Algebris bid for Generali, a political issue

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.