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Advisory Group on Privatisation Thirteenth Plenary Session

Advisory Group on Privatisation Thirteenth Plenary Session Privatisation, Capital Market Development and Pension Funds. Patterns of change in corporate finance and their impact on the governance and organisation of enterprises. Italian Privatisations and Corporate Governance Issues

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Advisory Group on Privatisation Thirteenth Plenary Session

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  1. Advisory Group on Privatisation Thirteenth Plenary Session Privatisation, Capital Market Development and Pension Funds Patterns of change in corporate finance and their impact on the governance and organisation of enterprises Italian Privatisations and Corporate Governance Issues in the New Euro Environment Paris, 21-22 September 1999 Pietro Ciucci - General Manager - IRI Spa

  2. 18,0 18,0 16,0 16,0 14,0 14,0 12,0 12,0 10,0 10,0 8,0 8,0 6,0 6,0 4,0 4,0 2,0 2,0 0,0 0,0 31/05/93 30/09/93 31/01/94 31/05/94 30/09/94 31/01/95 31/05/95 29/09/95 31/01/96 31/05/96 30/09/96 31/01/97 30/05/97 30/09/97 30/01/98 29/05/98 30/09/98 29/01/99 31/05/99 set-93 set-94 set-95 set-96 set-97 set-98 gen-93 gen-94 gen-95 gen-96 gen-97 gen-98 gen-99 mag-93 mag-94 mag-95 mag-96 mag-97 mag-98 mag-99 GOVT 10YR (ITA) GOVT 10YR (UK) GOVT 10YR (FRA) RIBOR 1M (ITA) PIBOR 1M (FRA) FIBOR 1M (GER) LIBOR 1M (UK) MIBOR 1M (SPA) GOVT 10YR (DH) GOVT 10YR (SPA) Fig.1 - INTEREST RATES CONVERGENCE Euroland LONG TERM SHORT TERM 29/01/93 Source: IRI - Economic Research Department /Bloomberg Financial Markets.

  3. 5,5 ECOFIN 1/5/1998 ECOFIN 1/5/1998 5 5 4,5 4 4 3,5 3 9/4/1999 7/9/1999 3 2 2,5 3MO 6MO 1YR 2YR 3YR 4YR 5YR 6YR 7YR 8YR 9YR 10YR 3MO 6MO 1YR 2YR 3YR 4YR 5YR 6YR 7YR 8YR 9YR 10YR ITA GOVT (BTP) 5/1/98 GER GOVT 5/1/98 ITA GOVT (BPT) 1/5/98 GER GOVT 1/5/98 ITA GOVT (BTP) 9/7/99 GER GOVT 9/7/99 ITA GOVT (BPT) 11/3/99 GER GOVT 11/3/99 Fig.2 - YIELD CURVES Italy vs Germany 5,5 4,5 3,5 2,5 Source: IRI - Economic Research Department / Bloomberg Financial Markets.

  4. NIKKEI 500 (JAP) DOW JONES INDUSTRIAL (US) FTSE EUROTOP 100 (EU) Fig.3 - STOCK MARKETS GROWTH PERFORMANCES Major European Markets Usa - Europe - Japan 350 300 250 200 150 100 50 0 giu-94 giu-95 giu-96 giu-97 giu-98 giu-99 dic-94 dic-95 dic-96 dic-97 dic-98 set-94 set-95 set-96 set-97 set-98 mar-94 mar-95 mar-96 mar-97 mar-98 mar-99 Source: IRI - Economic Research Department / Bloomberg Financial Markets

  5. Fig.4 - KEY FIGURES OF EUROLAND (1998; billion US$) (*) 1997 Source: IRI - Economic Research Department / DRI Standard & Poors data

  6. Fig.5 - THE RISE OF THE EURO CORPORATE BOND MARKET Euro-denominated bond issuance ($ bn) Source: Bank of America

  7. Fig.6 - THE EURO CORPORATE BOND MARKET Rating features International Corporate Bond issues 1998 International Corporate Bond issues 1Q 1999 A AA AA A 21% 23% 24% 29% Other 13% AAA Other 23% AAA 25% 42% Source: Bank of America

  8. Fig.7 - EUROPEAN FUND MANAGEMENT INDUSTRY (1997; billion US$) Source: IRI - Economic Research Department / Bank for International Settlements, 68th Annual Report.

  9. Fig.8 - HOUSEHOLDS’ FINANCIAL ASSETS Share (in %) managed by institutional investors (1997) Source: Rapporto IRS sul mercato azionario, 1999

  10. Fig.9 - COMPANIES’ CAPITAL STRUCTURE Usa, Japan, Euroland (1998) Source: projections IRI - Economic Research Department on National Accounts.

