Unlocking the Potential of Italian Companies
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Unlocking the potential of Italian companies © Copyright 2014 Milano Finanza S.p.A. – Milano All rights reserved. The translation, adaptation, in whole or in part, the re-production in any form (including on microfilm or film, photocopying and on electronic or digital devices) and/or by any means, including recording or maintenance in an information storage or retrieval system, is reserved for all countries. Lay-out and graphics: Alessandra Superti Cover: Illaria Santini This book was printed in December 2014 by Grafica Veneta – Trebaseleghe (PD) Translation from the Italian by Richard O'Connor FCA, CEO Financial Reporting Limited (www.financialreporting.it) We should all feel nothing but shame for the reputation that finance has earned itself in the last few years, but if you manage to guide healthy capital from successful businesses and the assets of families that wish to invest them intelligently in companies that really want to grow, you are genuinely doing one of the most beneficial jobs in the world. G.T. CONTENTS INTRODUCTION 7 Chapter 1 Ownership of Italian companies 9 Chapter 2 Growth of the Italian economy 23 Chapter 3 The overseas development of Italian enterprises and exports 29 Chapter 4 The Italian Stock Exchange 37 Chapter 5 The Mergers & Acquisitions (M&A) market 59 Chapter 6 Financial partners and Private Equity 71 Chapter 7 The luxury, high-end fashion and furniture and “Made in Italy” sector 83 Chapter 8 Valuations and prices 107 Chapter 9 The case of Rottapharm (and others besides) 119 CONCLUSIONS 125 TIP - AN UNRIVALLED PARTNER FOR LEADING ENTERPRISES 132 GLOSSARY 137 The present work is based on the observations of a group of professionals usually engaged in analysing investments and advising on corporate finance operations. On this occasion their ideas and experience have contributed to a new and singular project whose educational focus may be considered more ambitious than the pursuit of a deal. The goal in this case is not a closing, nor a success fee, but rather to find answers to questions which have confounded our industry for a number of years. (In alphabetic order) • Stefano Airoldi • Claudio Berretti • Matteo Biscaglia • Martina Cottino • Andrea Faraggiana • Lorenzo Fontana • Dario Fracchiolla • Luca Galimberti • Alessandra Gritti • Massimiliano Lecchi • Alessandro Martinoni • Lorenzo Miserandino • Alessandra Rollandi • Giovanni Tamburi Milan, December 2014 INTRODUCTION taly for sale, Italy the land of luxury, design, furniture and fashion, Italy with its lifeless stock market, the land of conquest and Italy the country snubbed by institutional investors and particularly those specialised in smaller enterprises, the cornerstone of Italian industry. Italy which has recently attracted huge volumes of American and Asian capital but which is continually swamped in debt, the Italy of which the MF declared “Nobody is listing on the stock market”, Italy the refuge of investment funds after the repeated disappointments of the BRIC’s. Italy the country of successful private equity, from Aston Martin to Club Méditerranée, from Printemps to Roche Bobois, Italy which can’t hang on to Bulgari and Loro Piana, nor Pernigotti and Cova. Italy with a plethora of small companies, but also the country which sets and maintains record exports. We could continue. All of the above has been said in recent months on the close interplay between enterprises, the financial markets and corporate ownership. Such statements are commonplace and objectively are very difficult to understand. They however provide food for thought. They have also led the T.I.P. (Tamburi Investment Partners SpA) team to flesh out often challenging ideas, such as the dynamics at play between business owners and their companies, their families and their current and/or potential shareholders, including the stock market. In a few months we have established a rather simple but we hope clear and accurate framework. A framework which highlights many problems but also comes up with a few possible solutions, a framework which does not seek to criticise inaction at managerial, entrepreneurial and banking levels, but which focuses on solutions to a situation which cannot be tolerated for much longer. We also provide examples and make reference to the many major successes produced by our country and which often get lost among the problems, the complaints and the cries from all quarters to politicians who remain deaf and disinterested. They seem incredibly absorbed by other issues, as if the development of our industrial fabric was not one of their priorities. We are a country of small businesses, although we remain a strategic exporter and a key part of the jigsaw for a large number of groups across many countries. We have phenomenal enterprises such as Luxottica, Ferrero, Ferrari, Prysmian, Brembo, Interpump, Amplifon, Prada, Eataly, Armani and Moncler to name but the leading examples which come to mind, although our overall productivity has been on the wane for twenty years. With Fiat we saved a piece of America which seemed a lost