until 2018, the government has more time to make good on its promise to reform the economy. And although only part has been delivered thus far, the Renzi government has shown determination in addressing various issues that traditionally put foreign investors off. For instance, the recent Jobs Act has streamlined the Italian labour market by introducing clearer rules on hiring and firing and a simplified employment system, with protection increasing with length of service. Recent tax reforms should also help streamline the relationship between tax authorities and foreign investors. And after many years of tax increases there have finally been some much welcomed cuts, and although most related to personal income and property taxes, it is expected that they will extend to corporate tax from next year. Liberalisations are also in the government’s agenda, although we are still waiting for parliament’s final approval of the law that should take the first timid steps in this direction.
Another area the government has been focusing on is the reform of the civil justice system, whose inefficiency has often been considered one of the main reasons for limited investment, slow growth, and a difficult business environment. The first data released seem encouraging, indicating a 20% reduction in the backlog of both new and pending cases. The main gist of the reform is the establishment of a separate track for out-of-court settlement, which offers alternative dispute resolution methods for minor cases and certain family law matters (including amicable separations and divorces). In addition, courts can now fast-track simpler proceedings, and new rules have been adopted to accelerate certain enforcement procedures. Last, but not least, as a general rule judges are now required to order the losing party to pay the winner’s attorney’s fees and higher interest rates are payable on the amounts awarded. Although the actual costs of litigation (for the State and the parties) are higher than those awarded by the court, these changes will probably prove the most effective methods to limit frivolous litigation.
Generally speaking, it is fair to say that although the reforms underway will not individually lead to radical change in the market place, they have persuaded foreign investors that the government is tackling the right issues.
Small and medium-sized enterprises for sale
From an industrial point of view, Italy can be considered a land of opportunities. One should remember that it is the second largest industrialised country in Europe. Unlike France and Germany, it has only a few large banks and multinational companies, but it counts myriads of profitable small and medium-sized companies (especially in the rich regions in the north-east) that export all over the world. These are, to a large extent, still family-owned and often face the inevitable problem of generational change. Thus, after the crisis of these years, old patrons facing these choices are more sensitive to the sirens of private equity funds and international strategic investors offering a rich way out and sometimes guaranteeing well-paid jobs to their offspring.
Foreigners are welcome
To complete the picture, it should also be remembered that Italy has always had a favourable attitude towards foreign investors. Unlike other countries, we have never experienced a wave of economic nationalism. The only response to a series of transactions carried out by French companies, which culminated with the acquisition of Parmalat, was the establishment of a sovereign fund. Since then the fund has played an important role but has never been an instrument to block foreign acquisitions. On the contrary, it has often been instrumental in allowing state-owned companies to divest and gradually transfer control of certain assets and companies. More recently, for instance, it acquired a 12.5% interest in Saipem (a global leader with distinctive skills and capabilities in engineering and construction and oil and gas drilling) from ENI, allowing ENI to deconsolidate Saipem. To confirm this internationally-minded strategy of the Italian Strategic Fund, suffice it to say that the Kuwait Investment Authority holds 22.9% of its investment arm.
Chinese investments are here to stay
Of all countries, China has had the lion’s share, with Chinese acquisitions in the last 18 months surpassing those in the United Kingdom and the United States, including acquisitions of significant and strategic assets, such as a 35% stake in CDP Reti, a company that holds 30% of Terna and Snam, which respectively own the electric and natural gas networks. Interestingly, even when Italy was generally considered a less attractive market, Chinese companies considered it one of their preferred entry points to the European market. Italy does in fact offer strategic assets in the traditional and advanced sectors and a gateway to the Mediterranean area. China’s special interest in Italy is also evident from the fact that in the last few years Chinese state-owned banks have acquired small but notable shareholdings in Italy’s largest blue chips.
In conclusion, as one would reasonably expect, a number of factors converged to create this momentum for Italy. The credibility of the current government is an important element in this bounce back, but we all know that political credibility is a currency that can be rapidly amassed but just as rapidly depleted. The completion of the reforms underway (including a serious spending review) will be the litmus test. But for now, we have reason to believe that this growth trend will continue.