  11. Fig.10 - MODELS OF EXTERNAL CAPITAL MARKETS Anglo Saxon Model Renan Model (Usa - UK) (Ger - Jap) Oriented Non-stable Oriented Stable to stable shareholders to transactions shareholders relationships Fluid Dedicated Non influential Fragmented Concentrated Influential shareholders capital shareholdings capital shareholdings shareholders Sell or Buy Speculative External decisions relatively Inside Sell or Buy independent information information decisions from speculative Source: M.E.Porter in K.Ohmae (ed.),”The Evolving Global Economy”, (1998)

  12. Fig.11 - MOBILE NETWORK OPERATORS IN ITALY The map of existing licenses (*) Ownership structure before Telecom take-over by Olivetti Source: IRI - Economic Research Department / Ministry of Communications (updated march 1999) (*) Ownership structure before Telecom take-over by Olivetti Source: IRI - Economic Research Department / Ministry of Communications (updated march 1999)

  13. Fig.12 - FIXED NETWORK OPERATORS IN ITALY The map of existing licenses (*) Ownership structure before Telecom take-over by Olivetti Source: IRI - Economic Research Department / Ministry of Communications (updated march 1999)

  14. 18.4 22.7 1.6 135.3 59.9 63.1 Fig.13a - PRIVATISATIONS’ PROCEEDS BY TYPE OF OFFERING (Five major European countries, U$ billion, 1981-98) 160 140 120 100 80 60 23.0 4.5 40 20 38.2 21.4 0 UK Italy France Germany Spain Public Offers Private Sales Source: IRI - Economic Research department / IFR-Thomson Privatisation International

  15. Fig.13b - PRIVATISATIONS IN EUROPE (Five major European countries, 1992-98) FINANCIAL TECHNIQUES USED Million US$ (1998 prices) Public Offers % Private Sales % Total % FRANCE 49,453 26,6 1,452 2,4 50,905 20,6 GERMANY 17,971 9,7 20,995 34,3 38,966 15,8 ITALY 57,267 30,8 21,987 35,9 79,254 32,1 SPAIN 36,572 19,7 4,336 7,1 40,908 16,6 UNITED KINGDOM 24,381 13,1 12,418 20,3 36,799 14,9 TOTAL EUR-5 185,644 100 61,188 100 246,832 100 (75,6%) (24,4%) (100%) (in %) Source: IRI - Economic Research Department / IFR-Thomson Privatisation International

  16. Fig.14 - EVOLUTION OF THE ITALIAN REGULATORY FRAMEWORK Gvmt Decree (may 1999)\ CIPE 30.12.92 CIPE 15.10.93 Law 481/1995 Law 474/1994 Law 359/1992 Gvmt decree: redefines the perime- ter of application of L.474; special tem- porary powers main- tained only for pu- blic order, health, defence New law proposal: powers to the Government for: * Privatisations’ regulation reordering * Acceleration of dismissal processes Measures supported by EU Commission which opposes the Golden Share’s use except extraordi- nary cases Iri, Eni, Ina, Enel trasformed in s.p.a. (p.l.c.) Determination of net assets and eva- luation procedures Share conferred to Treasury Power to Trea- sury for the pre- paration of a Reorganisation plan Regulation of privatisation procedures: * public offers * public tenders * private sales Discipline of pro- cedures for: * determination of participation value * selection of Advisor and Global Coord. Start-up of proce- dures for dismis- sal of entire hol- ding in Enel, Ina, Comit, Imi, Credit, Stet, Agip Setting up of the Privatisations Commitee Acceleration of procedures for Credit, Comit e Imi Possibility of: * Special powers * List vote and limits to share ownership * Partly Paid * Authorities for public utilities Obligation, in case of legal or effective control on a company pri- vatised through public offer, of: * making public parasocial agreements * launching public offers Setting up of Authorities for Tlc, Gas & Electricity Obligation for the Government to define moda- lities for public utilities’ privatisa- tion and conse- quent expression of an advice by Parliament

  17. 100% Foreign Capital 24% BANKS 40% 90% CGSS 30% MUTUAL FUNDS 30% INDUSTRY 13% 80% INSURANCE 17% 70% Institutional Investors 37% 60% INSURANCE 31% Domestic Capital 76% PENSION FUNDS 7% 50% MUTUAL FUNDS 62% 40% 30% Market 33% 20% 10% 0% Fig.15a - Italy: equity base by typology of investors Source: projections IRI - Economic Research Department on Technimetrics/Bloomberg Financial Markets data (April 1999)

