Italy's breakthrough deal

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

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The telecom stew was merged in 1994 to form Telecom Italia, with STET holding 64% of the company. Early the next year IRI, under heavy pressure from the EU competition authorities to cut its crippling and potentially dangerous L70 trillion-plus debt load, appointed first Morgan Stanley and then Milan's Euromobiliare to advise on the sale of STET/Telecom. Grilli stresses the importance of knowing the local market in a sale of Telecom's size. "What we've seen here is that the importance of getting the Italian retail and institutional parts right is paramount. They are the engine of the transaction," he says. "A local expert is very important for local knowledge." As a bonus, he adds, local institutions gain experience and expertise and make international contacts.

Naming the advisers didn't mean the sale was going to come quickly. "Between February 1995 and the end of 1996 it was all stop and go," says Rita Gastaldi, who heads corporate finance and primary markets at Euromobiliare. One stumbling block was that legislation setting up a regulatory office had to be in place before the state could exit telecoms. By blocking the law, opponents of privatization blocked the sale. Also, IRI and STET's top managers (led by managing director Ernesto Pascale) seemed to be dragging their heels. "Privatization would have meant a loss of power for STET managers," points out a Milan analyst. "It also meant IRI losing power-what would it do if it didn't own STET?" Adds Alberto Rolla, telecom analyst at Pasfin Sim in Milan: "Pascale felt strongly that the company should invest heavily in raising the barriers to entry to the Italian market. But private investors would probably prefer dividends or a share buyback."

Under an Italian-EU agreement, IRI was supposed to reduce its debt-equity ratio to 1-to-1 by the end of 1996. Selling STET by the deadline was impossible, so the treasury, under former Bank of Italy governor Carlo Ciampi, transferred STET to the ministry. The move was, Ciampi said in an interview, "a clear signal we are serious about privatization." STET finally set about merging with Telecom last January. But the government, fed up with the slow pace, fired management and brought in Guido Rossi, a wealthy corporate lawyer and a veteran of the 1993 salvage of Montedison, to be chairman and see the privatization through. Tomaso Tommasi di Vignano of Telecom Italia, a career Telecom executive, became group managing director.

The merger was rammed through various decision-making bodies in March. "It was like Bre'r Rabbit shouting, `Don't throw me in the briar patch,' says a former Telecom executive. "The people who did not want to sell were pushing for the merger as a way of buying time. They were surprised when it happened."

Completed in July, the reorganization was peculiar. Telecom, clearly the financial engine with 90,000 employees, was absorbed by tiny STET and its 500 employees-which then changed its name to Telecom Italia. "There were marginally more advantages this way," says Morgan Stanley's Taricco. "STET was already quoted in the United States, plus there were tax considerations pushing in this direction."