Session Session VV

OECD: 14th Session Advisory Group on Privatisation

Managing Commercial Assets under State Ownership

Governments in the Market: Case Studies

by

Prof. Vittorio Grilli

Director of the Italian Treasury

Budapest 20 September 2000

SummarySummary

Government’s new role in the market has made the underlying tensions among possibly conflicting roles and objectives more acute

Multiple roles:Multiple roles: Regulator (public)Regulator (public) Set economic policy (public)Set economic policy (public) Share holder (private)Share holder (private) Granting licences (public)Granting licences (public) Client Publ. ProcurementClient Publ. Procurement

(public/private) (public/private)

Multiple objectives:Multiple objectives: Reducing public debt ,deficit and Reducing public debt ,deficit and

Pusuing “national interest”(public)Pusuing “national interest”(public) Liberalisation & fostering competition Liberalisation & fostering competition

(public)(public) Reduce State’s role in economy (public)Reduce State’s role in economy (public) Max value of assets (private)Max value of assets (private) Sell at best conditions (priv)Sell at best conditions (priv) Improve efficency and transparency of Improve efficency and transparency of

financial mkts (priv)financial mkts (priv) Facilitate change in control and protect Facilitate change in control and protect

minority share holders (public)minority share holders (public)

ActionsActions Possible solutions to conflicting roles:separate as early as possible, Possible solutions to conflicting roles:separate as early as possible,

roles and agenciesroles and agencies responsible for them:responsible for them: 1 Regulator Independent Authority 1 Regulator Independent Authority

2 Set economic policy Line Ministry2 Set economic policy Line Ministry

3 Shareholder Treasury3 Shareholder Treasury

4 Granting licences Prime Ministerial committee4 Granting licences Prime Ministerial committee

5 Client Transparent public procurement5 Client Transparent public procurement

6 Improve financial mkts efficency Privatise banking and Stock Exch6 Improve financial mkts efficency Privatise banking and Stock Exch

7 Transparency change in control, 7 Transparency change in control,

protecting minority shareholders New corporate governanceprotecting minority shareholders New corporate governance

Despite clear roles, conflicts are probably inevitable. (ie 6 and 7 are not due to conflicting Despite clear roles, conflicts are probably inevitable. (ie 6 and 7 are not due to conflicting objectives , but from vested interest groups)objectives , but from vested interest groups)

Usual clash refers to: 4 and 5 vs 2 and 1Usual clash refers to: 4 and 5 vs 2 and 1

1 vs 31 vs 3

Corporate Governance and TransparencyCorporate Governance and Transparency

Insider trading

Takeover rules

Retail investment

Minorities’ rights

Change of corporate control

Privatisation rules and procedures

Listing requirements

Corporate Governance MechanismsCorporate Governance MechanismsShareholding

Limits

Voting List

System

Proxy

Voting

CREDITCREDIT

BCIBCI

IMIIMI

INAINA

ENIENI

TELECOM IT .TELECOM IT .

AUTOSTRADEAUTOSTRADE

ENELENEL

Special

Powers

FINMECC.FINMECC.

Development of Competition for Corporate ControlDevelopment of Competition for Corporate Control

Notice by bidder/targetNotice by bidder/target

Offer documentOffer document

Passivity rulePassivity rule

Mandatory offers Mandatory offers

Competing offersCompeting offers

Shareholders AgreementsShareholders Agreements

TENDER OFFER RULESTENDER OFFER RULES

Evolving Ownership Structure for Privatised CompaniesEvolving Ownership Structure for Privatised CompaniesTO DATE (*)FOLLOWING PRIVATISATION (*)

100% Free FloatUNICREDITO37% Banking foundations3% Allianz60% Free float

14.5% Core Shareholders85.5% Free Float

IMI

41% Compagnia di San Paolo and other core shareholders59% Free float

18% Core Shareholders82% Free FloatINA

85% Generali9% San Paolo6% Free float

100% Free FloatBANCA COMMERCIALE ITALIANA

70% Intesa30% Free float

61% Controlling Shareholders39% Free FloatSEAT PAGINE GIALLE

64% Telecom Italia (**)

36% Free float (**)

10.6% Core Shareholders89.4% Free FloatTELECOM ITALIA

55% Tecnost - 3.9% Treasury41.1% Free float

(*) % ownership refers to ordinary share capital; (**) Pro-forma merger with tin.it

Selected Case StudiesSelected Case Studies

Privatised in November 1997 through:

