GLG News by Paolo Zanetto

Implications: Alitalia bondholders face a positive scenario, although the regulatory risk is still high. The new rules issued by the government for the new special administration procedure are brand new, and they are probably going to change in the next 60 days.

Analysis: The Italian government decided not to proceed with the previous plan to reimburse partially the shareholders and bondholders of Alitalia by attributing them shares of the newco through warrants or equity swap. However the situation of the bondholders seems to be improving.

On one hand, for the small savers, law-by-decree n. 134/2008 approved yesterday states at article 3 that 'the small shareholders or small bondholders' will be bailed-out with government money. There is no definition of what 'small' means, the details will be specified in a government decree to be issued in the next weeks. This decision to allow a special help to small creditors may be unconstitutional, since it violates the principle of equal treatment of all creditors (so-called par condicio creditorum).

On the other hand, for the institutional investors is still valid law n. 111/2008, approved on June 23, which includes a provision (art. 2-quater) meaning that the €300m credit that the Italian government has towards Alitalia in the case of a special administration procedure will be reimbursed as the last one, only after all the other creditors will be paid in full.

The law-by-decree with the new rules for special administration must be converted into law by the Parliament within 60 days, that is before October 27th. Senate Industry committee will start its debate on the bill at the end of the current week, and it's expected to introduce major changes which are going to have a strong impact on the creditors' and bondholders' expectations.

Implications: After the resignation of PM Prodi, Italy will have to choose between a new government supported by the current Parliament or new elections. In either case there will be a major impact for relevant companies and deals, such as Alitalia-AirFrance, Telecom Italia, BPM, Banco Popolare, ENI, ENEL, Finmeccanica, Atlantia.

Analysis: On January 24, Italian PM Romano Prodi resigned. During next week we will know whether there will be a new government in Italy supported by the current Parliament - the most likely scenario - or whether there will be new national elections in April.

In both scenarios, the new government may decide to change PM Prodi's administration guidelines on a number of topics. Among the others:

Alitalia-AirFrance alliance. There may be a freezing of the negotiations (because of sensitive issues such as Malpensa airport, lay-offs) or even opening a new round of talks with the main rival AirOne, now teaming up with TPG.

Telecom Italia local network spin-off. Any decision has already be postponed to March, but it depends on the new government to bargain with the company on the perimeter of the network.

Privatizations (Fincantieri, Tirrenia). All the decisions will be taken by the new government, including Go/No Go on the privatization process (not started yet), choice between IPO or private placement, etc.

Reform of Popolari banks (BPM, Banco Popolare, etc.). The Senate has already requested the government to propose a bill for the reform of the voting system inside the Popolari banks.

CEOs of government-controlled companies (ENI, ENEL, Finmeccanica). All these companies will face EGMs in April, the new government will decide who are going to be the new chairmen, CEOs, directors.

Atlantia-Autostrade concession agreement. It will be up to the new government to persuade CIPE committee to accept the current draft of the concession agreement or whether to re-start negotiations with the company.

Implications: As the Financial Times noted in its Lex Column, “Generali sits bang in the middle of Italy's web of corporate cross-shareholdings and political power games”. Generali is the biggest Italian company by revenues (excluding ENI which is controlled by the government). The Financial Times also notes that “on recent form the government would block a takeover of Generali” by a foreign entity. Something similar happened in the summer 2006 with Abertis-Autostrade, and in early 2007 with AT&T-Telecom Italia. In the case of Generali, the Italian government has a powerful tool to block any takeover bid. ISVAP, the independent regulator of the insurance industry, has the power to issue or reject the authorization to any shareholder willing to become the “controlling shareholder” of an insurance company.

Analysis:

On October 24 a London-based hedge fund, Algebris, sent a letter to the board of Assicurazioni Generali strongly criticizing the current chairman, the two CEOs and the CFO of the group.

The immediate reaction by Generali was to get in touch with its main shareholders, first of all Mediobanca (which owns 15.6%). The chairman of Mediobanca, Cesare Geronzi, has been informally appointed as the man to manage the crisis.

Who’s behind Algebris?

