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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