1 Policy Dialogue on Corporate Governance in China Shanghai, China 25 - 26 February 2004 Session 2:...

1

Policy Dialogue on Corporate Governance in

China Shanghai, China 25 - 26 February 2004

Session 2: Ownership transfer in an efficient and fair

manner

Selecting proper privatisation methods Adolfo Di Carluccio

Ministry of Economy and Finance of Italy

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• The key objectives/drivers of the Italian privatisation program and its scope

• The main privatisation methods in Italy

• The achievements of the program (and the shortcomings) relative to the stated objectives

Contents of the presentation

3

The key drivers of the Italian privatisation program and its scope

• The key drivers of the Italian program: – The need for fiscal adjustment

a soaring level of budget deficit and public indebtedness with high government bonds spreads;

a mounting drag exerted by SOEs on public budgetthe pressure stemming from the EMU

– The need for developing capital markets and equity culture, also through strengthening institutional investors and market infrastructures (corporate governance)

– Improvement in corporate efficiency

4


• The size of the Italian privatisation program – SOEs’ value added as % of GDP declined from

19 to 2,6% in the period 1990/end-2002 – Over € 120 bl. sold (1992-2003)– Government ownership’s phasing out

completed in nearly all the commercial sectors

5

• Italy tops all the other UE countries as to proceeds and the share (roughly 87%) of state-owned assets disposed through public offerings

• Development of capital market perceived as a long-medium term objective rather than as a constraint

Country Proceeds from privatization

% GDP Public offerings/Total %

Italy 111,295 0,82% 87,30%

Spain 38,402 0,58% 59,64%

Germany 25,055 0,10% 58,03%France 75,918 0,47% 84,63%

UK 42,808 0,30% 51,26%

Proceeds from privatisations in UE countries (1992-2000, in billions of US $)

Source: IFR Thomson Financial International


6

The main privatisation methods in the Italian program

Different privatisation methods, serving different objectives (pros and cons)

• Trade Sale• Stable core of shareholders • Public offering• Sale to employees

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The main privatisation methods in the Italian program - Trade Sale

Pros Stronger improvement in corporate efficiency expected (conducive to

stronger governance structure for the company) Better outcomes in terms of proceedings (price premium embedded

for control) Transfer of technology and managerial skills Only minimal restructuring required (weak information asymmetry

between buyer and seller and buyer’s risk aversion to be overcome)

Cons Conducive of inefficient allocation of resources and potentially prone

to corruption if not based on transparent competitive bidding If based on transparent competitive bidding in strategic sectors it

cannot prevent foreign investors from acquiring the asset Misses the potential for capital market development.

8

The main privatisation methods in the Italian program - Stable core of shareholders

ProsPromotes strong stable governanceIn strategic sectors insures national controll over the

company and protects against hostile take-over Only minimal restructuring required (weak

information asymmetry between buyer and seller and buyer’s risk aversion to be overcome )

ConsAll the trade sale’s cons Possible large discount for the sale pricePotentially damaging to good corporate governance

9

The main privatisation methods in the Italian program - Public offering

Pros It is an open competitive asset allocation process It fosters capital market and equity culture development

Cons A great deal of preparation and planning and company’s

restructuring required (to address information asymmetry and buyer’s risk aversion)

Relatively well-developed and liquid capital markets and legal infrastructure are required to be already functioning

Generally not aiming at revenue maximization (underpricing and discount often granted)

10

The main privatisation methods in the Italian program - Sale to employees

Pros Increased incentives for improved efficiency through

aligning the interests of workers with those of the owners. Helps gaining employee support for privatisation.

Cons Corporate governance weaknesses (employees as

shareholders, if participating in decision making, are more concerned about employment level than profit)

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How did the Italian government manage to optimise the underlying tradeoffs?

