SALVATORE LIGRESTI made his fortune in construction. But it was his financial holdings that won the Sicilian entry to the salotto buono – the figurative “good drawing room” where Italy’s top financiers and industrialists fix deals and exchange favours. He bought a stake in Mediobanca, Milan’s equivalent of Goldman Sachs, and since the 1980s he has moved aggressively into insurance, securing control of Fondiaria-SAI (Fonsai), one of Italy’s largest insurers, and Milano Assicurazioni, a smaller rival.
Mr Ligresti was convicted in the Tangentopoli bribery scandal of the early 1990s, but soon bounced back. This year, however, the 80-year-old and his high-living family have been brought down to earth again amid judicial probes into market rigging by offshore trusts, secret side-agreements and asset-shuffling. Some 40% of the shares in Mr Ligresti’s holding company have been seized by courts, and two other key corporate vehicles have been forced into bankruptcy. Mr Ligresti is under criminal investigation.
It might be tempting to view such a public fall from grace as a sign that things are changing for the better in Italy, whose prime minister, Mario Monti, used a recent speech to bemoan the role played by the salotto in ensuring the survival of “Italianness” in business. But subsequent manoeuvres by the remaining members of the inner circle, led by Mediobanca, suggest otherwise. The deal they have stitched together to minimise their potential losses as leading lenders to Ligresti companies is convoluted and inequitable. Moreover, the companies’ boards and their regulators have helped make sure that a credible alternative plan hatched by upstart private-equity firms never stood a chance. At a time when Italy sorely needs investment, the affair suggests that connections will continue to count as much as competence in Italian finance.
Mr Ligresti and his three children spun a complex corporate web in which the insurers were controlled by a listed holding company, Premafin, which was itself majority-owned by two family building firms and numerous trusts (see chart). The family did not shy from using its positions in the firms it controlled. Concerns about related-party transactions between family building companies and Fonsai triggered investigations by the insurer’s statutory auditors. They reported in March that Mr Ligresti had received over €40m for consulting and that his daughter Giulia’s luxury-goods firm, Gilli, had benefited from contracts with the insurer, which had even sponsored a horse owned by another daughter.
What the Ligrestis received directly was far less than the flows of money from Fonsai to the building companies, such as the insurer’s 2008 purchase of a troubled hotel group from one of them. Despite these inflows, a hole of €110m opened up in the building firms’ accounts. In June a court declared them insolvent and appointed a liquidator to take control of their 20% stake in Premafin, the holding company. Two months earlier, a Milan prosecutor assigned to the case had obtained the seizure of another 20% stake in Premafin, owned by two Bahamas trusts linked to Mr Ligresti. The trusts were suspected of trying to prop up Premafin’s share price by making large end-of-day purchases.
As the Ligresti empire has buckled, Mediobanca and UniCredit, Italy’s largest bank, have tried to engineer a purported rescue of Fonsai, which after three straight years of losses has been ordered by insurance regulators to beef up its solvency ratio. The deal entails a complex series of mergers and rights issues involving Fonsai, Premafin, Milano and Unipol, a large Bologna-based insurer owned by co-operatives. Earlier this month Fonsai and Unipol completed their capital hikes, raising a combined €2.2 billion. But they have had to pay steeply: including an “incentive fee”, banks in the syndicate earned 10% or more of the amount underwritten, three to four times the norm for such offerings.
The hefty fees signal that the transaction is a stinker, argue opponents. Chief among them is Matteo Arpe, head of Sator, one of the two Italian private-equity firms (the other being Palladio) that held a combined 8% of Fonsai and put forward the rival bid. To some, Mr Arpe’s intervention appeared to be driven by personal enmity. He and Alberto Nagel, Mediobanca’s chief executive, had risen together through the investment bank’s ranks (both are 47). Mr Arpe was seen as a possible future boss but left in 1999 after clashing with, among others, Mr Nagel. Relations between them remain frosty.
But the alternative plan had advantages, not least simplicity. Instead of being entangled in a complex four-way merger, Fonsai would remain independent and get a new management team. A total of €800m of fresh capital would be injected, half of that coming from the two private-equity firms. Mediobanca’s supporters accused Sator and Palladio of lacking proper funding for their bid and intending to “flip” Fonsai quickly. Mr Arpe responded by securing a bank guarantee and pointing out that Sator can hold stakes for up to 10 years. But with the financial establishment rallying round the Mediobanca plan, the private-equity firms withdrew their offer on August 1st.
Who’s rescuing whom?
