The End of The Affair

Chaos theorists suggest that a flap of a butterfly’s wings in Brazil could set off a chain reaction that results in a tornado in Texas. The interdependent world of Italian finance works in much the same way. Early this month, the automaker Fiat — admittedly, a rather large butterfly — joined in a hostile bid for Montedison, a conglomerate whose far-flung holdings include Italy’s largest private-sector electric company.

Such transactions would hardly seem to be the stuff of high drama. Yet that one move called into question the power of the élite investment bank Mediobanca — which owns 15% of Montedison — and started Italian investors buzzing about the future of businesses ranging from Europe’s third-largest insurer to Italy’s leading newspaper to a top fashion-design house. “After 50 years, the rules of the game are finally changing,” says Fabio Gallia, managing director at Ersel-Warburg in Italy. But is it really the game that’s changed, or just the lineup of winning players?

Imagine drawing a map of who owns whom in Italy. You might start with Company A and find that it is 15% owned by Company B and 10% owned by Company C, both of which in turn are partially owned by Company D. And so on. Connect enough of the points, and you’ll find that most roads lead not to Rome but to Turin’s Fiat, or the Agnelli family

Who’s Who In the Battle for Montedison

MONTEDISON: A Milan-based conglomerate (2000 revenue: $12 billion) with holdings in energy, agriculture, engineering, and chemicals. Among Montedison’s key holdings is a majority stake in power producer Edison.

MEDIOBANCA: Besides its position as Italy’s largest merchant bank, Mediobanca also holds stakes in the giant insurer Generali and the media and fashion group HdP. Until Italenergia came along, its 15% ownership of Montedison made it the controlling shareholder.

FIAT: Although best known as a carmaker, Fiat has subsidiaries in aviation, insurance, and publishing. It owns over 10% of HdP. It has teamed up with state-owned French energy company EDF to create Italenergia, which could control 52% of Montedison.

MONTEDISON: A Milan-based conglomerate (2000 revenue: $12 billion) with holdings in energy, agriculture, engineering, and chemicals. Among Montedison’s key holdings is a majority stake in power producer Edison.

MEDIOBANCA: Besides its position as Italy’s largest merchant bank, Mediobanca also holds stakes in the giant insurer Generali and the media and fashion group HdP. Until Italenergia came along, its 15% ownership of Montedison made it the controlling shareholder.

that controls it, and Milan’s Mediobanca. This jumble of crossholdings — INSEAD professor Jonathan Story calls it “Spaghetti Junction” — has made it difficult for outside investors such as fund managers, corporate raiders or acquisitive foreign companies to gain power within Italian firms.

For decades, Mediobanca has been very much the senior partner in this arrangement. The bank was founded in 1946 as an offshoot of Banca Commerciale Italiana, one of the grandes dames of Italian finance, to provide medium-term credit to industry during postwar reconstruction. Mediobanca steadily built relation- ships and acquired shares, winning seats in the county’s top boardrooms. By the 1980s, it was said that practically any deal in Italy needed the blessing of the bank’s politically savvy chairman, Enrico Cuccia. A so-called Northern Galaxy — including Trieste-based insurance giant Assicurazioni Generali, BCI, and Florentine insurer La Fondiaria — revolved around Cuccia’s office behind La Scala opera house. Fiat was long regarded as an ally.

That extraordinary power has been chipped away over the past 10 years. After European monetary union and a round of bank consolidations, Italian finance got too big to fit on Cuccia’s desk. The banks that were the key investors in and allies of Mediobanca have all done mergers or deals with other banks. Banca di Roma in particular, despite owning 9.5% of Mediobanca, clearly isn’t on the team anymore; it’s lined up with Fiat in the Montedison bid. Cuccia’s death at 92 a year ago — followed by a grotesque episode in which his corpse was stolen in a failed attempt to extract ransom — may have weakened the bank’s backroom clout. Mediobanca managing director Vincenzo Maranghi, whatever his virtues, hasn’t acquired his late boss’s godlike mystique.

Enter the French. In May, the state electric utility Electricité de France (EDF) picked up 20% of the shares in Montedison. That position seemed to constitute a serious challenge to Montedison’s Mediobanca-approved management. The center-left government of Giuliano Amato then passed a decree freezing EDF’s voting rights in Montedison at 2%. The reasoning: EDF is a protected monopolist in France. So it’s not cricket for it to generate an easy $30 billion in annual sales and then turn around and snap up companies that actually have to compete.

This is where Fiat stepped in. It has forged an alliance with EDF, financier Romain Zaleski and several banks. The consortium, called Italenergia, now controls 52% of the voting shares of Montedison. Initially, the new Berlusconi government, which owes Fiat patriarch Gianni Agnelli some thanks for his quiet but crucial support, indicated it was “neutral” on the deal. Last week, however, Italian lawmakers put forward a bill to reduce Italenergia’s control to 44%. Italenergia quickly decided to water down EDF’s voting rights in the alliance, apparently neutralizing concerns about French control.

“The direct confrontation between Fiat and Mediobanca is something we have never seen before in Italy,” says Marco Bolgiani of Eptafund in Milan. But the onetime friends have had a few subterranean run-ins over the years. For example, the bank supported Olivetti’s successful 1999 bid for Telecom Italia, which Fiat opposed. Still, the notion of a vendetta shouldn’t be overplayed: shares in a company called HdP, whose investments include the newspaper Corriere della Serra and the designer Valentino, shot up briefly this month on hopes that Fiat might lead a raid there as well. Fiat had declined to renew a syndicate pact with other HdP shareholders, including Mediobanca. Last week, however, Fiat rejoined that club.

The fact is that Fiat’s interest in Montedison — or, more precisely, in Montedison’s majority stake in energy producer Edison — makes sense on its merits. Margins in the car business are frustratingly low. Italian electricity, meanwhile, is in the early stages of privatization and prices are among the highest in Europe. Enel, the state-controlled firm that is the country’s largest electric power company, is selling off capacity, and Italenergia could be first in line to buy it. “With the technical expertise of EDF and the industrial weight of Fiat behind it, Italenergia is well-placed to establish itself as Italy’s second electricity company,” says Andrea Gilardoni, professor of utilities management at Bocconi University in Milan.

The sight of Mediobanca on the ropes has some investors wondering if the bank itself might soon become a takeover target, or be forced to merge with an ally. Marco Tacconis, an analyst for Schroder Salomon Smith Barney in London, says there’s little chance that Mediobanca will be around — at least in its current form — a year from now. Among the prizes for a suitor: Mediobanca’s key stake in the insurer Generali.

So is this the great opening up of the Italian market? Not yet. Even if control of Mediobanca shifts, its big shareholders have an incentive to keep things in the family. In a market where pension funds have until recently been small players, Generali has been an important source of “patient capital,” observes Bolgiani of Eptafund. Tacconis agrees: “[Generali] is too important for such owners to be ready to give their shares to a foreign player, or to somebody who wants Mediobanca at any price.” But once the butterfly flaps, you never know for sure what kind of storm it’s set in.