The most popularly recognised features of Italian business in the UK press have deservedly been the contribution that Italian footballers have made to the quality of the game in the Premier League, Italy’s inability to defeat England in Rome, the Ferrari-Williams duel in Formula 1 and the improved quality and reliability of the new Alfa Romeo models. The dramatic decrease in interest rates, successful privatisations, the relatively stable run of government policy, the buoyant economy and Italy’s strong EMU stand have created incredibly profitable opportunities for international financial institutions and investors, but understandably, they make far less colourful reading. The real puzzle is how a country with a perceived history of political volatility and economic instability can have an economy that is officially as powerful as the UK’s (unofficially 30-40% larger) and yet still provide solace to shoppers, holiday makers and intellectuals alike, with Gucci, Chiantishire and works of art around every corner? However, financial institutions, investors and businessmen have not been led astray by the available distractions and appear to have found the answers they require as more international investment flows into Italy.
Deal statistics, to the extent that anyone can really understand them, suggest that the Italian market is “hot”. Armies of investment bankers, advisors and “commercialisti” (the ubiquitous Italian advisors) have reputedly been involved in 416 transactions in the first 9 months of 1997 in Italy, worth various zillions of Liras. This is slightly lower overall than the previous year, but there has been encouraging growth (30%) in the foreign acquirors segment (127 deals) with the Americans and British leading the way. During 1997 there were a number of significant privatisations and occasional large deals such as Alliance-Sante’s reverse merger with one of our Deloitte & Touche clients – Unichem (Italians claim this as their own and not, as mistakenly reported, a French deal) and the privatisation via a LBO-Publisher partnership of The Italian “Yellow Pages” (SEAT), at 3,200 billion lira (ecu 1.7 billion) surely one of the largest ever buyouts on the Continent. However, the bulk of transations remain solidly in the middle market , with values of GBP10-50 million. This has its origins in the nature and composition of Italian industry which beyond the list of usual suspects is dominated by small and medium-sized privately owned companies.
If the old adage that “smart money invests in the future” is even close to being true, the prospects for the Italian deal market appear very bright and go a long way to explaining the increase in M&A activity.
* Political stability is a relative matter in Italy, and has more to do with the political “system” than with reality, but fundamental economic and financial policy issues are not as polarised as they once were.
* Real GNP growth is expected to be 1.2% in 1997 and forecast at 2.2% in 1998, with inflation of 1.8% (November) being at its lowest since the 1960s. The balance of trade is healthily positive.
* Notwithstanding the Dollar and Sterling’s relative strength, the Lira is well positioned amongst Continental European currencies.
* Interest rates have declined significantly over the last two years with an inverted to flat yield curve. More importantly, current spreads to US Treasuries, Gilts and other European currencies have narrowed dramatically or even turned positive. Eurolira rates currently hover between 5-6%, and yields on Italian Treasuries range from 5.55% for the one-year to 5.88% for the ten-years; 1998 forecasts suggest there is room for a further 100 basis point drop across the board. The Eurolira bond market, once reserved for AAA issuers, is highly liquid and the first high-yield issue for an Italian corporate issuer should be in the market by Christmas.
* The reduction and control of the level of public debt is a priority and the markets are helping. The government deficit is forecast at 3% of GDP for 1997 down from 6.7% in 1996.
* While official unemployment statistics of 10-11% remain a concern, in most Northern and Central regions, the actual figures are about 3-5%.
* Italy has one of the lowest levels of consumer debt in the world.
* Italy’s savings rate is one of the world’s highest and the demand for investment products from savers and institutional fund managers is high.
* Pension reform has been a hotly debated subject, and the resulting development of a pension fund industry, although still in its infancy, is imminent, as all fund managers on the London to Milan shuttle are acutely aware.
* Italian capital markets are still considered underdeveloped but every sign suggests that they are growing up very quickly.
* Privately owned companies dominate the industrial structure and are now coming to grips with issues of succession, thin capitalisation, equity and debt capital markets, the globalisation of industry and markets, growth or consolidation and rendering asset wealth liquid.
* More and more companies are learning to live with the practice of having their financial statements audited by one of the international firms and sophisticated “due diligence” for transactions is well established.
* Focusing on core businesses may not yet be the buzz words on everyone’s lips in Milan but conglomerates are refocusing and restructuring their strategies and beginning to divest businesses that do not fit.
* Privatisations are continuing, notwithstanding the occasional political skirmish, and strategic and financial investors do have roles to play.
* The Italian Stock Market is undergoing several important changes aimed at addressing the concerns of minority investors, corporate governance, transparency and cumbersome regulation.
* To the delight of fund managers, Italian investors, long spoiled by double-digit tax-free returns on government bonds, are seeking new products to invest in, and recent IPOs, even those of dubious quality, have been greatly over-subscribed. The shift to accepting equities as investments in a portfolio is well on its way and demand for new issues is expected to remain strong.
Strategic multinational acquirors have rarely shied away from Italy, understanding both the opportunities inherent to the domestic consumer market and those related to exporting technology, products or brands. However, at times their understanding of “cultural aspects” of doing business in Italy has not been the greatest, and in this we are committed to helping them avoid the many pitfalls. Many financial investors have long had an established presence in Italy and are now focusing on it more closely as a result of having new European funds for investment. The “private” structure of Italian industry offers them great opportunities beyond straight acquisition transactions, MBOs and MBIs. We are currently Involved in a number of transactions where issues of capitalisation and divergent shareholders interests are being addressed by the role of the private equity investor who is taking the opportunity to acquire a significant or controlling stake with a view to floating the companies on the stock market over the next two to four years. It is interesting to note how, in a way, these private equity providers are returning to the roots of their UK strategy, with the necessary willingness to contemplate smaller transactions and by bringing their financial and international skills to on improving results.
So what is wrong with this picture? The most commonly heard complaints include the relatively slow deal flow, the small size of transactions, fierce competition for trophy deals and the long time frames. At the risk of being cynical, the same has applied at different times in the more sophisticated industrial economies we are familiar with, the US and the UK. Growth, development and consolidation are stressful stages, but they can be a hell of a lot more profitable than advanced maturity.
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