Privatize The Beast

Late last summer, Michele Tedeschi knew he had some tough days ahead. The mild-mannered official from Southern Italy had just taken on the top job at state-owned Istituto per la Ricostruzione Industriale (IRI), a holding-company colossus whose interests range from banks and telephones to yogurt and olive oil. Given IRI's heavy debt and Italy's weak economy, Tedeschi figured that IRI, with $53 billion in group sales, would need some rejiggering here and a little restructuring there to brighten its ho-hum performance.

Those must now seem like the good old days. On May 11, the group was rocked by the arrest of Chairman Franco Nobili on corruption charges. And Tedeschi, 53, says that IRI will announce 1992 operating losses of a cool $2.9 billion when its board meets next month--one of the largest pools of red ink ever in European corporate history.

SHOCK WAVES. The earnings debacle, and the need to cover around $7 billion in bad debts, is forcing Tedeschi and IRI to begin the biggest downsizing of a state-owned giant yet attempted in Italy. While IRI has sold off assets before, Tedeschi notes that now it will be getting out of entire sectors, such as banking and engineering. "It's a real break with the past," he says.

Already, the sheer size of IRI's losses is sending shock waves throughout beleaguered Italy. After all, IRI has been at the very heart of Italy's mixed economy since the country began lifting itself out of the ashes of World War II. With 9.5% unemployment and zero economic growth, the country can ill afford problems at its biggest business group, employing 400,000 people. And at a time when Italy's postwar political and financial institutions are under fire as never before, IRI's problems are adding to the deep sense of crisis that is pervading the country.

To get back on track, IRI strategists figure that privatization is the only option. By the end of next month, says Tedeschi's finance director, Pietro Ciucci, IRI will have sold eff chunks of Naples-based SME, its food and retailing group. Managed by Wasserstein, Perella & Co., the sell-off will pump as much as $1.5 billion into IRI coffers. By the end of the year, says Ciucci, IRI will also have spun off most of its 67%-owned Credito Italiano, the country's fifth-largest bank.

Gradually, the outlines of a new IRI are shaping up, says Tedeschi. Today's unwieldy portfolio of scores of companies, from Alitalia to a 25% stake in French-Italian semiconductor manufacturer SGS-Thomson, will be pared down. Remaining will be something more akin to an investment company with minority participation, mostly in engineering group Finmeccanica and STET, the telecommunications holding company. Eventually, holding company shares may be sold to the public. It adds up to real change for a group that has long benefited from Italian pork-barrel politics.

WORKING FAST. It will be some time before what went wrong can be sorted out. Last spring, IRI was counting on a modest profit for the year. But in September, serious problems began to emerge in ILVA, the IRI-owned group that is Italy's largest steel company. Later, Iritecna, the group's huge general-contracting company, started hitting the skids.

Now, Tedeschi and Ciucci are working against the clock. Over the last couple of months, they have raised hundreds of millions of dollars selling off tax credits and rights to future dividends from shares IRI owns. Those gimmicks raised enough cash to pay the bills over the first half of this year. But IRI can't stand any more financial window dressing, says a top official of Italy's Treasury Ministry, which technically owns 100% of IRI.

Critics are already saying that Tedeschi is moving too slowly. With a career spanning 33 years within Italian state industry, Tedeschi is seen by some as being too close to the old guard. According to one prominent Italian economist: "Tedeschi wants to channel funds to keep the system in place, and that's very different from privatizing."

Tedeschi rejects the argument that IRI is moving too slowly to privatize. He and other IRI executives note that privatization has slowed in other European countries. But as IRI's huge losses indicate, Italy's state companies need fresh blood, sooner rather than later.

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