The announcement followed a meeting in Brussels between the Italian Treasury Minister, Carlo Azeglio Ciampi, and EU Competition Commissioner, Karel Van Miert, to discuss the Italian government's sale of its equity participation in IRI. As reported in our previous entries on this data base, IRI is the ultimate holding company for Italian telecommunications. IRI owns approximately 63% of the corporate capital of STET, which in turn owns 62% of the corporate capital of TI.
This plan reflects a significant change in the policy of the Italian government, which was planning on launching the privatization of STET by March of 1997. Political delays in creating a telecommunications authority (See our report of July 19, 1996) and political pressure from the European Union prompted the government to opt for this new plan. The authority is instrumental to the privatization of STET since it will supervise quality, service, and competition in the provision of communications services. Because the establishment of such an agency is a precondition to the privatization of STET, the government was compelled to modify its plans. Also, the plan constitutes part of a scheme that the EU Commission has been demanding. In essence, the EU wants the Italian government to reduce the heavy debts of IRI and ease its position during the transition to the planned sale of STET.
According to the plan, the Italian Treasury is now expected to buy IRI's holding in STET. The purpose of this purchase is twofold:
- 1) It will recapitalize IRI without breaching EU state aid rules. Under the terms of a state aid agreement reached with Brussels in 1993, IRI is required to reduce its debt to 5 trillion lire ($ 3.3 billion) by the end of 1996. Since IRI's current debt totals 22.5 trillion lire, the EU Commission blessed the merger plan although it also expressed concerns for the further delay on the privatization of the telecommunications industry; and
- It will accelerate IRI's break-up. The Italian government wants to expedite the sale of its participation in IRI. A recent statement of the Italian government in support of this strategy reads: "IRI's mission as a public holding of big industrial and service companies operating under state monopoly has come to an end."
It appears that the Treasury will be able to own only less than 50% of the shares of the new company resulting from the merger. That will determine a "de facto" privatization of the telecommunications industry. Also, it will generate a legal issue. How can a government privatize a company in which it owns below 50% of the capital stock? Watchers predict that the government will enact special legislation to overcome this issue.
Because IRI's dissolution will reduce the government's role in the Italian economy, part of the political majority supporting the government opposes the Treasury's full control over STET and the privatization of the telecommunications industry. Nevertheless, the Italian Prime Minister, Romano Prodi, wants to go ahead with the new plan. Mr. Prodi has repeatedly stated his intention to focus serious attention on telecommunications. Also, as an ex Chairman of IRI, Mr. Prodi appears well equipped to reform and privatize Italian telecommunications.
The stock market reacted immediately to Mr. Ciampi's announcement of the merger. Shares in STET rose almost 15% in recognition that the merger would enhance the holding's value. In contrast, TI's shares fell 5%. The prevailing feeling is that the market received the merger positively because it simplifies the structure of government-held telecommunications companies. Also, STET would no longer be penalized for being a holding company as holding companies are generally discounted by about 30% related to their asset value.
Observers noted that the market is benefiting from Italy's enhanced credibility after the government seemed to have found a solution to IRI's plight within the deadline imposed by its agreement with the EU. This view is also based on the fact that Mr. Ciampi has further instructed IRI to proceed with the sale of its stakes in Banca di Roma, a major Italian bank, Finmare, the shipping company, Autostrade, the state-run motorway network, and perhaps Alitalia, the national airline company. Such divestitures will help reduce IRI's debt.
The content of this article is intended to provide general information on the subject matter. It does not substitute for advice of legal counsel.
