Telecom Battle Revives Calls for Reform
By COLLEEN BARRY, AP Business Writer
MILAN, Italy -- Pirelli Chairman Marco Tronchetti Provera cheered on
the Inter Milan soccer team as it beat Parma 2-0 one recent Sunday,
belying none of the enormity of the news he was about to drop.
The former Telecom Italia chairman had just sent out an urgent summons
to key Pirelli & C SpA shareholders, who had a controlling share in
the company. He was about to unveil an offer that would sell Telecom
Italia to U.S.-based AT&T Inc. and its Mexican affiliate -- a deal
that would send shockwaves from the markets in Milan to the halls of
power in Rome.
Within two weeks, the offer for Europe's fifth-largest telecom was
dead, crushed by political worries that a strategic national asset
would fall under foreign control. Rome seemed to breathe with relief
when a deal sealed this weekend gave control to Spain's Telefonica SA
and a group of Italian financial heavyweights.
The drawn-out battle for one of the nation's most important industrial
concerns has laid bare the overlapping and sometimes conflicting
business relationships in Italy that critics say hurt small
shareholders, erode Italian competitiveness and have become one
obstacle -- along with the perception of creeping government
protectionism -- to foreign investment.
As immediate as the Italian examples are, analysts say methods of
preserving control of listed companies exist in one form or another
throughout Europe, adapting to local business norms.
"I believe there is a big emphasis on control and every European
country has developed some mechanism. In Scandinavia, there are
super-voting shares. In France, there are cross shareholdings and in
Germany there are special rights for some lenders," said Umberto
Mosetti, a professor of corporate governance at the University of
Sienna and an advocate for small shareholders.
In Italy, the classic method is the so-called shareholder pacts that
form the center of many industrial relationships: Business and banks
buy up significant blocs of one another's stakes and then form binding
agreements to act as a voting bloc and sell shares only to other
members of the pact.
The system took off in postwar Italy as a way to generate capital
without opening up to outsiders. Italian business interests were spun
into a web of crossholdings and pledges of fidelity built on personal
relationships, forming a type of insurance: I'll protect your
interests now if you protect mine in the future.
Today, 40 percent of companies quoted on the Milan stock exchange
belong to shareholders pacts, accounting for half of exchange's
capitalization, according to Gianfranco Gianfrate, a finance professor
at Milan's Bocconi University.
While the system remains strong, there have been some signs that it is
cracking as a new mold of manager shows more independence. Fiat SpA,
under the stewardship of Chief Executive Sergio Marchionne, recently
announced its exit from the shareholders agreement with the Milan
investment bank Mediobanca.
Two such pacts were at the center of the Telecom Italia saga. Still,
their influence was ultimately eclipsed by the government's jitters
over foreign ownership of the former telecom monopoly.
Mario Monti, the former EU Commissioner and now president of Bocconi
University, observed in a recent front-page editorial in Corriere
della Sera that while the EU forced Telecom Italia to give up its
so-called golden share to outvote all other stakeholders on key
industrial decisions in 2000, Rome replaced it with a new invention:
the golden shake.
And in a rare move for a diplomat, the U.S. ambassador to Rome Ronald
P. Spogli published a letter in the same newspaper critical of the
government for discouraging the entrance of foreign capital.
The question of Telecom Italia's future control had been open since
Tronchetti Provera ceded day-to-day control of the company in
September, when he resigned as chairman after a confrontation with the
government over the company's future. But he still retained strategic
control as the chairman of Pirelli -- which owned 80 percent of the
Olimpia holding company that took control of Telecom Italia in 2001
with an 18 percent share.
That still did not give him a free hand. After getting the offer from
AT&T and America Movil, he had to consult the Pirelli shareholders
pact, which included Mediobanca and insurer Assicurazioni
Generali. They agreed to the talks.
But they reacted much more sternly a few days later when Tronchetti
Provera withdrew his support from his successor as Telecom Italia's
chairman, Guido Rossi. Still supporting Rossi, Mediobanca and
Assicurazioni Generali issued a terse statement calling for a meeting
of the Pirelli shareholders pact -- publicly reminding the Pirelli
chairman that he could not act without their support.
In the end, he got it. Rossi was forced out, and Tronchetti Provera
managed to close a $5.58 billion deal handing control of Telecom
Italia to the Spanish-Italian consortium -- itself a shareholders
pact. The deal values Olimpia's Telecom Italia shares at $3.83 -- well
above the current $2.90 market price.
None of that premium winds up in the pockets of the small
shareholders, however, and critics say that too often, shareholder
pacts act in their own interest, which often does not translate into
increasing share value.
Moreover, shareholder groups have been able to gain control of Telecom
Italia with far less than the stake that would obligate them to launch
a full takeover. Olimpia controlled it with just 18 percent -- and the
new group of shareholders will do so with just 23.6 percent.
Meanwhile, small shareholders, who control 70 percent of the company's
shares, have seen their stock halved in value in the last six years.
Calls for reform are growing.
In an interview with Corriere published Thursday, Industry Minister
Pierluigi Bersani called for further European reforms on takeovers and
a revamping of Italian rules.
"They have really gone too far in ignoring the interests and rights of
the small shareholders," he said.
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