Public offering

Private placement with core shareholders

Tender offer on TI shares launched by Olivetti in Feb 1999

Privatised in June 2000

Recapitalisation in April 1998

Merger with MEI (23% of STMicroelectronics) in Dec 1999

30% held by Treasury following privatisation

Privatised in July 2000

IPO in July 1997

Sold majority to trade buyer

Tender offer on ADR market float to be launched in Oct 2000

Privatisation ProcessPrivatisation Process and Following Events and Following Events

1996 1997 1998 - 2000

Spin off of mobile business

(TIM)

STET transferred from

IRI to Italian Treasury

Merger STET/TI

Management change

Removal of holding

company discount

SEAT demerger

Sale of SEAT through a

competitive auction

TI privatisation

Olivetti’s tender offer on TI

shares

Management change

following completion of

tender offer

Spin off of Internet division

(tin.it)

Merger SEAT/tin.it

TI’s Privatisation: Facts and Figures TI’s Privatisation: Facts and Figures

PRIVATISATION METHODOLOGYPRIVATISATION METHODOLOGY PRIVATISATION METHODOLOGYPRIVATISATION METHODOLOGY Public offering + private placement with Public offering + private placement with

core shareholderscore shareholders

Public offering + private placement with Public offering + private placement with core shareholderscore shareholders

PUBLIC OFFERING (EURO 9.6 BN)PUBLIC OFFERING (EURO 9.6 BN) PUBLIC OFFERING (EURO 9.6 BN)PUBLIC OFFERING (EURO 9.6 BN)

84% sold to Italian retail investors (10% 84% sold to Italian retail investors (10% to TI employees)to TI employees)

16% sold to institutional investors16% sold to institutional investors

84% sold to Italian retail investors (10% 84% sold to Italian retail investors (10% to TI employees)to TI employees)

16% sold to institutional investors16% sold to institutional investors

PRIVATE PLACEMENTPRIVATE PLACEMENT (EURO 2.2 BN) (EURO 2.2 BN)

PRIVATE PLACEMENTPRIVATE PLACEMENT (EURO 2.2 BN) (EURO 2.2 BN)

10% TI’s ordinary share capital sold to 10% TI’s ordinary share capital sold to core shareholderscore shareholders

No formal concert among core No formal concert among core shareholdersshareholders

Lock-up provisionsLock-up provisions

10% TI’s ordinary share capital sold to 10% TI’s ordinary share capital sold to core shareholderscore shareholders

No formal concert among core No formal concert among core shareholdersshareholders

Lock-up provisionsLock-up provisions

CORPORATE GOVERNANCECORPORATE GOVERNANCE CORPORATE GOVERNANCECORPORATE GOVERNANCE

Special powers granted to Italian Special powers granted to Italian TreasuryTreasury

3% shareholding limit for 3 years3% shareholding limit for 3 years Voting list systemVoting list system

Special powers granted to Italian Special powers granted to Italian TreasuryTreasury

3% shareholding limit for 3 years3% shareholding limit for 3 years Voting list systemVoting list system

Olivetti’s Tender Offer on TIOlivetti’s Tender Offer on TI

FEBRUARYFEBRUARY FEBRUARYFEBRUARY Olivetti announces its intent to launch a tender offer for 100% of TI’s

ordinary share capital at 10 per share, valuing TI at 52.6 bn

Olivetti announces its intent to launch a tender offer for 100% of TI’s ordinary share capital at 10 per share, valuing TI at 52.6 bn

MARCHMARCH MARCHMARCH

TI responds with its defence plan (financing package + cash tender on TIM minorities shares)

Olivetti raises its bid to 11.5 per ordinary share

TI responds with its defence plan (financing package + cash tender on TIM minorities shares)

Olivetti raises its bid to 11.5 per ordinary share

APRILAPRIL APRILAPRIL

TI’s Extraordinary Shareholders Meeting summoned to approve the defence plan fails to reach the required 30% quorum

TI and Deutsche Telekom announce that they have agreed to a 76 bn “merger of equals”

Olivetti’s tender offer is officially launched with the offer period to last 17 working days

TI’s Extraordinary Shareholders Meeting summoned to approve the defence plan fails to reach the required 30% quorum

TI and Deutsche Telekom announce that they have agreed to a 76 bn “merger of equals”

Olivetti’s tender offer is officially launched with the offer period to last 17 working days

MAYMAY MAYMAY

TI announces that, in case Olivetti’s tender offer is unsuccessful, it would implement the buy-back program on ordinary shares at 9.5 per share

