Capital crisis making Italy SpA stronger

July 10, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A procession of Italian industrialists and financiers slipped through the alleyways behind La Scala opera house two weeks ago to discuss the legacy of the man whose name adorns the piazza outside the building where they met: Enrico Cuccia. The group, ranging from a former Treasury minister to an iconoclastic fashion mogul, shared stories of the founder of Mediobanca, who’d passed away 14 years to the day. Yet for all the nostalgia that afternoon, absent was any obvious desire to turn back the clock to the days when Mediobanca was the unchallenged puppet-master of Italian business.

That’s surprising given the parlous state of corporate Italy. The uno-due punch of the financial and sovereign debt calamities has thrust the establishment into a profound crisis, one even more sweeping than the Tangentopoli corruption scandal that two decades ago sent dozens of Italy’s top businessmen and politicians into Milan’s San Vittore prison. The uniquely Italian form of capitalism conceived by Cuccia after World War Two is at last being consigned to history.

Though the revolution reshaping the nation’s economy is painful and prolonged, those with the most at stake know that Italy needs dramatic change. Deprived of the protections of the past – whether from the cash-strapped government in Rome or Mediobanca in Milan – Italian companies are at last being forced to play by the rules of global finance. Some 95 percent of the institutional investors who account for the bulk of trading on the Italian Stock Exchange are foreign. The survivors of this Darwinian selection will be the better for it.

Unlike the cyclical spikes in bankruptcy filings that typically accompany wrenching economic change in the United States, the evidence of Italy’s transformation is subtler, if wider-reaching. As companies pass the hat to investors beyond the Alps, they must transform their governance in ways that would have Cuccia turning in his grave on the banks of Lago Maggiore (assuming his body, stolen shortly after its 2000 burial, was ever in fact returned to its resting place).

And nowhere is this change more evident than at Mediobanca itself. In the turbulent year of 1946, Cuccia established the bank as a bulwark for private industry, largely in the north of the country, against a rising tide of post-war socialism and state interventionism. Through interlocking investments, shareholder pacts, cascading holding companies and shared directorships, Mediobanca stood at the center of the so-called “salotto buono,” or fine drawing room, a group that included important enterprises like Fiat, Pirelli, Generali and Rizzoli-Corriere della Sera. The bank was a frenemy of the state.

Under Chief Executive Alberto Nagel – who most days is nearly as likely to be found in the City of London as Milan – today’s Mediobanca is unwinding this cat’s cradle of capital, freeing up funds for more productive uses than calling the shots at other companies, and investing anew in its capital markets and advisory businesses. Indeed, days after hosting the gathering last month to celebrate a new book of Cuccia’s letters and speeches, the bank agreed with other shareholders to dissolve the Chinese box they had used to control Telecom Italia. Foreign capital, from Spain’s Telefonica, will take their place.

There’s more reform on the horizon. Mediobanca will probably reduce the size of its board from an unwieldy 23 directors to as few as 15 in coming months, a compliance with Bank of Italy rules that’s not unwelcome inside the bank. It won’t be long before the shareholders’ pact that pools around 30 percent of Mediobanca’s own shares will dissolve entirely. Since kicking off its strategic reform plan last June, the bank has divested 800 million euros of equity.

And as Mediobanca goes, so does the rest of the galaxy of companies formerly in its orbit. Fiat long ago shifted its orientation away from Italy with the acquisition of Chrysler. Though Mediobanca will continue to maintain a hefty stake in Generali, the insurer is being run by a professional manager, Mario Greco, who argues that the company’s future as an independent company resides in its ability to generate returns, not manipulate corporate governance.

Where the rubber really has met the road, however, has been at Pirelli. Over the past year, the tire company has had to collapse the byzantine chain of holding companies through which Marco Tronchetti Provera has exercised control since taking the wheel in 1992. The catalyst wasn’t just Mediobanca, but a feud with another shareholder, the Malacalza family, which forced Tronchetti to seek the help of a private equity fund, Clessidra, led by Claudio Sposito.

In exchange for buying out the Malacalzas, Clessidra attached strings to its investment – again the kind that international investors generally demand. These included a right to auction Pirelli off in a few years. Tronchetti has since swapped Clessidra for Rosneft, the Russian oil producer run by Vladimir Putin’s close ally Igor Sechin. Though the trade probably staves off a sale of Pirelli any time soon, the move to clean up the chain of control, and make it more accountable to public shareholders, was accomplished.

Bereft of Milanese capitalism’s once-reliable levers of power – be they shareholder pacts, cascading holding companies, Mediobanca or even the cocoon of state ownership – the independence of corporate Italy will depend on competent managers producing top-notch products and services in free and competitive markets. Not all of them will survive. But those that do will be world class.

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