  18. Foreign Capital 24% 100% BANKS 16% CGSS (noyau dur) 38% 90% MUTUAL FUNDS 29% INDUSTRY16% 80% INSURANCE 30% 70% Domestic Capital 76% EMPLOYEES 9% 60% Institutional Investors 25% INSURANCE 63% 50% PENSION FUNDS 8% 40% MUTUAL FUNDS 28% 30% Market 37% 20% 10% 0% Fig.15b - France: equity base by typology of investors Source: projections IRI - Economic Research Department on Technimetrics/Bloomberg Financial Markets data (April 1999)

  19. Fig.16a - PRIVATISATIONS’ CONTRIBUTION TO THE ITALIAN STOCK MARKET GROWTH (January 1993 - August 1999) STOCK MARKET CAPITALISATION COMIT DAILY EXCHANGES ON CAPITALISATION (in % of GDP) INDEX THE STOCK MARKET 2.1.1993 116 Bil. US$ 11.2% 451 276 Mil. US$ (average ‘93) 27.8.1999 586 Bil. US$ 50.3% 1507 2,100 Mil. US$ (average ‘98) Source: IRI - Economic Research Department 1999

  20. Fig.16b - PRIVATISATIONS’ CONTRIBUTION TO THE ITALIAN STOCK MARKET GROWTH (January 1993 - August 1999)  CONTRIBUTION OF ITALIAN PRIVATISATIONS 51.8% of 1/1/93 capitalisation 10.2% the present capitalisation CONTRIBUTION OF IRI PRIVATISATIONS 20.9% of 1/1/93 capitalisation 4.1% of present capitalisation  Italian stock market still relatively limited, but capable of further significant development (Ita 37% of 1998 GDP; Ger 44%, Fra 57%, Spa 61%, Gbr 155%; Jap 56%; USA 113%) Recent estimastes by CONSOB:  Number of companies potentially able to be listed: 450/550 Capitalisation potential: at least 106 billion US$ (19% of present capitalisation) Source: IRI - Economic Research Department 1999 / Consob, Annual Report 1997

  21. ROE Long term interest rate Spread • Fig.17 - THE ITALIAN STOCK MARKET • (ROE - Long term interest rate Spread) % 15,0 10,0 5,0 0,0 -5,0 -10,0 1993 1994 1995 1996 1997 1998 1999* 2000* * expected Source: IRI - Economic Research Department / Euromobiliare

  22. 1,097 5,068 1,890 2,669 2,423 3,525 356 1,433 680 484 243 425 276 268 Number of listed companies Market capitalisation Fig.18a - THE HIT PARADE OF INTERNATIONAL STOCK MARKETS (Capitalisation and number of listed companies) 3,000 Billion US$ - December 1998 10,271 2,500 2,000 1,500 1,000 500 0 Paris Zurich Tokyo NYSE Milano Madrid London Toronto Nasdaq Frankfurt Brussels Stockholm Amsterdam Hong Kong Source: International Federation of Stock Exchanges