Olivetti’s tender offer closes with Olivetti reaching a 52.1% acceptance level

TI announces that, in case Olivetti’s tender offer is unsuccessful, it would implement the buy-back program on ordinary shares at 9.5 per share

Olivetti’s tender offer closes with Olivetti reaching a 52.1% acceptance level

Olivetti’s Tender Offer on TI – Issues Faced by TreasuryOlivetti’s Tender Offer on TI – Issues Faced by Treasury Special Powers

Veto right on mergers and purchases of TI’s shares over 3%

Olivetti’s tender offer on TI

Proposed merger with Deutsche Telekom

(controlled by German State) Share Ownership (3.0%)

Attendance to shareholders meeting

Preserve Treasury’s economic interest

“30% rule” for bid defences

Decide on acceptance to tender offer

Shareholding Limit

3% limit lapses if tender offer is launched on 100% of ordinary share capital

Applicability in case of acceptance level

below 50%

Treasury adopted a neutral stance toward the tender offer, leaving to market forces the success or failure of the bid

Privatisation ProcessPrivatisation Process

1997 1998 - 1999 2000

Consolidated losses

Euro 1.2 bn

Net debt Euro 5.1 bn

Very diversified business

portfolio

Low market share vis-à-vis

sector peers

Turnaround plan

Recapitalisation Euro

1.0 bn

Strategic alliances

Corporate streamlining/

cost rationalisation

Divestiture of non core assets

(EBPA, ASI)

Restructuring of Energy and

Transportation

Merger with MEI

23% stake in STM

Euro 1.1 bn cash

Privatisation

FinmeccanicaFinmeccanica’s Strategic Alliances’s Strategic Alliances Prior to privatisation Finmeccanica formed several strategic alliances in each of

its core businesses: Joint Venture partner has been selected for its specific skills in the sector Strategic equity interest supported by shareholders agreement and

management deployment Key objectives of the joint ventures were:

Transform Finmeccanica from a conglomerate into an industrial holding company

Create new companies able to play a major role in a consolidating sector Enhance shareholders value

Finmeccanica’s International Joint VenturesFinmeccanica’s International Joint Ventures

BUSINESS SECTORBUSINESS SECTOR COMPANYCOMPANY PARTNERPARTNER EQUITY INTERESTEQUITY INTEREST

DEFENCEDEFENCE AMSAMS BAE SystemsBAE Systems 50%50%

HELICOPTERSHELICOPTERS Agusta-WestlandAgusta-Westland GKNGKN 50%50%

MISSILESMISSILES MBDMBD BAE Systems/EADSBAE Systems/EADS 25%25%

AERONAUTICSAERONAUTICS EMACEMAC EADSEADS 50%50%

SPACESPACE AstriumAstrium EADSEADS PendingPending

Finmeccanica’s Privatisation: Facts and Figures Finmeccanica’s Privatisation: Facts and Figures

PRIVATISATION METHODOLOGYPRIVATISATION METHODOLOGY PRIVATISATION METHODOLOGYPRIVATISATION METHODOLOGY

Public offering on Italian and Public offering on Italian and international markets (Euro 5.7 bn)international markets (Euro 5.7 bn)

Concurrent convertible offering (Euro Concurrent convertible offering (Euro 0.8 bn) launched by Finmeccanica0.8 bn) launched by Finmeccanica

Public offering on Italian and Public offering on Italian and international markets (Euro 5.7 bn)international markets (Euro 5.7 bn)

Concurrent convertible offering (Euro Concurrent convertible offering (Euro 0.8 bn) launched by Finmeccanica0.8 bn) launched by Finmeccanica

INSTITUTIONAL OFFERINGINSTITUTIONAL OFFERING INSTITUTIONAL OFFERINGINSTITUTIONAL OFFERING

2.0x oversubscribed2.0x oversubscribed

26.3% to US investors26.3% to US investors

29.3% to Italian investors29.3% to Italian investors

44.4% to RoW investors44.4% to RoW investors

2.0x oversubscribed2.0x oversubscribed

26.3% to US investors26.3% to US investors

29.3% to Italian investors29.3% to Italian investors

44.4% to RoW investors44.4% to RoW investors

RETAIL OFFERINGRETAIL OFFERING RETAIL OFFERINGRETAIL OFFERING

1.9x oversubscribed1.9x oversubscribed

1.2 million requests1.2 million requests

76% of total offer allocated to retail76% of total offer allocated to retail

1.9x oversubscribed1.9x oversubscribed

1.2 million requests1.2 million requests

76% of total offer allocated to retail76% of total offer allocated to retail

Corporate Governance post PrivatisationCorporate Governance post Privatisation Considering Finmeccanica’s presence in the defence sector, the Italian

