Tronchetti's Telecom Italia Coup

How Pirelli's chief took over

Pirelli Chief Executive Marco Tronchetti Provera had been scouring global markets for months for the right deal. Having grossed $5.6 billion in cash from the sale of two technology units, he considered nabbing part of Lucent Technologies Inc.'s (LU ) fiber-optic business but passed it over as too pricey. Then in July, a tantalizing opportunity appeared in Tronchetti's own backyard: Telecom Italia (TI ). He had made a failed pitch for taking the state-owned company private in 1994 and missed again when a takeover battle for the telco erupted in 1999. This time, Tronchetti's timing was impeccable.

Disgruntled investors and bankers who financed the $45 billion hostile takeover of Telecom Italia by Roberto Colaninno two years ago were threatening mutiny. It didn't take long for Milan's financial circles to leak news of Chief Executive Colaninno's frantic efforts to find fresh investors. Tronchetti's moment had arrived. On July 27, he made an irresistible friendly bid: a $6.4 billion buyout of a big stake in Olivetti, the holding company that controlled Telecom Italia. The offer represented an 80% premium on Olivetti's stock.

The behind-the-scenes story of Tronchetti's coup reveals how deals in Europe's third-largest economy still depend more on old-world alliances than on the rough-and-tumble justice of open markets. Pirelli, together with ally Benetton and two banks, took control of an empire with a market value of $99 billion for only $6.4 billion, thanks to the complex chain of holding companies created by Colaninno. The 80% premium goes to the handful of investors who own 23% of Olivetti. And Telecom Italia's outside shareholders? They get nothing.

LEAN AND SIMPLE. If there's a silver lining, it's that the old-style deal was clinched by a new-style executive focused more on profits and innovation than power. Tronchetti, 54, the son of a Milanese industrialist, turned around the near-bankrupt tire and cable maker Pirelli in the early 1990s, then transformed it into one of Italy's few successful global technology players. "Pirelli is managed as a lean and simple company," says Gian Luca Braggiotti, a former Pirelli manager who now heads myCube, a Milan-based investment fund. Tronchetti's crowning success was the sale last year of Pirelli's 90% stake in its optical components business to Corning for $3.6 billion.

But managing Telecom Italia will be a challenge of a different magnitude. It's lagging in new technologies, customer-unfriendly, and overstaffed. Together, Telecom Italia and Olivetti have $34 billion of debt, and Pirelli is taking on $2.7 billion of its own to finance the takeover. Meanwhile, analysts forecast net profit at Telecom Italia will decline by 14% this year, to $1.5 billion, as competition heats up. Tronchetti has already said he'll spin off Pirelli's truck tire and energy cable businesses for about $1.75 billion and focus on telecom. Nevertheless, investors drove Pirelli shares down 17%, to $2.25, the first trading day after the deal was announced.

But Tronchetti will have more room to maneuver than Colaninno. He used a company he controls as the vehicle for the takeover, and isn't dependent on a clutch of financial backers. Colaninno started to lose his grip in March, when markets were pounding the shares of Olivetti and Telecom Italia. Foiled in their expectations of a quick, speculative gain, both the Brescia-based investors and their banks--Chase Manhattan and Banca Antonveneta--were angry at Colaninno's repeated requests for capital increases and frightened by the sliding stock prices. "They had lost confidence," says a Milan banker.

In early July, Tronchet-ti broached a buyout, but Colaninno refused. Near the same time, Banca Antonveneta approached the Benetton family, the Veneto-based clan that built a $5 billion industrial group out of a retail clothing business. The Benetton group's holdings include a stake in Blu, Italy's fourth-largest mobile phone operator. Benetton board member and financial head Gilberto Benetton offered Colaninno a capital injection in exchange for co-management of Telecom Italia, but investors feared a dilution of their stock and Colaninno didn't want to share control.

The pressure kept mounting. Colaninno's own effort to restructure Olivetti's debt through a complex share conversion and buyback plan stalled. So a panicked Colaninno embarked on a frenzy of negotiations in mid-July with dozens of potential investors. Interested parties included Spanish power utility Endesa, media mogul Rupert Murdoch, merchant bank Mediobanca, Saudi Prince Alwaleed, and Spanish rival Telefonica, according to executives close to the deal. Endesa was ready to make an offer, insiders say, but when Colaninno's team quietly sought a green light from the government, which still holds a golden stake in Telecom Italia, the response from Rome was chilly.

Catching word of Colaninno's effort, Tronchetti made his move. In late July, he offered the Brescia investors $3 per Olivetti share. They countered with $3.95 and talks broke off. Then, on Friday, July 27, halfway through a Telecom Italia board meeting in Milan, Colaninno's partner Emilio Gnutti walked out of the room to see Tronchetti several blocks away at Pirelli headquarters. Tronchetti upped the price for Olivetti shares to $3.65--80% above that day's share price--and the two men shook hands on the deal. Gnutti then dined with Colaninno to inform him that his investors wanted to accept the buyout.

To work out a deal, Colaninno, investment bankers, industrial backers, and investors converged on Pirelli HQ on Sunday. Chaos reigned as Colaninno tried to impede the sale for three hours. Meanwhile, Spain's Telefonica bombarded Colaninno's investors on cell phones with a higher offer. "The air conditioning went out. Food was scarce, and no one slept that night--including Tronchetti," says one banker.

Despite the prospect of richer offers from foreign bidders, the group preferred an all-Italian deal. "Many others were interested, but no one made written offers," says Ettore Lonati, an industrialist from Brescia and one of Colaninno's original backers.

QUICK WORK. But Colaninno continued to delay, demanding a more lucrative golden handshake for a swift exit. Those close to the deal said his former allies agreed to pay him an extra $100 million dividend, plus $30 million more in bonus payments. On July 30 at 9 a.m., Colaninno resigned. A sleep-deprived Tronchetti faced analysts and the press as the chairman-in-waiting of Telecom Italia, pending a 30-day antitrust review by European Union officials. "We will present a financial restructuring and part of the industrial plan as soon as we have the green light," says Tronchetti.

Those close to Tronchetti say he will work swiftly to address the debt, bolster investments in technology and innovation, and transform the sleepy culture of Telecom Italia into that of a globally competitive company. "He's decisive and transparent and doesn't compromise," says Gilberto Benetton, who took a 6% stake in Pirelli several years ago because he believed in Tronchetti. If Tronchetti can turbocharge Telecom Italia and treat all shareholders fairly, he will go a long way toward changing Italy Inc.

By Gail Edmondson in Milan

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