  23. Fig.18b - STOCK EXCHANGES’ DAILY TURNOVER (billion $, average 1998) Source: Rapporto IRS sul mercato azionario, 1999

  24. 31/01/94 31/01/94 31/01/94 31/01/94 31/03/94 31/03/94 31/03/94 31/03/94 31/05/94 31/05/94 31/05/94 31/05/94 29/07/94 29/07/94 29/07/94 29/07/94 30/09/94 30/09/94 30/09/94 30/09/94 30/11/94 30/11/94 30/11/94 30/11/94 31/01/95 31/01/95 31/01/95 31/01/95 31/03/95 31/03/95 31/03/95 31/03/95 31/05/95 31/05/95 31/05/95 31/05/95 31/07/95 31/07/95 31/07/95 31/07/95 29/09/95 29/09/95 29/09/95 29/09/95 30/11/95 30/11/95 30/11/95 30/11/95 31/01/96 31/01/96 31/01/96 31/01/96 29/03/96 29/03/96 29/03/96 29/03/96 31/05/96 31/05/96 31/05/96 31/05/96 31/07/96 31/07/96 31/07/96 31/07/96 30/09/96 30/09/96 30/09/96 30/09/96 29/11/96 29/11/96 29/11/96 29/11/96 31/01/97 31/01/97 31/01/97 31/01/97 31/03/97 31/03/97 31/03/97 31/03/97 30/05/97 30/05/97 30/05/97 30/05/97 31/07/97 31/07/97 31/07/97 31/07/97 30/09/97 30/09/97 30/09/97 30/09/97 28/11/97 28/11/97 28/11/97 28/11/97 30/01/98 30/01/98 30/01/98 30/01/98 31/03/98 31/03/98 31/03/98 31/03/98 29/05/98 29/05/98 29/05/98 29/05/98 31/07/98 31/07/98 31/07/98 31/07/98 30/09/98 30/09/98 30/09/98 30/09/98 30/11/98 30/11/98 30/11/98 30/11/98 29/01/99 29/01/99 29/01/99 29/01/99 31/03/99 31/03/99 31/03/99 31/03/99 31/05/99 31/05/99 31/05/99 31/05/99 30/07/99 30/07/99 30/07/99 30/07/99 Fig.18c- MAJOR EUROPEAN STOCK EXCHANGES Price trends and daily turnover (mln. of shares)* 14000 7000 1800 7000 1600 6000 12000 6000 1400 10000 5000 5000 1200 4000 8000 4000 1000 800 6000 3000 3000 600 2000 4000 2000 400 2000 1000 1000 200 0 0 0 0 Volume (mln. of shares) DAX Index Volume (mln. of shares) UKX Index 25000 30000 600 5000 4500 25000 500 20000 4000 3500 20000 400 15000 3000 15000 300 2500 10000 2000 10000 200 1500 5000 1000 5000 100 500 0 0 0 0 Volume (mln. of shares) MIBTEL Index Volume (mln. of shares) CAC Index * lhs: monthly turnover; rhs: prices index Source: IRI - Economic Research Department / Bloomberg Financial Markets

  25. Fig.19 - PRIVATISATIONS IN ITALY (1992 - 98) The role of IRI Million US$ (1998 prices) 50 5,817 40 30 37,530 13,865 20 17,972 2,305 10 1,765 0 TREASURY IRI OTHERS Public offers Private sales Source: IRI - Economic Research Department / IFR-Thomson Privatisation International

  26. Fig.20 - IRI GROUP PRIVATISATIONS (1992-98) (million U$, 1998 prices) * Privatisations Debts Others Dismissals Total (A) (B) (C) (D=A+C) (E=A+B+C) IRI S.p.A. Total 1992-98 20,819 9,538 2,099 22,918 32,456 SECTOR HOLDINGS Total 1992-98 3,240 1,713 5,679 8,919 10,632 IRI GROUP (TOTAL) Total 1992-98 24,059 11,251 7,778 31,837 43,088 * Minority shares and real estate assets Source: IRI Spa

  27. Sector Holdings Privatisations Debts Others Sector Holdings IRI Spa Fig.21 - IRI GROUP PRIVATISATIONS (1992-98) (Million US$, 1998 prices) Privatisations Others 10,632 7,778 24,059 11,251 32,456 Debts IRI Spa Source: IRI - Economic Research Department

  28. Fig.22 - IRI Spa: PROFITABILITY PERFORMANCE (Million $) 4,000 2,977 1,818 2,000 -2,767 -5,886 -846 -199 106 0 -302 -20 -730 -648 -2,000 -1,544 -4,000 -3,501 -3,440 -6,000 -8,000 1992 1993 1994 1995 1996 1997 1998 Operating Income* Net Income * Net of extraordinary revenue items Source: IRI’s Administration and Accounting Department

  29. GEMINA • Falck • Impregilo • BC Partners • Italpetroli • Mc Donald’s • HERMES • Ed. Holding (Benetton) • Pirelli • Caltagirone • San Paolo IMI • Ras • MC DONALD’S • SEA (Milano’s airports) • BRISA (Portuguese Highways) • AUTOS. TO-MI (Gavio) • ITT - Sheraton (Usa) • MACQUARIE (Bank) (Asl) Fig.23 - THE MIXED MODEL - PRIVATISATIONS IN THE PIPELINE The competitors for the hard core 45,8% already on the stock market 14% already on the stock market AEROPORTI DI ROMA S.p.A Present stock market capitalisation 4.526 mil Euro * AUTOSTRADE S.p.A Present stock market capitalisation 889 mil Euro * 3% local authorities 56% public offer 51,2% hard core 30% hard core • ED HOLDING (BENETTON) 16% • Fondazione Crt 4% • Unicredito 2% • Ina 2% • Acesa (Autos. Catalane) 4% • Felsinea (Guidalb.Guidi & C.) 2% • GRUPPO CIR • (De Benedetti) • British Airports • Authority (Gbr) • Banca di Roma • ABN Amro • (Neth) • Schiphol • (Amsterdam Airport) (Neth) • Frankfurt • Airport (Ger) • B.Pop.Milano • BARCLAYS (Gbr) • DOUGHTY HANSON (Gbr) * 4 Sep.1999 - Source: various press releases and articles. IRI has not yet officially announced the names of bidders. Interest for AdR has been expressed by 5 groups of investors and 11 single entities; for Autostrade preliminary offers by 2 groups of investors and 4 single entities.