UK UPDATE – Understanding and Dealing with Hedge Funds and Shareholder Activism Across Europe: The Impact of the Financial Crisis
The attached guide takes a pan-European look at trends and developments through the 2008 financial crisis and in the period since, focusing on:
- the position of hedge funds: their behaviour, performance and strategies in that period, as well as the changed regulatory landscape they now face, and
- activist behaviour by both hedge funds and other investors during that period.
- For the first time, the Italian Stock Exchange Commission applied a law of 2007 that enables it to order the launch of a tender offer, or impose a fine, for breach or circumvention of the mandatory tender offer rules.
- Previously the sanctions, which proved ineffective, consisted of a fine, the freezing of voting rights, and the forced sale of the shares in excess of the statutory threshold.
- The main purpose of this new rule is to enable minority shareholders to obtain fair compensation for their loss without needing to go through long and costly litigation.
- The Commission has broad discretionary powers in determining whether to impose the tender offer, and the price.
Last December, for the very first time, the Italian Stock Exchange Commission (Consob) imposed a sanction ordering the launch of a tender offer on a group of shareholders who, acting in concert, circumvented the mandatory tender offer rules. After a year-long investigation, Consob established that three shareholders of Greenvision Ambiente S.p.A. had entered into an undisclosed agreement to acquire control. More precisely, they purchased stock, in the aggregate, in excess of the 30% threshold that should have resulted in the launch of a mandatory tender offer. These purchases allowed them to appoint six out of the seven board members.
The interesting thing about this ruling is that it is the first application of a law designed to ensure effective compliance with the provisions on mandatory tender offers, set out in Directive 2004/25/CE. The Directive gives member states significant leeway to decide the sanctions for breach of the mandatory takeover rules, and to decide how to grant minority shareholders redress (“The sanctions…shall be effective, proportionate and dissuasive”).
Prior to the new legislation enacted in 2007, when a party breached the mandatory tender offer rules, Consob imposed a pecuniary sanction, “froze” the breaching party’s voting rights, and ordered the sale of the shares purchased in excess of the relevant threshold triggering the obligation to launch a tender offer. Although these remedies may have significantly deterred the buyer (as it was prevented from acquiring effective control over the target), they did not adequately compensate the minority shareholders deprived of the chance to sell their shares at the premium price usually paid by a buyer wanting to gain control of the company.
The ineffectiveness of the existing set of remedies became evident in a high-profile case in 2002 regarding the acquisition, in breach of the mandatory tender offer rules, of over 30% of the share capital of Fondiaria (an insurance company) by its competitor SAI and other intermediaries acting on its behalf. As a result, minority shareholders initiated several court actions, some of which are still on their way to the Italian Supreme Court, based on the application of general principles of civil law, such as tort liability and breach of contract. In general, it is not yet settled that an individual shareholder may seek damages from the buyer in breach of the mandatory tender offer rules (although lower courts have upheld this principle). In any event, the Italian experience shows that leaving the task of granting redress to shareholders solely to the judiciary is less than ideal. In particular, the absence of securities class actions entails a proliferation of trials – in different courts – and entails each minority shareholder incurring the cost of a highly uncertain litigation, as case-law in this area is far from settled.
The Italian legislator attempted to fill this gap by granting Consob discretionary power to impose any person(s) in breach of the mandatory tender offer rules to launch a tender offer (at a price established by the regulator), rather than simply imposing the sale of the shares. The underlying rationale is to allow minority shareholders to receive fair compensation for the loss incurred, without needing to turn to the courts.
Consob’s first application of the provision had been long-awaited by the legal and business communities, which were eager to understand how the Commission will use the broad discretion the new law grants it. In fact, Consob is free to decide whether to impose – on top of the pecuniary sanctions, which are applicable anyway and can equal the consideration for the tender offer – the launch of a tender offer rather than the sale of the shares in excess of the statutory threshold. The decision must be based on the circumstances of the case, including the reasons underlying the breach, and the need to protect minority shareholders.
In the Greenvision case, Consob established that the three shareholders acted in concert to acquire control of the company, circumventing the mandatory tender offer and associated costs: a blatant example of willful misconduct. Moreover, the Commission concluded that, given the limited volume of transactions of Greenvision shares, a forced sale would have depressed their price, and caused the minority shareholders to suffer still further losses. The ruling is particularly interesting as a precedent because the law provides no guidance on how to determine the offer price. Consob stated that it does not necessarily need to be the same as that of the mandatory tender offer that should have been launched at the time of the breach. In the circumstances, it applied a premium to the current market price, consistent with the premium the buyer paid – or could reasonably have been expected to pay – to obtain control of the issuer.