Large resort to: mixed procedures public offering of minority stakes of large SOEs

Strong long-lasting ownership structure for newly privatised companies (NPC) but the controlling stake not to be indefinitely shielded from competition for corporate control (no cross-shareholdings or other shareholder agreements required)

Multiples tranches to maximize proceedings Involvement of both retail and institutional investors (including foreign

ones) No strong underpricing Golden share to protect against take-over of a NPC where the industry is

deemed to be of strategic or public interest.

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Typically the Italian Government resorted to 2 schemes of privatisation methods Mixed sale procedure typically combining

trade sales with a public share offering, involving both retail and institutional investors (plus sometimes a sale of stakes to employees)

public offering of minority stakes of large SOEs, involving both retail and institutional investors (generally through multiple tranches), while retaining a controlling stake

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Privatisation methods in Italy - 1992-2003 on a revenue basis (Treasury -managed transactions)

Public offering (institutional)

29,5%

Public offering (retail)38,1%

Stable core of shareholders

4,0%

Trade sale22,3%

Employees3,5%

Others2,6%

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The main privatisation methods in Italy

Mixed sale procedure It serves well the goal of capital market development But also insures a strong governance structure A long-lasting ownership structure for newly privatised

companies envisionedBut the controlling stake not to be indefinitely shielded

from competition for corporate controlNo resort to a stable core of shareholders in its “strong”

variant

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The main privatisation methods in Italy

Public offering of SOEs’ minority stakes while retaining public controlling Protecting the company from hostile take over and

ensuring protection of public interest by retaining government control over the company while putting it under the discipline of financial markets

Gradual disposal of State-owned companies through multiple tranches over a period of time as a sale strategy to maximize total proceeds

But also a policy device to take time and allow financial market institutions and equity culture to develop

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Retail participation in the program and promotion of equity culture

Public offerings often designed to attract individual investors, and sometimes favour the employees of companies being privatised, with preferential share allocations and other incentives bonus shares (typically after 1 or 2 years ) money back guarantee (i. e. in ENI 1 transaction) price discount

Market surveys undertaken before the offering - Creating media awareness

Strong advertising efforts before the offering

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Retail partecipation in the program and promotion of equity culture

304.000

375.000

1.000.000

420.000190.000

383.000

404.962

830.450

2.100.000

1.700.000

438.000

1.600.0002.120.000

1.250.000

3.800.0001.500.000

2.023.000

- 500.000 1.000.000 1.500.000 2.000.000 2.500.000 3.000.000 3.500.000 4.000.000

Credito Italiano Dec. '93IMI Feb. '94

BCI Mar. '94INA June '94

ENI 1 Nov. '95ENI 2 Oct. '96

San Paolo May '97ENI 3 June '97

Telecom Italia Oct. '97ENI 4 June '98

AEM July '98BNL Nov. '98

BMPS June '99Acea July '99Enel Oct. '99

Autostr.Dec. '99Finmeccanica June '00

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Retail participation in the program and promotion of equity culture

November

1995

October

1996

June

1997

October

1997

June

1998

November

1998

October

1999

December

1999

ENI 1 (*) ENI2 ENI3 Telecom ENI 4 BNL ENEL (*) Autostrade

Weighted

Underpricing

Underpricing (excluded bonus share) 4,38% 7,91% 8,69% 2,28% 3,10% 8,37% 0,32% -0,55% 2,92%

Underpricing (including bonus share) 4,43% 12,73% 13,65% 6,50% 14,34% 17,32% 4,04% 6,86% 9,02%

Stocks requested (in ml) 819 743 1.578 2.922 1.466 2.600 4.748 903

Stocks assigned (in ml.) 401 700 858 1.450 891 662 2.425 491

Stocks requested / Stocks assigned 2,04 1,06 1,84 2,02 1,65 3,93 1,96 1,84

(*) IPOs

No strong underpricing; equity culture not promoted at the expenxe of proceeds

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• Italian privatisations targeted international investors, especially at the beginning of the process, thus attracting an increasing number of them

