Italy's breakthrough deal

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

• E-mail
• Print
• Link

But October 27 turned out to be Gray Monday, the day when Asian jitters sent world stock markets plunging. Telecom slumped below its offer price-and stayed there. Benito paid, but he was stuck with the shares. "My wife told me to stay in treasury bonds," he commented sourly. Not until early December did the shares rise above the discounted offering price. But by then Castelmagno, like countless other Italians, decided he rather liked owning Telecom shares and chose to keep them.

Though somewhat chagrined by the price decline, treasury mandarins put their best spin on it. "You've got to remember that the fall in the market is not a Telecom Italia event, it's a worldwide event," says Vittorio Grilli, the dapper 40-year-old former academic who heads the treasury's privatization team. "These things occur every once in a while. It's unfortunate it occured the day after the offer." Adds one of the deal's bankers: "We really didn't want to bring in people who just wanted to sell the day after for a quick profit."

Four years into a privatization program that has brought more than $38 billion flowing into its coffers, Italy's treasury has tested all sorts of selling techniques-from private trade sales to initial public offerings and secondary flotations, single- and multitranche deals, shorter and longer bookbuilding periods, as well as the use of convertible bonds. In tough markets, such as 1995, it promised to reimburse investors' losses. In strong markets, such as 1996 and 1997, it has offered bonus shares to those holding on to their shares for more than a year.

About the only technique the treasury hasn't tried is selling shares on an installment payment schedule, a gambit used several times by Britain in its massive 1980s privatizations. In Italy the technique would require special legislation, meaning delays. But it's not really necessary. "There is a stronger case for it when interest rates are in double digits than when they're at 6%," says Grilli. "But there isn't a problem of cash-constrained retail investors in Italy. They have plenty of cash, if they want to use it." A full 16.2% of disposable income, he points out; "the household savings rate here is huge."

A sale of Telecom Italia has been in the air ever since the 1992 currency crisis and magistrates' corruption investigations swept away the political order that had ruled the republic since the end of World War II. With the arrival of a series of technocratic governments, the idea of selling state assets ceased to be regarded as heresy and entered the political mainstream.

But selling Telecom Italia entailed problems. For one thing, it didn't exist as such. It was a spezzatino telefonico, a telecom stew, of separate companies for international traffic, for domestic traffic, satellite traffic, and so on, many of them with their own listings on the bourse but all controlled by Italy's largest, most heavily indebted state industrial holding company, Istituto per la Ricostruzione Industriale (IRI), through a sub-holding called STET. Thanks to the cash flow from its monopoly of Italian telecoms, and a highly centralized, authoritarian management enjoying its own political sponsorship, STET was one of the most powerful companies in the country. "Who runs Italy?" asked Karel Van Miert, the EU competition commissioner, after one of his many run-ins with the company. "STET or the government?"