The underlying reasoning of the decision indicates Consob’s willingness to use this remedy only in cases of deliberate breach where there is a special need to protect the minority shareholders. The controlling shareholders may now challenge Consob’s determination of the offer price, but the court will simply be asked to assess whether the Commission reasonably applied its discretionary power in the circumstances. The court may void the assessment, but not re-determine the offer price. From a policy point of view, it is interesting to note the shift towards a remedy that would leave individual shareholder’s claims outside the courtroom, by providing an alternative means of redress capable, in most cases, of granting fair compensation faster and more cost-effectively.
ITALIAN UPDATE – Formation of New Italian Fund to Protect Italian National Champions, in Reaction to the Takeover of Italy’s Parmalat by France’s Lactalis
The recent acquisition of Parmalat — one of the biggest Italian listed companies — by the French dairy group Lactalis, caused a huge debate in the financial and political communities in Italy.
Lactalis’ bid was initially met with stiff Italian resistance, including encouragement of potential local “white knights,” issuance of an emergency decree to allow Parmalat to postpone its General Meeting, and debate about possibly issuing a decree granting the government new powers to block foreign bids for companies deemed strategic. But in the end, Italy decided to abandon the fight, and Lactalis managed to complete its takeover bid.
After the “thunderstorm,” the Italian government’s emphasis shifted from introducing protectionist measures to a more far-reaching goal of stimulating the Italian market for domestic mergers and acquisitions, so as to counter foreign competition. As a first step, the Ministry of Economy promoted the establishment of a new fund to invest in companies of “significant national interest”, which has been broadly defined. The initial investor in the fund is the Italian government’s Cassa Depositi e Prestiti, but the fund is also open to banks, insurance companies, and other institutional investors. It is expected that, in the near future, participation in the fund will be opened to foreign private investors as well.
The political fear of losing “national champions” to the advantage of “foreigners” is commonplace almost everywhere in the world, however, in Italy it has its own peculiar origins and reasons.
Italy’s economic base consists primarily of small and medium sized enterprises which contribute to most of the country’s national exports and GDP. Traditionally, Italy has fewer large industrial or financial groups, most of which are family owned or controlled, in comparison to other developed economies such as France, Germany, and the UK. Over the years, this peculiar structure of the Italian economy has contributed to making Italian industrial and financial groups comparatively less dynamic than their foreign counterparts when pursuing mergers and acquisitions. In general, in the Italian business environment, “friendly” transactions tend to be more common than competitive bids where several potential buyers compete for the same target. This is partially due to the fact that, traditionally, only a few Italian companies listed on the stock exchange are actually “public companies”. Also, Italian entrepreneurs often see few incentives in embarking on M&As, as family-run businesses — even when they grow to a meaningful size — can encounter significant difficulties in managing the challenges of external acquisitions.
While our purpose here is not to discuss the effect of the peculiarities of Italian capitalism on the economy as a whole, it is fair to say that, as the Italian M&A market has increasingly opened up to foreign investors over the last couple of decades, Italian companies have been faced with the challenge of foreign competitors which, overall, have been more aggressive and dynamic.
The recent acquisition by the French dairy group Lactalis of Parmalat — one of the biggest Italian listed companies in terms of market capitalization — caused a huge debate in the financial and political communities. Parmalat was turned around after going bankrupt in 2003, thanks to the efforts of a management team that was particularly effective in restructuring the company and making it profitable again. However, that same management was considered too conservative by many, in pursuing a strategy of growth. In fact, when Lactalis moved to acquire a large stake in the company, Parmalat was sitting on a significant amount of cash, while evaluating a few possible business combinations.
Soon after Lactalis increased its stake to around 29%, a group of Italian investors, mainly led by domestic banks, tried to find a “white knight” to launch a bid to prevent Lactalis from controlling the company. Despite significant initial political support, the Italian “white knight” never materialized, mainly because of difficulties in finding a strong industrial partner interested in joining the group. Eventually, Lactalis decided to launch a tender offer, and acquired full control of Parmalat. Notwithstanding the fact that Parmalat’s Board of Directors considered the offer price insufficient, the offer succeeded owing to a lack of concrete alternatives. Lactalis’ bid spurred a significant debate in the media and in the Italian political arena as it revitalized the numerous and vociferous advocates calling for stronger protection for Italian “national champions” from foreign takeovers.
