A share of Olivetti’s burden

Last week I found cause to write about the German telecommunications market. On reflection, among my attempted analyses of the deregulation of the German telecoms market, and comparisons with the unhappy equivalent experience in the UK, there was probably something to be said about national characteristics.

The German telecoms market is austere and efficiently constructed, though whether its telephone systems are efficient I wouldn’t know. By contrast, we British muddle through cheerily and, sometimes (as in the case of Mercury) not so cheerily.

The Italian market is – well – Italian. By that I mean it has tremendous style and often little substance, rather like a Fiat. It is cheeky, but with a lot of self-confidence founded on little other than a glorious past (in this respect, it has its similarities with the UK). Above all, the Italian market has bravado.

How else do you explain Silvio Berlusconi’s declared aim to abandon his media interests in favour of a political career? It was a political career that proved short-lived – if that is not an oxymoron in Italy – and he now presides over the dissolution of parts of his media empire.

And how else can we explain Olivetti chairman Carlo De Benedetti’s request for his shareholders to stump up an incredible near-1bn in a rights issue aimed at reviving the fortunes of the ailing computing-to-telecoms group?

Bravado is the word. De Benedetti is proposing to accompany the rights with a further swathe of redundancies – adding 5,000 workers to the 33,000 Olivetti has already assigned to the scrapheap.

He is also putting some centre-left political noses out of joint by appointing Mediobanca as chief underwriter to the new issue. Mediobanca has just announced a plan to merge Gemina – the Italian investment bank – with Ferruzzi-Montedison to form Italy’s second largest industrial combine.

There are those within Italian politics who are increasingly alarmed by the over-weening power of Mediobanca. It is, perhaps, no coincidence then that De Benedetti should be seeking to coat-tail this industrial power.

He still has a jail sentence hanging over him, against which he has appealed, for his alleged role in the collapse of Banco Ambrosiano. He also admitted a couple of years ago that Olivetti paid back-handers to public officials for big contracts. In Italy, this is an issue less remarkable for its substance than for the fact that he felt obliged to confess.

Pride is a valuable commodity in Italy, and De Benedetti’s has taken a bashing over the past four years. He has repeatedly promised his shareholders jam tomorrow and then failed to deliver. Although his claims at the weekend that Olivetti was returning to financial health were founded on its return to operating profit in the first half of this year, they were buried under a mountain of extraordinary items for massive restructuring. It sounded like special pleading. Nevertheless, De Benedetti promises to return to net profit next year.

He claims that turning around Olivetti can be compared to the rescue operations performed at Digital Equipment and at IBM in the US. But the comparison is a tenuous one. Neither of those companies were starting from quite such a parlous financial and trading position. Furthermore, they did not have a string of failed rescue plans behind them.

This is not to be too hard on Olivetti. It has managed to shake itself free from a legacy of fairly mundane computer and office technology manufacturing. It has broached potentially more lucrative markets in the information technology and telecoms industries. Olivetti is now holds the largest stake in Omnitel-Pronto Italia – Italy’s second largest mobile telephone concern. It has also strengthened its interests in multimedia.

Its attitude to the personal computer market appears ambivalent. On the one hand, it has never had the critical mass to compete in the cut-throat PC business – and Olivetti knows it. On the other, it appears to be convinced that the market is just about to come good for it. To this end, Olivetti has announced a new range of desk-tops and notebooks. For De Benedetti, at least, size is not everything.

So, for what purpose does Olivetti, which has struggled so optimistically for so long and with so little to show for it, propose to use nearly 1bn-worth of new shareholder funds?

First and foremost, De Benedetti is asking the financial markets to put up or shut up. Analysts have long whinged that Olivetti needs a substantial capital increase to stand any hope of competing in the markets to which it has so long aspired. They just weren’t expecting anything this big.

Secondly, the rights issue (as well as some further disposals) will fund the purchase of American investment bank Lehman Brothers’ stake in Omnitel-Pronto Italia. Olivetti will acquire a 41 per cent stake in the mobile phone concern – an increasingly cash generative vehicle if the market experience of the UK and Germany is anything to go by.

Lastly, the issue will allow De Benedetti to reduce crippling levels of debt to the merely burdensome.

The question is: will shareholders take up what must amount to one of the top five rights issues in Europe this decade? It is a vital question, because the answer not only prescribes Olivetti’s immediate and medium-term future but also significantly affects the future of Italian banking on the European stage.

Should Olivetti’s shareholders spurn their rights, underwriter Mediobanca will exercise a significant degree of control over Olivetti’s fortunes – having only recently played a controlling role in the destiny of the Ferruzzi-Montedison empire. If Mediobanca goes on like this, it will have to be taken out by a Goldman Sachs or a Deutsche Bank.

But Olivetti’s shareholders will go for the rights issue. The price that it is paying Lehman for its Omnitel stake implies that Olivetti’s overall stake in the mobile phone company is worth about the same as its whole capitalisation before the capital increase. This means the new shares in Olivetti are acquiring the Omnitel stake, while getting all Olivetti’s other interests for free. It looks like a good deal to me.

It is also one hell of a final gamble for De Benedetti, for this must be his last chance. It will be a shame if he fails, not least because he is a nicer bloke than Berlusconi. If this latest act of Italian bravado does fail, Berlusconi will know that his old rival has certainly suffered his last defeat. But at least it will be at the hands of his own shareholders.v

George Pitcher is joint managing director of media consultancy Luther Pendragon.