• Most Italian privatisations were offered to US investors (SEC registered or 144a)

– discipline of exposure to world’s largest capital market seen as necessary for privatisation program's credibility

• Italy is now firmly established as an integral part of all European equity portfolios

US and

Canada

9,9% Rest of

the World

4,8%Italy

40,5%

Rest of

Europe

8,5%

UK and

Ireland

14,4%Germany

8,0%

France

5,9%

Switz

8,0%

Enel Oct. 99Enel Oct. 99

Domestic30%

US27%

UK23%

Europe13%

Rest of the World7%

Eni 1 Nov. 95 Eni 1 Nov. 95

Significant Participation of Foreign Investors

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ALLOCATION BREAKDOWN IN ITALIAN PRIVATISATION OFFERINGS (AVERAGE)

Foreign investors have played an important role, particularly at the early stage of the process International credibility has been a priority target to ensure success of privatisation program

1993-19941993-1994

OPVOPV INSTITUTIONALITALY

INSTITUTIONALITALY

INTERNATIONAL

INTERNATIONAL

1995-19961995-1996

1997-19981997-1998

19991999 64%64% 14%14% 22%22%

52%52% 20%20% 28%28%

46%46% 15%15% 39%39%

40%40% 10%10% 46%46%

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Italian bidder Foreign bidder

0

10

20

30

40

50

60

70

80

1993 1994 1995 1996 1997 1998 1999

55%

45%74%

26%

62%

38%78%

22%83%

17%81%

19%84%

16%

Vol

um

e in

Eu

ro b

illi

ons

Foreign bidders have been an important component of the M&A activity in recent years

ITALIAN M&A MARKET

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The Italian privatisation program: its impact on capital markets

0,00

0,100,20

0,300,40

0,50

0,600,70

0,80

1979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003

-100.000200.000300.000400.000500.000600.000700.000800.000900.000

% GDP (LH)

in milions of euros (RH)

Graph 6 - Market value of partially and fully privatized companies as % of total market capitalization (as to end-2003)

45%

55%

Market value of partially and fully privatized companies

Increase in stock market capitalization (1979-2003)

Source: Italian stock exchange

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0100000200000300000400000500000600000700000800000900000

1000000

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

0%20%40%60%80%100%120%140%160%180%

Trading volume (LH) in ml. of euros

Turnover ratio (RH): trading volume-prior year-end total market capitalization ratio

Source: Datastream and Italian stock exchange

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Source: Datastream

0

20000000

40000000

60000000

80000000

100000000

120000000

140000000

160000000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

# of traded shares of private companies on the Italian stock exchange# of traded shares of partially or fully privatised companies

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Corporate ownership patterns of privatised firms

Ownership structure as of end-2003

Ownership structure just after privatisation

(**)C

om

pan

y

In

du

stry

Date o

f p

riv

atis

atio

n (

1st t

ran

sactio

n)

Meth

od

of s

ale

# o

f c

ha

ng

es i

n c

on

tro

l

Go

lden

sh

are

% o

f e

qu

ity

so

ld t

o s

tra

teg

ic -

ind

ustria

l

inv

esto

rs (

*)

% o

f e

qu

ity

so

ld t

o i

nstit

. in

vesto

rs

% o

f e

qu

ity

so

ld t

o r

eta

il i

nv

esto

rs

% o

f e

qu

ity

reta

ined

by

s

tra

teg

ic -

ind

ustria

l in

vesto

rs

% o

f e

qu

ity

reta

ined

by

in

stit

. in

vesto

rs

% o

f e

qu

ity

reta

ined

by

reta

il i

nv

esto

rs

Aeroporti di Roma airport July 2000 mixed (trade sale + PO) 1 no 55,0 30,7 14,3 100 0,0 0,0

Autostrade motorway Dec. 1999mixed (stable core of shareholders + PO) 0 no 30,0 14,0 56,0 62,2 0,7 37,1

