Italy: A Tricky Test For Berlusconi

Self-confidence isn't something that Silvio Berlusconi, Italy's new Prime Minister, has in short supply. When his closest political allies began debating how to proceed with billions of dmllars of privatizations in late April, the magnate-turned-politician jetted off to his Sardinian beach house for some sun. "I haven't yet decided what to do about it, but it's something we can solve easily," said Berlusconi just before he left.

He'd better bone up fast. Even though his government won't take over until mid-May, privatization is emerging as the biggest point of disagreement in his unwieldy center-right coalition. Italy started its huge sell-off only five months ago. The lion's share is still to come, ranging from insurer INA to STET, the sprawling telecommunications company (table).

Berlusconi's coalition members agree on the need for privatization but not on the means. The main issue is the role of Italy's dealmaker par excellence--Mediobanca, the secretive Milan-based merchant bank. Key minority stakes in such corporate giants as Fiat and Pirelli make Mediobanca and its honorary chairman, Enrico Cuccia, 87, the nerve center of Italy's big industrial clans. It's a system similar to the influence German banks have over German industry. But in Italy, Mediobanca has the entire field to itself.

In recent days, Mediobanca has flexed its muscles. It has taken effective control of two of Italy's largest banks--Credito Italiano and Banca Commerciale Italiana--just weeks after they were privatized. That shocked Italians who had hoped that sell-offs would send some fresh air through the clubby Milan bourse. Romano Prodi, the head of state-owned IRI, warned that Mediobanca "is now at the center of an enormous concentration of private power aiming to take over privatized public companies."

Bigger targets? Cuccia supporters argue that the two privatized banks will be well-served by being brought into the Mediobanca web. Banca Commerciale, for example, has long been Mediobanca's key commercial-banking ally. "Mediobanca succeeds simply because it is the best around," says Fiat Chairman Gianni Agnelli, one of Cuccia's closest allies.

But Prodi and others fear that Cuccia is out for bigger corporate targets. Indeed, it has been an open secret in Milan for months that Mediobanca has been preparing a hard core of shareholders--led by Pirelli and France's Alcatel--to take key stakes in STET. With its $6.5 billion cash flow and a $27 billion four-year capital investment program, STET would be a glittering prize.

This time, it could be an uphill battle for Mediobanca. The National Alliance, Berlusconi's neofascist ally, wants Rome to retain strategic stakes in public utilities such as STET. Northern League populists, backed by small and medium-size businesses that view the industrial dynasties with great suspicion, want privatizations--but with new rules barring Mediobanca and its allies from controlling groups such as STET. "If Mediobanca, Fiat, and Pirelli are running the show, they are not going to make STET a global competitor," says Gianfranco Pagliarini, the League's economic strategist.

Berlusconi will have to decide the issue. Trouble is, he may not be an impartial judge. In mid-April, Mediobanca replaced Goldman, Sachs & Co. as key adviser to Berlusconi's $7 billion Fininvest media empire, which plans to float off shares in its Mondadori publishing unit next June. With a potential conflict of interest like that, it's going to take more than self-confidence for Berlusconi to solve Italy's privatization puzzle.

      Company      Business       Sell-off        Value
                    date    Billions of dollars
      INA          Insurance          June, 1994      $6
      STET         Telecom            Nov., 1994     $18
      ENEL         Electricity        Dec., 1994     $20
      ENI/AGIP     Oil & gas                1995     NA
        DATA: Business Week
Before it's here, it's on the Bloomberg Terminal.