This is the question everybody is asking in Italy. Algebris, created by the Italian banker Davide Serra (former Morgan Stanley), has always had close relationship with TCI. Furthermore, most people believe that Matteo Arpe, former CEO of Capitalia and hard opponent of Cesare Geronzi, is helping Algebris on this deal.

Some people also believe that this strategy was agreed upon with De Agostini. The group, officially owning 2.45% of Generali, is rumoured to own more than 4%, and it’s a strong critic of the current top management.

The political factor

As the Financial Times noted in its Lex Column, “Generali sits bang in the middle of Italy's web of corporate cross-shareholdings and political power games”. Generali is the biggest Italian company by revenues (excluding ENI which is controlled by the government). Some examples of its importance the Italian system are:

a) Generali is controlled by Mediobanca, which in turn is in the process of a continuous fight among its Italian and French shareholders. Changing the governance of Generali, currently chaired by a French man, would lead to great instability inside Mediobanca;
b) Generali is now a major shareholder of Telco, the newly created holding controlling the majority stake in Telecom Italia;
c) Generali is the central element of stability of the Italian banking industry. For instance the insurance group owns 5.07% of Intesa Sanpaolo, which in turn owns 2.21% of Generali. When in 2003 there were rumors regarding a possible French takeover of Generali, the former governor of the Bank of Italy, Antonio Fazio, asked some Italian banks to defend Generali.

The Financial Times also notes that “on recent form the government would block a takeover of Generali” by a foreign entity. Something similar happened in the summer 2006 with Abertis-Autostrade, and in early 2007 with AT&T-Telecom Italia.

In the case of Generali, the Italian government has a powerful tool to block any takeover bid. ISVAP, the independent regulator of the insurance industry, has the power to issue or reject the authorization to any shareholder willing to become the “controlling shareholder” of an insurance company.

ISVAP would consider as “controlling shareholder” any investor, or group of investors acting together, reaching the highest stake in the company. In the case of Generali, it means that any group of investors would need ISVAP’s authorization if they want to own more than 15.7%.
So far the government and the leading politicians have been quiet on the Generali affair. Considering the weakness of the Prodi cabinet, with possible new national elections in 2008, a foreign bid for Generali would become a major campaign issue. Today the chairman of Generali, Antoine Bernheim, will have a meeting with the Minister of Economy, Tommaso Padoa-Schioppa.

A suggestion for activists

The Italian system has already proved to be very effective in driving away any undesirable foreign bid for strategic Italian companies.
Any activist fund willing to join Algebris in its strategy should definitely take in consideration the political relevance of the Generali affair, and act in advance in order to establish correct government relations in Italy with all the decision-makers in the government, in the political parties and in the financial regulatory bodies.

Implications: The prosecutors are claiming damages for a total of €98bn from the Italian gaming concessionary companies, including €4.0bn from Lottomatica (LTO.MI) and €4.8bn from Snai (SNA.MI). While the government is still considering what to do, there's increasing pressure from the Parliament to approve a bill which may help the industry to pay much smaller amounts.

Analysis: The prosecutors at Rome-based "Corte dei Conti" issued fines against 10 gaming concessionary companies for a total of €98bn, for the lack of compliance with the 2004 regulations on the online transmission of information between the installed gaming machines and the Ministry of Finance (through its agency Sogei). Two listed companies received very high fines, Lottomatica (LTO.MI) for €4.0bn and Snai (SNA.MI) for €4.8bn.

The problem is mainly political. The Deputy Minister of Finance, Alfiero Grandi, chaired a special committee since June 2006 to check the possible responsibilities inside the government for lack of surveillance over the gaming industry, since the gaming activity is possible in Italy only based on a concession agreement with the government.

Now the prosecutors are checking whether some people inside the Ministry of Finance and its division AAMS may have been corrupted by the concessionary companies for not doing their surveillance job. This probe may even lead to the arrest of some high-profile officers of the Ministry. If such an event will happen, it will become a major political scandal.

The current problem however is the gigantic fine, calculated by the "Corte dei Conti" prosecutors based on the concession agreement - which is not a public document, despite the concessionary companies have the right to make it public. The concessionaries are contesting the prosecutors' calculation, saying that the result should be very different. It's hard to tell who is right, since it's impossible to proceed with a legal analysis without having access to the text. However the administrative court of Rome ruled in favor of the suspension of the payment of the fines until the end of the trial.

