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Financial Services Industry

Italy's breakthrough deal

Global Finance, Dec 1997/Jan 1998 by Glover, John

The wide distribution of Telecom Italia shares is finally creating the retail equity market that the country needs.

In the words of the local press, it was "la madre di tutte le privatizzationi," the mother of all privatizations. That seeming hyperbole was a tribute to the slew of records clocked up at the end of October by the privatization of Telecom Italia, Italy's national phone operator.

It was not an initial privatization: 55.3% of the company (formerly called STET) already traded on the Milan, London, and New York exchanges. But Italy's treasury sold virtually all of the remaining 44.7% in two parts, a L5.4 trillion ($3.2 billion) private placement of 9.02% to core strategic shareholders (including Italian banks, insurers, and an Agnelli family investment vehicle), followed by a L18.93 trillion flotation that lured nearly 2.1 million normally equity-shy Italians into banks, brokerage houses, and post offices in the hope of booking shares.

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The total $14.9 billion take made the sale the largest privatization ever outside Japan-bigger even than Deutsche Telekom's $13.3 billion sale last year. The private tranche was the largest private placement ever carried out, notes Marco Taricco, vice president of investment banking at Morgan Stanley Dean Witter, one of the treasury's advisers. And the "greenshoe" overallotment provision-225 million shares worth some $1.5 billion"dwarfed most offerings," says Charles Kirwan-Taylor, co-head of equity capital markets at London's Barclays de Zoete Wedd, one of the two global coordinators. In a new index produced by Milan investment bank Mediobanca that weights stocks by float, or the shares available for trading, Telecom Italia now accounts for 20.6% of the Milan borsa.

To pull off the sale, BZW and Mediobanca, the other global coordinator, had to cope with extraordinary obstacles, including a worldwide stock market plunge, the (temporary) resignation of Italy's prime minister, Romano Prodi, and the news that BZW's equity operations were being put up for sale by its parent, Barclays Bank. As it turned out, Mediobanca, in its first effort honchoing a privatization, did such a good job placing shares domestically that BZW wound up with only 50 million shares for international buyers.

But more than money was riding on the Telecom deal. Mario Draghi, director general of Italy's treasury, to whom the ministry's privatization team reports, points to three public policy objectives at the heart of Italy's privatization program. "First, we needed to remove the state from the running of businesses," Draghi says. "Second, we wanted to develop a retail shareholder culture in Italy. Third, we wanted to ensure the accountability of company management to shareholders."

The Telecom sale, the high point of this plan so far, mostly achieved these objectives, except for a few qualifications. The treasury did not exit the company entirely; it retains a so-called "golden share" giving it continued influence over management. Mario Monti, the European Union's single-market commissioner, has opened infraction proceedings against Italy (as well as Britain and Portugal) over the use of golden shares. And Telecom Italia chairman Guido Rossi resigned in November, apparently over continued political interference. Now running the company is group managing director Tomaso Tommasi di Vignano, who is close to the Prodi government.

But in winning huge numbers of retail investors, the deal was unquestionably a triumph. They had no trouble ponying up the minimum investment of L10,908,000, or roughly $6,270. To meet demand, the size of the retail offer had to be doubled to 1.45 billion shares, while institutions, which had booked 800 million shares, wound up with only 280 million.

Italy needs to encourage widespread share ownership both to sell off the rest of its huge state-owned companies and to begin shifting to a private pension system. "For us, [Telecom Italia] is the dramatic change you had in Britain with Mrs Thatcher," says one of the Italian bankers involved in the deal. The success set the stage for the sale of Banca di Roma in December and augurs well for the privatization of Enel, the national electricity supplier, in 1998-a deal that may be even bigger than the Telecom Italia sale. In short, in the words of the title of a recent book by Massimo D'Alema, secretary of the Democratic Party of the Left and the power behind Romano Prodi's center-left government, Italy is finally becoming "un paese normale"-a normal country.

In selling companies, as in comedy, everything is in the timing. For the treasury, the timing of the Telecom sale was pure serendipity. The offering price was set as the shares' closing price on the bourse on Friday, October 24, the day the booking period closed, minus a 3% discount for retail investors-with a maximum price of L11,200. And a 10% bonus issue of shares was set aside for retail investors who hold their shares for at least a year.

Savers such as Benito Castelmagno, a Milan clerk, advised and encouraged by a friend who works at Banca di Roma, was one of thousands who saw a chance to turn a quick buck. With most of his savings in government bonds, he was making his first foray into the equity market. As he explained to friends and colleagues, the shares would be delivered on Monday, October 27. He figured he could sell them and have the money by the time he had to pay for them on October 29.

Financial Services Industry

Italy's breakthrough deal

Global Finance, Dec 1997/Jan 1998 by Glover, John

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