BNL banking Dec. 1998mixed (stable core of shareholders + PO) 0 no 25,0 30,5 44,6 32,7 9,0 58,3

CAPITALIA banking Nov. 1997 PO 1 no 50,0 12,0 38,0 30,4 4,2 65,4ENEL energy Nov. 1999 PO 0 yes 68,3 11,7 20,0 67,6 3,0 20,9

IMI- SAN PAOLO banking Feb. 1994 mixed (trade sale + PO) 0 no 37,1 22,6 40,3 39,8 11,1 49,2

INA -GENERALI insurance June 1994 mixed (trade sale + PO) 1 no 18,4 49,4 32,3 20,7 6,4 72,9

SEAT media Nov. 1997 trade sale 1 no 64,7 16,5 18,7 62,5 1,0 36,5

Telecom Italia telecom Nov. 1997 mixed (trade sale + PO) 2 yes 6,6 8,8 84,6 17,0 5,7 77,2

Alitalia air transport 1st half 1998sale to instit.investors+ shares

to employers 0 no 53,0 26,5 20,5 64,3 18,3 17,4

Average (Aereporti di Roma excluded) 39,2 21,3 39,4 44,1 6,6 48,3Average (only financial institutions) 32,6 28,6 38,8 30,9 7,7 61,4

Average MIB30 5,4

Average MIB30 (only financial institutions) 5,0

PO: public offering

(*) Retained by the State in the case of Enel and Alitalia

(**) In case of several tranches figures refer to ownership structure at the time of the last one

Source: Bloomberg and the Ministry of the Economy and Finance of Italy

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The large number of shareholders created by public offerings proved to be an unstable pattern of corporate ownership

1. Share ownership structure in partially and fully privatised companies has showed a trend towards concentration

2. In non-financial industries strategic/ industrial investors have substantially expanded their controlling stake in the companies after privatisation

3. Stickiness in the ownership of the controlling stake 4. Corporate ownership of privatised firms has shifted away

from institutional towards retail investors

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PO: public offeringSource: Bloomberg and the Ministry of the Economy and Finance of Italy

Company Industry

Date of privatisation (1st

transaction) Method of sale

# of industrial investors in the 1st quartile (25%) of the ownership structure Number

Ownership share (%)

Aeroporti di Romatransport -

infrastructure July 2000mixed (trade sale +

PO) 1 1 100

Autostradetransport -

infrastructure Dec. 1999

mixed (stable core of shareholders +

PO) 1 2 69,5

Banca Nazionale del Lavoro banking Dec. 1998

mixed (stable core of shareholders +

PO) 3 8 40,1

CAPITALIA (formely called Banca di Roma) banking Nov. 1997 PO 6 11 39,5

ENEL energy Nov. 1999 PO 1 1 67,6

IMI- SAN PAOLO banking Feb. 1994mixed (trade sale +

PO) 2 10 55,5

INA -GENERALI insurance June 1994mixed (trade sale +

PO) 6 3 20,7

SEAT media Nov. 1997 trade sale 1 1 62,5

Telecom Italia telecom Nov. 1997mixed (trade sale +

PO) 1 2 19,3

Alitalia air transport 1st half 1998

sale to institutional investors +shares to

employers 1 1 64,3

Average 2,3 4 53,9

of which

Financial institutions 4,3 8,0 38,9

Non-financial institutions 1 1,3 63,9

Larger shareholders over 2%

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However1. the average share of equity owned by institutional investors in

newly or partially privatised companies (6,6 percent) still higher than the corresponding average share for the stocks included in the Milan stock exchange MIB 30 index (5,4 percent).

2. in the financial industry ownership structure more dispersed relative to that prevailing in non-privatised companies

3. in the financial sector the controlling stake of newly privatised banks fragmented among a larger number of “industrial investors” (manly other banks, jointly managing the companies).

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