Government decided to keep a significant equity stake in Finmeccanica (30%) and retain a “Golden Share”

Voting list system for retail and institutional investors have been introduced in the Company’s by-laws

SPECIAL POWERSSPECIAL POWERS SPECIAL POWERSSPECIAL POWERS

Approval of material acquisitions of shares (3%)Approval of material acquisitions of shares (3%) Approval of material shareholders’ agreement (relating to 3% Approval of material shareholders’ agreement (relating to 3%

or more of Finmeccanica’ share capital)or more of Finmeccanica’ share capital) Appointment of members of the Board of Directors and Appointment of members of the Board of Directors and

Statutory AuditorsStatutory Auditors Veto powers (dissolution, transfer of business, mergers)Veto powers (dissolution, transfer of business, mergers)

Approval of material acquisitions of shares (3%)Approval of material acquisitions of shares (3%) Approval of material shareholders’ agreement (relating to 3% Approval of material shareholders’ agreement (relating to 3%

or more of Finmeccanica’ share capital)or more of Finmeccanica’ share capital) Appointment of members of the Board of Directors and Appointment of members of the Board of Directors and

Statutory AuditorsStatutory Auditors Veto powers (dissolution, transfer of business, mergers)Veto powers (dissolution, transfer of business, mergers)

SHAREHOLDING SHAREHOLDING LIMITLIMIT SHAREHOLDING SHAREHOLDING LIMITLIMIT

No more than 3% of the company held by any natural and No more than 3% of the company held by any natural and legal person for a period of 3 yearslegal person for a period of 3 years

Limit can be exceeded if a tender offer is launched on 100% of Limit can be exceeded if a tender offer is launched on 100% of the company’ share capital (Law 474)the company’ share capital (Law 474)

No more than 3% of the company held by any natural and No more than 3% of the company held by any natural and legal person for a period of 3 yearslegal person for a period of 3 years

Limit can be exceeded if a tender offer is launched on 100% of Limit can be exceeded if a tender offer is launched on 100% of the company’ share capital (Law 474)the company’ share capital (Law 474)

Privatisation ProcessPrivatisation Process

COFIRI and a group of financial investors acquired ADR from Alitalia

Successful IPO of ADR shares, priced at the top of the announced range (Euro 5.68 per share). Total consideration equalled approximately Euro 307 mn for 45% of ADR’s capital

DPCM establishing the regulatory framework for the privatisation procedure

Local Authorities exercised their option to acquire a 3% stake

IRI and Consorzio Leonardo signed the contract for the sale of IRI’s 51.2% interest in ADR

IRI transferred its ADR shares to Consorzio Leonardo

1995 1997 1999 - 2000

PrivatisationPrivatisation Objectives and Options Objectives and Options The objective of the privatisation was to maximise the proceeds from the sale

as well as to preserve public interests relating to the Rome airport system

The alternatives considered included: Public offering Public offering with core shareholders Trade sale

A trade sale procedure was identified as the best option to maximise value and allow for a stable shareholder base for ADR

PrivatisationPrivatisation Issues Issues

Put in place a “real” privatisation

Conflicts of interest

Maximise proceeds

Support from Local Authorities

Stakeholders’ interests

Minority shareholders

ISSUEISSUE ACTIONACTION

No more than 2% of ADR to be held by State-owned companies

Airlines excluded from sale procedure

Two-stage competitive auction

Option to 4 Local Authorities to acquire a 3% stake in the company

Detailed business plan to be presented by final bidders

Mandatory public tender on market float

PrivatisationPrivatisation Results Results The divestiture method selected for the privatisation of ADR proved to be

successful The auction process proved to be very competitive, for the benefit of IRI and the

minority shareholders The price paid to IRI by the winning bidder (10.8 Euro per share) implied a

significant premium to ADR’s pre-bid market price

In compliance with the tender offer rules the price that will be paid to the minority shareholders (9.13 Euro per share) is equal to the average between the weighted average price of ADR shares over the last 12 months and the price per share paid to IRI

Several contractual obligations have been undertaken by the acquiror: Launch of a tender offer on the remaining ADR share capital 5 years lock-up period for the shares acquired from IRI Maintenance of employment levels for 3 years Implementation of business plan and financial viability