1 policy dialogue on corporate governance in china shanghai, china 25 - 26 february 2004 session 2:...
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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
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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 key drivers of the Italian privatisation program and its scope
• 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
The key drivers of the Italian privatisation program and its scope
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.
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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
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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)
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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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The main privatisation methods in the Italian program
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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The main privatisation methods in the Italian program
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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The main privatisation methods in the Italian program
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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Significant Participation of Foreign Investors
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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Significant Participation of Foreign Investors
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
23
The Italian privatisation program: its impact on capital markets
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
24
The Italian privatisation program: its impact on capital markets
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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Corporate ownership patterns of privatised firms
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
27
Corporate ownership patterns of privatised firms
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%
28
Corporate ownership patterns of privatised firms
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).