Such a gigantic fine would kill the whole gaming industry. Therefore the Parliament is trying to find a solution. The House Finance committee approved a resolution in August 2007 suggesting the re-consideration of the current concession agreement rules leading to those fines. Some MPs suggested to approve a bill in order to shorten the period for the application of the new regulations for the gaming machines, pushing the beginning of the application from 2004 to 2006. That would result in a major cut to the concessionaries' fines, which are calculated on the basis of days in lack of compliance.

Finance minister Vincenzo Visco denied that his ministry is studying such a bill. However it's possible that other cabinet members are considering such an idea. On Friday, September 28 the government will submit its Budget bill for 2008. Between October and December it will be up to the Parliament to modify and approve such a bill. It's entirely possible that the gaming industry's lobbying effort will be successful, resulting in the approval of an "earmark" inside the Budget bill in order to cut dramatically their fines.

Implications: The Italian Senate Finance committee is discussing a bill on the reform of the Popolari banks, such as Banca Popolare Milano (PMI.MI) and Banco Popolare (BP.MI). The reform, if approved, will lead to better rules for the institutional investors, although the principle of 'one shareholder, one vote' will not be changed. There's a strong lobbying activity from the Popolari banks in order to halt the bill.

Analysis: After a long preliminary discussion, the Senate Finance committee in Italy is discussing a bill on the reform of the Popolari banks, such as Banca Popolare Milano (PMI.MI) and Banco Popolare (BP.MI). Many senators introduced bills of reform. On June 26, 2007 the chairman of the committee, Sen. Giorgio Benvenuto, proposed a joint text. The debate on the joint text will start on September 18.

The reform, if approved, will lead to better rules for the institutional investors, although the principle of 'one shareholder, one vote' will not be changed. The bill increases the limit of shares possession for the institutional shareholders to 5%. It will become mandatory to insert in the by-laws of the Popolari banks a voting system allowing at least one director appointed by the institutional investors. The procedure to be recognized as a socio will become quicker.

Most important, in the EGM there will be a proxy voting - each shareholder may receive the voting rights from up to 10 other shareholders/soci. This provision may modify the power balance inside the EGM, currently totally in favor of the labor unions inside the Popolari banks, as the recent developments in Banca Popolare Milano clearly show.

There's a strong lobbying activity from the Popolari banks in order to halt the bill. Meanwhile the Italian government has not announced a clear, official position, although some cabinet members - such as the Deputy Minister of Economy, Roberto Pinza - are supporting the bill and making pressure over the majority coalition senators to approve it in a decent time. It's possible that the Senate will give its final approval before Christmas. Then it will be up to the House of Representatives to debate the same bill.

Implications: Alitalia's new business plan abandoning Milan Malpensa airport opens the door to any non-European airline willing to make Malpensa its European hub, in one of the richest cities of Europe.

Analysis: Yesterday the board of directors of Alitalia approved a new business plan, trying to drive the company out of the financial crisis. In the last months the Italian government tried to sell its controlling stake in the company thorugh an International auction, which failed because of restrictions against lay-offs. Now the biggest chance is to convince Air France to enter the company through a capital increase. Meanwhile Alitalia has announced it will focus on Rome Fiumicino airport (FCO), closing European and International routes from Milan Malpensa airport (MXP). There are two main reasons: a) Air France's hub Paris CDG is too close to Milan, the French airline doesn't want competition from there; b) the Alitalia unions always opposed the transfer of employees from the historial hub in Rome to Milan. The decision seems weird also for another reason: some 70% of the air tickets in Italy are sold in the Milan area.

Milan Malpensa, a major International airport in one of the richest cities of Europe, which was born as the new hub of Alitalia, will progressively become an 'orphan' airport with no major airline using it as a hub. The local governments of all Northern Italy are very concerned by this, and they're looking for a new partner. The airports of Milan - Malpensa hub and small city airport Linate - are owned by SEA, a company controlled at 85% by the City of Milan.

