Italy's Alitalia may be tagged with the unflattering nickname "Always late in the air, late in arrival," but that hasn't dulled the appetite among buyers angling to take over the ailing national carrier. On Feb. 13 five bidders made the Italian treasury's short list to buy a controlling interest in the money-losing airline, including three Italian groups—a fund, a bank, and a private airline entrepreneur—and two top American private-equity funds.
But a lot of people are still scratching their heads as to why private-equity players such as David Bonderman's Texas Pacific Group (TPG) and MatlinPatterson Global Advisers would want anything to do with Alitalia in the first place.
Last year, the company lost an average of €1 million ($1.3 million) a day, and it hasn't posted a profit in five years. Its labor woes and inefficiencies are notorious: In one particularly mind-bending example, Alitalia forfeits countless millions in revenues every year as paying passengers are regularly bumped from its most profitable Rome-Milan route to make room for commuting pilots and crew who have refused to relocate to Milan's Malpensa hub. Indeed, constant labor strife was one of the factors behind the government's decision last December to quit bailing the company out of trouble.
Given the apparent intractability of Alitalia's woes, people were positively dumbfounded when, in late January, 11 bidders—10, actually, as one of them turned out to be a penniless high-school teacher—offered to buy at least a 30.1% stake in the company and to present turnaround plans.
The Treasury's initial bid requirements included minimum capital of around $130 million and a commitment to keep the national routes and maintain the carrier's Italian identity. But the real stickler remains what the Treasury's "general interest" in the future of Alitalia's 18,000 workers will translate into. Analysts say the battle for Alitalia likely will be fought and won over jobs.
No one doubts it will be a bloody battle. Each of the five remaining contenders has until the beginning of April to present a non-binding industrial plan. Only then will those who make it to the next round get a chance to look at the financial books. A final selection will take place late May or June, and if a deal is reached, the dirty work of restructuring begins.
But the rewards are out there, and equity investors are famous for discerning diamonds in the rough. Overall, Italy's economy is showing signs of picking up speed, with gross domestic product growth of 2% last year, its best performance since 2000. Italy has an untapped market of potential domestic flyers, and business travel is rising. The bel paese also is the No. 5 tourist destination in the world. Over the years, Italy has invested heavily in its airport infrastructure, yet it retains a relatively low passenger-to-airport ratio.
Above all, after 60 years flying the Italian skies, Alitalia has brand recognition—albeit somewhat tarnished. That's one reason groups like Texas Pacific Group smell a deal. As one of the world's top five private-equity firms, with more than $30 billion dollars under management, it has invested in—and sometimes turned around—airlines ranging from Continental (CAL) and America West (LCC) to Ireland's Ryanair. TPG is currently working on a deal together with Australia's Macquarie bank for Australian airline Qantas.
"At the moment there's a bit of merger fever in the market…and quite a lot of interest in airlines," says aviation analyst Chris Tarry of consultancy CTAIRA in Tunbridge Wells, England. While the Qantas deal is up in the air, "There's no shortage of cash, investors are looking around for something new, and there's potential in the Italian market," Tarry says.
The interest of the three Italian groups isn't surprising either: All are major stars in the economic and political orbit of Prime Minister Romano Prodi's center-left government. One group is led by financier Carlo De Benedetti, front man for the M&C risk-capital fund, with its partners Cerberus European Investments and the ELQ Investors of Goldman Sachs.
A couple of the high-flying Italians reportedly with him on the deal include Alcide Leali, the former owner of Air Dolomite and now of finance-vehicle Lefinalc; Diego Della Valle, of Tods shoes fame; and Nerio Alessandri, the founder of workout-equipment star Technogym.
Another group in the running is the investment wing of Italy's largest bank, Unicredito, headed by Alessandro Profumo, who has close ties with Prodi. Many analysts expect Unicredito eventually to pair up with a larger industrial partner, perhaps Lufthansa or Air France-KLM, which already holds a 2% stake in the company, though Air France has repeatedly denied interest in buying Alitalia outright.
The third Italian would-be groom is airline entrepreneur Carlo Toto, whose QuestAP Holding owns Air One, the No. 2 airline in Italy, with about 30% domestic market share. Air One has a commercial alliance with Germany's Lufthansa. Toto has the financial backing of Corrado Passera's Banca Intesa San Paolo, Italy's second largest bank, and can boast years of industrial experience, which may be needed to relaunch the airline. However some feel he's the weakest of the Italian candidates.
"Air One is at a disadvantage," says Professor Carlo Scarpa, of the University of Brescia and co-founder of Italian economic analysis Web site www.lavoce.info. "Much of its revenues stem from the Rome-Milan leg, and if it takes over Alitalia it will most likely be asked to give up slots by the antitrust group and hence lose value."
Scarpa believes that until the five groups fully reveal their strategic industrial alliances it will be difficult to determine who will make the next cut. "Much depends on who the American private-equity funds align with," he says. "My guess is that in the end it will come down to De Benedetti and Unicredito, partnered with a strong industrial leader."
The risk also exists that at the end of the process Alitalia will find no buyer at all. Prodi has invested a lot of political capital into this privatization, the first since he took charge in May, 2006. But the economic reality is that Alitalia should have gone bankrupt years ago, and any effective industrial plan will involve hard choices in terms of employment and strategic regional development.
It's possible that, even with Alitalia's well-publicized problems, the Prodi government won't be able to resist pressure from unions and other interest groups who would prefer to see the airline remain in state hands. Already it has announced plans to keep about 5% interest in the carrier. But if the political will falters to let others fix Alitalia, the prospects for Italy's flagship carrier are bleak.