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Abu Dhabi, UAEWednesday 12 December 2018

Italy a target for aggressive foreign investors

Italian market seems to have become ripe for activism, especially in the last three years, analysts say

Trevi Fountain In Rome, Italy. The country is ripe for activist investors, analysts say. Getty Images
Trevi Fountain In Rome, Italy. The country is ripe for activist investors, analysts say. Getty Images

When US activist investor Elliott Advisers laid siege to Italy's dominant phone company last month month, a shiver went through the country's corporate sector.

Once a genteel club that resolved its problems in quiet, behind closed doors, corporate Italy is increasingly becoming prey for activist shareholders.

North American and British investors, who favour more aggressive investment styles, have been steadily building their presence in Italy as its cosy network of cross-shareholdings has broken down following the global financial crisis.

Anglo-Saxon funds own 60 per cent of the blue chip Italian stock market held by investors according to Borsa Italiana - itself part of the London Stock Exchange Group.

The Italian exchange does not give historical comparisons but corporate governance experts say the influence of these funds has been climbing.

Fabio Bianconi, director of corporate governance consultancy Morrow Sodali said the the Italian market seems to have become ripe for activism, especially in the last three years. "Activists in Italy, for example, are pushing for business simplification with spin-offs and disposals."

Elliott made its move into Telecom Italia (TIM) early last month, declaring itself a minor shareholder and challenging the former phone monopoly's controlling shareholder, French media group Vivendi, to launch a major shake-up.

TIM has lost more than a third of its market value since Vivendi first took a stake in mid-2015. Elliott, founded by Wall Street hedge fund pioneer Paul Singer, wants TIM to partially sell its fixed-line network, possibly through a listing, and has called for Vivendi's directors on the TIM board to be replaced.

Last week, a battle of activists broke out over Italian telecoms infrastructure firm Retelit. German activist fund Shareholder Value Management lined up against a plan by other investors to depose Retelit's current chief executive as it supports the current business plan.

Activist investor Amber Capital, which looks for opportunities to improve corporate governance, has run 10 activist campaigns between 2015 and 2017 in Italy.

The shareholder structure of Italian companies has become less concentrated: when the financial crisis started to hamper banks' lending, controlling shareholders were forced to place part of their stakes with institutional investors, according to Arturo Albano, corporate governance specialist at Amber Capital.

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The weight of institutional investors in Italian firms has more than doubled in the past 20 years, based on Bank of Italy and financial accounts data.

Over half of institutional investors in Italian blue chips are based in the United States, the biggest centre for activism.

Their participation in shareholder meetings has also grown.

Until 2010, when a law clarifying voting rights came into force, shareholders were unclear of their voting rights in the event that their holdings had changed in the weeks leading up to a shareholder meeting. That often deterred them from voting.

The law introduced a "record date", usually seven trading days before a meeting, which gave funds certainty over how many votes they could cast at the upcoming meeting.

They are now in the position to back the proposals of other shareholders, including those of activist investors, if they create value for all stakeholders, Mr Albano said.

Shareholder activism still faces challenges in Italy.

Families control firms accounting for 33 per cent of the Italian exchange's total market value and can wield powerful blocking stakes against activist investors.

Politics can also get in the way: the Italian government holds indirect stakes in some of the country's most important listed companies and it has a legal veto - its so-called "golden power" - over changes of control in strategic firms.

Rome held a 30 per cent stake in oil major Eni in 2009 when the firm resisted calls from US-based hedge fund Knight Vinke to break itself up. It took three years before Eni sold its gas transport group Snam to state investor CDP.

Politics have not deterred Elliott, whose push for a shake-up at TIM touches on assets deemed by the government to be of national interest, such as its fixed-line network and its submarine cable business, Sparkle.

Political risk is something activist funds are learning to deal with after Knight Vinke's mixed experience with Eni, said finance expert Hannes Wagner, of Milan's Bocconi University.

Today's activism is sprouting from roots that were put down a decade or more ago, as share registers opened up and activist investors gained more experience of working in Italy.

Last year, Mr Wagner published a detailed analysis of 1,740 activist "engagements" with listed companies in 16 countries between 2000 and 2010, concluding that around 13 per cent of Italian firms had had to deal with shareholder activism.

Italy is second in the list after the US because it has a decent absolute number of engagements but a relatively low number of publicly traded firms, said Mr Wagner, who studied instances where activist funds engaged management teams.

Reuters