Non-European airlines, such as those from Far East or Middle East, may be interested in making Malpensa their European hub. Some names circulated recently inclue Emirates and Air China. But apparently even American Airlines is considering such a possibility. The solution is not easy, considering that: a) some Eastern airlines belong to alliances such as SkyTeam (now focusing on Paris CDG and Rome Fiumicino) and Star Alliance (focusing on Zurich and Munich airports, both too close to Milan), which may not like the introduction of Malpensa among their European hubs; b) there would be limits to non-European airlines according to the Single European Sky regulations; c) the market for airport slots in Italy is totally controlled by the Ministry of Transport, and therefore any decision on Malpensa's partner should have the full support of politics.

On top of that, the City of Milan is trying to privatize SEA (Milan airports) after the failure of the privatization auction in 2005. The main reason for that was the uncertainty of the future of Malpensa, since Alitalia was already considering to focus more on Rome Fiumicino. If an airline partner will be found, the City of Milan will quickly proceed to the sale of its stake into SEA. According to Italian regulations, an airline can't own an airport. But there is a potential role for any investors - including private equity - willing to make this bet.

Implications: The consolidation in the Italian utility sector is a political game decided by the mayors of the biggest cities: Turin, Milan, Bologna and Rome. Turin's local utility Iride is trying to find a partner for a merger, after the acquisition of Genoa's local utility. Will it be Milan's AEM or Bologna's HERA? And what about Rome's ACEA?

Analysis: The consolidation in the utility sector in Italy is a difficult political game. The decision-makers are the mayors of the biggest cities: Turin, Bologna, Rome - all led by social-democrats - and Milan, led by a conservative mayor. However belonging to the same political area is not enough to proceed with mergers.

After the scenario was blocked for a long time, after Turin and Genoa took the groundbreaking decision to merge their local utilities into Iride, even Milan and Brescia decided to merge their own utilities (both listed), AEM Milan and ASM Brescia. The game has just started, and there are big question marks on the future steps.

The political observers find quite clear that the mayor of Turin, Sergio Chiamparino, is willing to find another partner for Iride, probably for a new merger. The most likely candidates are AEM-ASM Milan and HERA Bologna. Mr. Chiamparino started off-the-record talks with Bologna's mayor Sergio Cofferati, but the situtation became more difficult.

Apparently Mr. Cofferati is willing to proceed with a merger between his own local utility HERA and the one of Rome, ACEA. However he didn't take a position yet, and he keeps negotiating with both Turin and Rome. But Mr. Chiamparino is not willing to accept this strategy, and he's now expected to open his own talks with the mayors of Milan and Brescia, the two controlling shareholders of AEM-ASM.

There will be soon important news on this consolidation process, especially considering the change of political alliances inside the social-democrats due to the creation in October 2007 of the Democratic Party, which is going to be led by Rome mayor Walter Veltroni.

Implications: Italian oil company ENI will receive full support from Italian PM Romano Prodi and the Italian diplomacy for its negotiation with Kazakhstan for the drilling rights of Kashagan gas field.

Analysis: Big problems for Italian oil company ENI from Kazakhstan. President Nursultan Nazarbayev decided on August 27 to suspend the permits to the International consortium Agip-KCO led by ENI (together with Shell, Exxon-Mobil, Conoco, Total, Inpex and with the Kazakhstan government's oil company KazMunaiGaz with 10%) for the drilling works on the Kashagan gas filed, one of the largest in the world.

The tensions between the Kazakh government and ENI started when the Italian company announced that the start of the upstream activity will be postponed 18 months, from late 2008 to mid 2010. Kazakhstan oil minister has started off-the-records negotiation talks with ENI in the last few days. The Kazakh government's goal is to increase its stake in the consortium, according to some accounts from the current 10% up to 40%.

Italian Prime Minister Romano Prodi already offered full help to ENI in order to defend the Italian company's rights. The Italian diplomacy is already working very hard on this issue. ENI chief executive Paolo Scaroni is scheduled to meet president Nazarbayev on September 4th. If no deal will be done in that meeting, it's lvery ikely that PM Prodi will schedule an official visit to Kazakhstan, probably in the week of October 8. It's possible - but not yet decided - that even Foreign minister Massimo D'Alema will visit the country before PM Prodi's trip, especially in the case ENI's negotiation talks will become very tough.