On 31 Octoberst, Pirelli announced the termination of the shareholders’ agreement covering 31.8% of the Company’s share capital. A few months earlier, other agreements covering major Italian companies had been terminated, such as the one relating to 58.3% of the publisher of the newspaper *Corriere della Sera*, RCS Mediagroup including Fiat, Mediobanca, Italmobiliare, General, Pirelli, Intesa Sanpaolo, Sinpar and Geminiand the one controlling Telecommunications company, the holding company that owns 22% of Telecom Italia’Generali, Intesa Sanpaolo and Mediobanca, the Italian shareholders, will gradually sell all their shares to the Spanish competitor TelefonicaEven the mother of all coalitions, which has been controlling Mediobanca for the last 55 years, has recently undergone a significant reshaping, with the exit of direct participations from Groupama, Generali, Fondiaria-Sai as acquired by Unipol), Poligrafici Editoriale in February, which were preceded in October 2011 by Tod’s Owner Mr. Diego Della Valle (who also terminated his membership in RCS on April 2012, in conflict with the other major shareholders Mediobanca and Fiat), the textile group Rat and the foreign shareholders Commerzbank, Santander and Sal. Oppenheim. In fact, the insurers Generali and Fondiaria-Sai are still indirect members of Mediobanca’s agreement, via Fin.Priv. srl, the holding company also owned by Fiat, Italmobiliare, Pirelli and Telecom Italia. In any case, the controlling group of Italy’s leading merchant bank has seen its influence significantly reduced over the last couple of years, falling from a 45% stake in October 2011 to the current 30%, which is the minimum threshold required for the biennial renewal of the agreement.
The drawing room, which, literally translated as the “good drawing room”, is the Italian definition for the elite circle of a few industrial and financial groups linked by cross-ownerships in dozens of firms, suffered its first hard blow in July 2012, when the Rome-based contractor Mr. Pietro Salini gained control of Impregilo through the first real proxy fight on an Italian large-cap. The former controlling shareholder of Impregilo was Gavio Group, one of the most influential members of the Living room. But the real decline of the “Mediobanca system” came true at the beginning of this year, with the approval of Generali’s strategic plan. The Trieste-based insurance group is one of the main hubs of the whole system, but on 14 January 2013 the recently appointed CEO, Mr. Mario Greco, stated that Generali’s role is not that of a strategic shareholder, and that the Company should focus exclusively on its core business: insurance. Finally, in June 2013, the end of the “system” was even included in Mediobanca’s strategic plan, under which the merchant bank is expected to exit Telco (Telecom Italia) and RCS (in which Mediobanca still holds 15% of the share capital), and to reduce its stake in Generali from 13% to 10% by 2016.
Brief history of the drawing room
The Italian way to shareholders’ agreements was born exactly in Mediobanca, in 1958, when the founding banks Banca Commerciale Italiana (now Intesa Sanpaolo), Credito Italiano and Banco di Roma (both merged into UniCredit) allied with the main partners of the first Italian merchant bank (Lazard, Lehman Brothers, BHF and Sofina) in order to establish a controlling shareholders’ group. Thirty years later, in 1988, the agreement lost its original financial connotation, through the partial divestment of the founding banks’ ownership in favour of the most influential Italian industrial groups. The drawing room was formally inaugurated and its focus shifted from safeguarding the stability of the merchant bank to safeguarding the Living room itself, through a complex system of cross-ownerships: the investments’ target is no more value creation, but the mutual aid of participants against any kind of external threat, through strong economic and political relationships. Taking into account only listed companies, as of September 2012 at least 65 Italian issuers were connected Through direct or indirect cross-shareholdings, around a quarter of the entire stock market. Taking into account also non-significant holdings (less than 2% of the issued share capital) and cross-shareholdings in private companies, almost the entire Italian economy was (is) in some way controlled by the “system”.
Actually, shareholders’ agreements were originally conceived for commendable purposes, aimed at stabilising the management of industrial companies in a market characterised by a lack of capital: founders of high-growth companies were able to reduce their holdings, unlocking relevant liquidity needed for further investments, without losing control and the continuity of the company’s management. Nevertheless, the necessary condition for shareholders’ agreements to effectively create value is that all members have real and strong interests in that specific company. The distortion arises when shareholders join the agreement to safeguard their interests in external companies, thanks to participation in a powerful network of economic and political relationships.
The decline
A financial structure based solely on self-preservation and the protection of external interests was inevitably destined to create inefficiency and destroy value throughout the entire Italian industrial and capitalistic system. The prolonged financial crisis, which is far from over in Italy, dramatically highlighted such value destruction, leading to the collapse of many groups involved in the “system,” such as the Ligresti family's Fondiaria-Sai insurance group. For the first time, it is no longer possible to hide inefficiencies through state interventions or internal reorganisations of the Living room. The last attempts failed disastrously, with the “brave captains” who received Alitalia almost as a gift, but also with the several, improvised and ruinous controlling groups of Telecom Italia that have succeeded over the last sixteen years.
The egregious losses suffered by the main Living room’The players finally persuaded them to reduce their exposure, even if with culpable delay, up to the definitive dissolution of agreements which have so far been considered crucial for the endurance of the entire “system”. Only with regards to Telecom Italia, the Italian members of the major shareholder Telco, Generali, Intesa Sanpaolo and Mediobanca (two banks and one insurer, whose core businesses have nothing to do with telecommunications) wrote-off more than 1.3 billion Euros over the last two years. In a widespread relational network, losses and inefficiencies propagate like real viruses, making the entire system definitively unsustainable.
It is still too soon to mark the definitive end of Italian relational capitalism, as the (former?) Living room’s members are still linked by many common interests. The risk is that the current changes merely mask short-term, hasty withdrawals and internal re-organisations. For instance, even though the shareholders’ agreement governing Pirelli has been terminated, a new agreement has been signed at Camfin, Pirelli’s major shareholder with a 26.2% stake, including some Living room’s participants, such as Mr. Tronchetti Provera, UniCredit and Intesa Sanpaolo, jointly with the fund manager Hourglass SGR.
If the end of the relational system were real, it would mean that the financial crisis has produced at least one positive effect (the only one, until Italian politics is affected by a long-standing paralysis): major companies may finally be able to release financial resources (or what is left of them), so far reserved for the mere self-preservation of the “system”, in order to invest in their core businesses. If divestments were real, and not just driven by the short-term lack of resources, it would even be possible to imagine a “normal” Italian capitalism, finally ready to face market competition, where efficiently managed companies create value and are able to survive, regardless of the help of more or less influential “drawing rooms”.
Also read:
Italian business: No way back – Rachel Sanderson, Financial Times, 20 August 201 – Rachel Sanderson, Financial Times, 20 August 2013