Backers of the Mediobanca plan say it will create a powerhouse that can better compete with Generali, Italy’s insurance giant. But the deal’s billing as a bail-out of Fonsai is disingenuous. Unipol gets 61% of the combined group, but it is no white knight. The company is saddled with a dicey-looking portfolio of interest-rate derivatives, some of it highly structured (and reportedly sold by JP Morgan). This had incurred €625m of mark-to-market losses as of March 31st. Unipol Banca, its retail bank, was recently downgraded by Moody’s because of its “very high” level of non-performing loans. Some think Unipol is in worse shape than Fonsai, whose woes have as much to do with its forced property entanglements as with any intrinsic weakness.
The debate over who is rescuing who is not purely academic, since under Italian law acquirers can seek a waiver from having to launch a full buyout of minority shareholders if the target is troubled. Unipol secured just such a pass. Fonsai’s shareholders have reason to feel particularly aggrieved since the restructuring calls for Premafin’s hefty debts to be dropped in their laps.
By contrast, the deal is gentle on lenders, which is hardly surprising given that chief among them is Mediobanca itself. It has €1.5 billion of exposure to Fonsai and Unipol, a sum equal to 60% of its market capitalisation. UniCredit, meanwhile, is a big creditor of Premafin. Easy to see, then, why they were at pains to craft a deal, however tortuously structured, that avoided bankruptcies anywhere along the Ligresti chain.
Some question whether Fonsai’s board has stood up forcefully enough for its shareholders. It accepted management’s narrative that there was no viable alternative to the Unipol merger, even after seeing presentations from Goldman Sachs and Ernst & Young that highlighted Unipol’s problems. The only board member who voted against the plan was Salvatore Bragantini, a former regulator.
According to Mr Bragantini, a committee of nominally independent Fonsai directors reported to the full board that the exchange ratios were outside the range considered reasonable, but recommended they be accepted anyway as there was “no choice”. This was “strange”, he says, because there was a credible, if somewhat speculative, alternative in Sator/Palladio. He says he reminded the board of the article of the Civil Code that spells out directors’ duty to oppose measures they know to be against the company’s interest. Shareholders never got to vote on the rival plans. Fonsai’s rights-issue prospectus says the board felt it prudent to accept the sub-optimal exchange ratio “to overcome the current uncertainty regarding the future of [Fonsai].”
Questions also hang over regulators’ role in the affair. A week after conditionally approving the Unipol/Fonsai tie-up, ISVAP, which oversees Italian insurers, sent a letter to Unipol expressing concern that its statutory reserves had dipped far below the level considered adequate. Yet ISVAP waved through the capital increases without requesting the shortfall be disclosed. Curiously, the task of vetting the Unipol deal was moved to a new team within ISVAP after members of the original team questioned the transaction’s viability. The first group was later brought back into the process, but too late for it to scupper the other team’s positive evaluation. Furthermore, ISVAP controversially ruled Sator and Palladio’s joint bid to be a “shareholder pact” rather than a “consultation pact”, which blocked them from raising their stakes in Fonsai above 10% and gave the impression of bias towards the Mediobanca-led plan. The Monti government plans to fold ISVAP’s responsibilities into the Bank of Italy, a move believed by some to be partly motivated by concerns that the regulator has become captured by powerful financial interests.
The role of Consob, the stockmarket watchdog, is also under the spotlight. When the prosecutor investigating the Ligrestis wrote to Consob about Unipol’s problems, it replied that it would examine these more closely after the merger – the equivalent of giving a driving licence to a teenager months before his test.
The most financially savvy member of Mr Monti’s cabinet, economic-development minister Corrado Passera, who is a former head of Intesa Sanpaolo, a big bank, nurses deep reservations about the Unipol deal, according to someone familiar with his thinking. But it appears that no one in government – which admittedly has bigger worries – has pushed back against the transaction.
The establishment solution rammed through by Mediobanca and its allies is not quite a done deal, however. Sator is likely to bring multiple lawsuits, including over the procedural oddities at ISVAP and against Fonsai’s board for giving its offer short shrift. Smaller shareholders are planning to sue too. Cases could be brought for “false communication” if Unipol’s position turns out to have been worse than presented.
The biggest threat to the deal is the recently opened investigations by a prosecutor and Consob into an alleged secret side-agreement, under which the Ligrestis would support the merger with Unipol in exchange for a cash pay-off of more than €40m and other perks. Mediobanca denies any such pact was signed, though it acknowledges the existence of a list of requests from the Ligrestis, on which Mr Nagel scribbled his initials to show he had read it. If Consob finds that he did reach an agreement with the Ligrestis, it could insist on a full buy-out of Fonsai shareholders. This, in turn, could scupper the merger with Unipol, put Mediobanca’s €1.1 billion of loans at risk and undermine Mr Nagel’s position. If it can’t be proved that the agreement was signed, the flawed Mediobanca-led plan will most likely be consummated and the occupants of the salotto buono will be able to breathe a collective sigh of relief.
Pubblicato su: The Economist, Italian finance circling the yachts
sul blog Schumpeter, il 7 agosto 2012, alle 19:32