Initially, the Italian government tried to place certain hurdles for the French takeover, and actually adopted an emergency decree to allow the postponement of Parmalat’s General Meeting for a couple of months, in an attempt to gain time to allow a group of Italian companies to launch a bid before Lactalis could appoint a new Board. As any prospect of an Italian “white knight” faded away, the government also considered the possibility of issuing a decree granting it new powers to block foreign bids on companies deemed strategic. This may well have halted the French bid. The new decree was supposed to be modelled on French law No. 2005-1739 of 30 December 2005, which created an authorisation procedure for foreign investments in certain sectors of activities that could have affected public policy, public security, or national defence. This attempt was, however, soon abandoned by the Italian government, fearing the risk that these new rules could have proved to be inconsistent with EU rules on free movement of capital. Thus, after a summit between Berlusconi and Sarkozy, the Italian government decided to drop the fight against the French “invader”, at least this time.
As the thunderstorm on Parmalat ended, with the French group finally taking over Parmalat, from a political standpoint, the problem of protecting Italian “national champions” from foreign attacks remained far from resolved. However, the government policy to curb this political pressure seems to have shifted from introducing restrictive measures aimed at deterring foreigners from taking over Italian companies, to the more far-reaching goal of stimulating the market for domestic mergers and acquisitions, so as to counter foreign competition.
The latter goal is clearly more far reaching and harder to achieve in the short term. In theory, this policy is obviously more desirable and consistent with Italian obligations under European law, however, it carries two significant risks. On one hand, it may not be considered sufficient to satisfy the immediate requests of those factions within the government that believe that the country is undergoing a “looting” of its strategic assets. On the other, its implementation requires strong government commitment to pursue significant changes to the structure of Italian capitalism and, at least, a bit of time.
For the time being, however, the government seems to have chosen an intermediate solution, which should be able to deliver some immediate results and represents a step forward in fostering the domestic M&A market. The idea was borrowed from France, as this next-door neighbour is not only perceived as the most significant “threat” to domestic ownership of Italian companies, but is also considered to be a front runner when it comes to protecting its own national strategic interests from “foreign attack”. The core of this approach is the creation of a fund focused on investing in companies of “significant national interest”, which have been broadly defined by the Ministry of Economy to include companies operating in strategic sectors, such as defense, security, infrastructure, public services, transportation, energy, telecommunications, finance, and high tech, as well as companies that, regardless of their business, exceed certain thresholds in terms of revenue and number of employees. While the broadness of the above definition will not limit a fund’s target choice very much, there is the more significant limitation that will come from the fact that only the buying of minority stakes in companies that are economically and financially sound will be allowed, as European rules on state aid limit the State’s ability to invest in distressed companies.
Similarly to its French predecessor, the Italian fund has been established by enlarging the scope of activity of an entity known as “Cassa Depositi e Prestiti”, a special entity controlled by the Ministry of Economy which lends savings collected through the postal services to public entities and finance infrastructures.
Therefore, as the initial investor of the fund is the Cassa Depositi e Prestiti, which is expected to inject approximately 1 billion euro (and in the aggregate up to 4 billion euro), the fund will be off the state’s balance sheets, as its funding does not actually come from public debt. Also, it is expected that, in the near future, participation in the fund will be opened to foreign private investors as well, in an effort to encourage foreign investment in Italian companies, while keeping them in domestic hands.
Critics argue that the fund may turn out to be an instrument for politicians to exert influence on Italian businesses, somehow recreating under the cover of a new and more acceptable form, the old system of state intervention in the economy — a sort of new IRI — the Istituto per la Ricostruzione Industriale — that over the years represented the State’s long hand in business sectors ranging from the transportation to the confectionery industry.
Even though the fund has yet to start operating, the significant background circumstances relating to the newly appointed Managing Director, Mr. Maurizio Tamagnini, are noteworthy. Mr. Tamagnini headed one of the largest international investment banks in Italy, and his appointment may be regarded as a significant step towards insulating the fund from political pressure, and may even give an indication of the fund’s investment style and strategy for the very near future.
The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.
- Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
- Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
- Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
- Distressed deals have exceeded US$75 billion per annum since 2009.
- Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.