  30. 60,4% 100% 88% 100% 77,2% 52% 50% Fig.24 - THE PRIVATISATION OF TELECOM ITALIA (Oct. 1997) The Group at a Glance TELECOM ITALIA TIM Telecom Italia Mobile Nuova Telespazio STET International 12% STREAM SIRTI ITALTEL FINSIEL TelecommunicationServices Multimedia ManufacturingandEquipment I.T. (Software & Systems)

  31. Fig.25 - THE PRIVATISATION OF TELECOM ITALIA (Oct. 1997) Key figures - 1998 Net sales US$ 26.2 Bn  Operating income US$ 5.3 Bn  Net income US$ 2.2 Bn  Shareholder equity US$ 21.5 Bn  Long term debt US$ 5.6 Bn

  32. Fig.26 - PRIVATISATION OF TELECOM ITALIA (Oct. 1997) Core Group of Stable Shareholders (6,6% of share capital) Rolo Banca Alleanza 0,3 Imi Fondazione 0,4 Ina 0,75 Cariplo 0,5 0,5 Montepaschi Credito Italiano 0,5 0,7 Credit Suisse Group Comit 0,67 0,5 Ifil Compagnia 0,6 Generali S.Paolo 0,6 0,6

  33. Fig.27 - PRIVATISATION OF TELECOM ITALIA Shareholder Structure pre-tender (March 1999) Market retail 21% Foreign investors 53% Italian investors 26% CGSS Italian Istitutional investors Foreign institutional investors Imi - S. Paolo 1,4% Treasury 3,5% State Street (USA) 1,9% Generali 1,1% Bank of Italy 2,3% Nomura (GIA) 1,8% Employees 2,2% Ina 0,9% Merrill Lynch (USA) 1,1% Credit Suisse (SVI) 0,7% Bankers Trust (USA) 1,0% Unicredito Italiano 0,7% Core group F&F Deutsche B. (GER) 0,8% shareholders 7,1% Alleanza 0,6% Credit Suisse (SVI) 0,7% Ifil 0,6% Others 10,9% Calpers (USA) 0,7% Banca Intesa 0,5% Janus (USA) 0,5% N.italian funds (99) Comit 0,5% Standard Life (USA) 0,4% Mps 0,5% Bernstein (USA) 0,4% Rolo 0,3% TIAA Inv. (USA) 0,3% Rowe (USA) 0,3% Total (*) 7,8% Schroder (USA) 0,3% Santander (SPA) 0,3% Others 42,6% N.foreign funds (1335) (*) It was 6,6% in Oct.1997, at the moment of the privatisation

  34. STRENGTHS Board representation: the switch from public capital to private capital dominance Gradual introduction of private management methods and styles Golden Share: it made possible privatisation of large public utilities WEAKNESSES CGSS relatively small and fragmented Weakness of alliances Lack of hierarchy in CGSS Negative impact of CGSS on foreign stakeholders due to cultural gap Potential conflict among Board members Golden Share: reduced presence of foreign shareholders Fig.28 - PRIVATISATION OF TELECOM ITALIA (Oct.1997) The Core Group of Stable Shareholders (CGSS)- ASWOTanalysis GoldenShare Golden Share Golden Share: more open attitude to internationalisation and globalisation The physiology of contendibility OPPORTUNITIES Golden Share: potential fall back to public ownership The pathology of contendibility THREATS Contendibility

  35. Tecnost Minority shareholders (a) Olivetti 2.4% 70.5% Telecom Italia tendering shareholders Tecnost 27.1% 51.02% Telecom Italia non-tendering shareholders 48.98% Telecom Italia Fig.29 - OLIVETTI’S TENDER OFFER Post-tender Shareholder Structure of Telecom Italia (a) Assuming all Tecnost minority shareholders participate in the rights issue

  36. Mannesman Fig.30 - OLIVETTI’S TENDER OFFER The cash component 7.9 Euro bn Proceeds from Sale of Oliman Olivetti Olivetti shareholders 2.6 Euro bn Rights Issue 12 Euro bn Rights Issue Tecnost Banks 6.5 Euro bn Syndacated loan 18.5 Euro bn Rights Issue Telecom Italia tendering shareholders

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