Kidnapping `The Mama Of All Privatizations'

When the Italian government announced it would sell off its 61% stake in telecommunications giant STET this year, bankers from Hong Kong to New York could hardly contain their excitement. With $25 billion in sales, STET would be one of the largest privatizations ever in continental Europe. Teams from financial powerhouses such as J.P. Morgan, Deutsche Bank, and Kleinwort Benson began working round the clock in February to submit proposals to manage the global placement.

But now, the "mama of all privatizations," as the Italians call it, has taken a sudden new turn. In early March, the two most powerful financial groups in Italy--Milan-based investment bank Mediobanca and Rome-based colossus Banca di Roma--launched a preemptive strike against the sale by offering to buy out the government's entire stake in STET.

The move underscores the lingering strength of antimarket traditions in Italy--despite the recent political upheaval and steps toward economic liberalization. Critics are already charging that Mediobanca and Banca di Roma are brazenly trying to change the rules on STET's privatization in a bid to carve up the telecommunications giant among themselves and their industrial allies.

In bidding for STET, the banks are offering an immediate downpayment to its majority owner, state-owned industrial holding company IRI. IRI's stake is currently worth around $7 billion. The banks' long-term plan, however, is to control STET by placing around 30% of its capital with friendly shareholders.

Foreign financial institutions, which hold around 19% of STET shares, are especially disturbed. Since the banks' proposal was made public on March 7, STET shares have slumped over 12% as foreign funds have bailed out. Says Chris Seidenfaden, Italy specialist at Standard & Poor's MarketScope in London: "They seem to be changing everything in Italy. But in fact nothing is changing." Bankers are awaiting a ruling from the interim government of Prime Minister Lamberto Dini on the offers.

If the deal goes through, it will mark a giant boost in the power of Italian banks over industry. With key cross-shareholdings in such blue-chip companies as Fiat, Pirelli, and insurance giant Assicurazioni Generali, Mediobanca already controls the fate of a large chunk of Italian industry. And Banca di Roma, thanks to a series of recent acquisitions, has become the most powerful credit group in central and southern Italy.

It's not difficult to see why STET is a coveted prize. The telecommunications holding company is probably Italy's richest group, with its telephone business likely to produce $6 billon in cash flow this year. Its 62%-owned Telecom Italia is the single largest mobile-phone operator in Europe and could be worth as much as $7 billion when it is spun off next July. "By taking over STET," says one prominent Milanese financier, "Mediobanca has the means of creating enormous leverage for its allies like Fiat, Pirelli, and Olivetti."

CONFLICTS OF INTEREST. The bank, for example, could sell its stake to one of the industrial companies or help lock them in as telecom suppliers. Conflicts of interest may be unavoidable. Banca di Roma is a shareholder of Omnitel-Pronto Italia, a private consortium set up by computer group Olivetti to compete against STET's mobile-phone services. And Pirelli, which is 13% owned by Mediobanca, is one of the Italian phone company's biggest suppliers.

In the end, the show of force by Mediobanca and Banca di Roma may falter. The banks are clearly taking advantage of Dini's weak interim government, but parliamentary opposition is already mounting to the proposed operation. If the banks succeed in taking over STET, says Gianmaria Galimberti, economic expert at the Northern League party, "it will strangle the democratization of the Italian market and impede the birth of an economy based on public companies with diffused shareholders."

The outcome, say industry watchers in Rome and Milan, could be a typically Italian-style compromise. Dini may not approve the banks' offer for STET but may decide to delay the privatization or carve out a deal offering a little something for everyone. An open market, in that case, will be the loser.

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