cause, while F.C.A. now outperforms the other major automotive players across various classes, although in Italy we always seem to speak about Fiat in negative terms. Our stock exchange is not fit for purpose and we continually prop up the public/private equity rankings, while at the same time it is always said - now even by the Bank of Italy - that we have hundreds of companies which could list tomorrow. A perfect set of contradictions. Against this confusing backdrop and considering that in a few relatively short years and without public money we have created one of the biggest financial hubs in the country and certainly the largest network of Italian entrepreneurs with the common goal of growing top class and ambitious businesses, we consider it a useful exercise to compile a series of thoughts which have evolved from our experience in the industry. Italian companies have plenty of room for development and could learn to leverage more through equity rather than debt markets and can certainly access stable truly long-term sources of funding to support development and international expansion. It simply requires focus. In the following pages we combine analysis with tools, observations and possible points of reference. The challenging circumstances highlighted by many remain, although a range of proven effective solutions exist. These lie within the financial sphere obviously, which is only a small part of an enterprise's success, but has a key role following the recent economic crisis. A central part of the entrepreneurial mindset, which many claim to have but lesser in fact demonstrate, is a willingness and ability to bring plans to fruition. CHAPTER 1 The ownership of Italian companies recent paper by Salvatore Rossi, the Director General of the Bank of Italy, focuses on the ownership of Italian companies and firmly underlines their extreme fragility. In addition, he points out – as the Bank of Italy has highlighted on countless previous occasions – that a healthier relationship between entrepreneurs and their funding sources, a more savvy approach by the banks and a greater role for investors and the equity market could quickly strengthen capital backing and more in general ensure the sustainability of Italian industry. One phrase, although only a footnote, strikes a particular chord with those working in the financial markets for many years due to the weight of its significance: “We currently assess that at least 500 companies in Italy are ready and willing to list on the stock exchange”. For at least twenty years it has been said that hundreds of Italian companies are ready to list and scores of reports have been produced on the matter; what a shame that our perpetually under-developed stock exchange consistently hosts no more than between 270 and 350 companies. This is completely out of step with Italy’s place within the global industrial and financial system. In 2014 we again set a record – IPO withdrawals. Various arguments have been put forward by way of explanation, many of which by professors out of touch with the everyday workings of companies (and business owners) or by purely theoretical economists which only serve to highlight, in every case, how out of touch they are with the real issues affecting businesses and the financial markets. As outlined in the following table, Italy currently has a rather small group of listed companies compared to the likes of Germany, France and the United Kingdom. TABLE 1 – LISTED COMPANIES AND GDP OF THE CORE EUROPEAN COUNTRIES Number of listed GDP 2013 Country Market companies (Oct. 2014) (EURO mln) Germany 705 2.737.600 Deutsche Borse France 1.030 2.059.852 Euronext Paris United Kingdom 2.467 1.899.098 London Stock Exchange Italy 339 1.560.024 Borsa Italiana Spain 206 1.022.988 Bolsa Española Turkey 235 617.794 Borsa İstanbul Netherlands 148 602.658 Euronext Amsterdam Switzerland 272 489.673 SIX Swiss Exchange [Sources: Eurostat, respective stock exchanges] The reality is that Italian business is structurally under-capitalised (equity on average only represents a scandalous 15% of funding). Effectively competing cannot even be considered if this longstanding laziness or reluctance of business owners to invest sufficient capital in their businesses continues, given the fundamental need to access stable and consistent funding to adequately innovate, invest and compete in an increasingly integrated and global market. A true entrepreneur channels sufficient means into the only structure which they can invest in apart from their skills, time, energy and appropriate capital: their business. On the other hand, with banks which have for decades lent money at very/excessively low rates and often more on the basis of friendship than proper business practice, why should business owners put their hands in their pockets to come up with money which does not seem necessary? GRAPH 1 – FINANCIAL STRUCTURE OF BUSINESSES [source: Ministry for Economic Development; 2011 figures] For years it was commonplace that Italian banks (and other institutions) would issue loans with minimal collateral; nothing further was needed and often the company warehouse was accepted in guarantee.