Italy: still a family affair?

Despite ownership models with more loops than a bowl of spaghetti, major deals, new funds and increasing mid-market action continue to drive Italy’s private equity market forward. Joanna Gant reports.

With a €12bn LBO of Wind Telecomunicazoni from Enel, the state-owned electricity distributor, in the offing, 2005 looks set to be another record-breaking year for the Italian private equity market. If agreed, a buyout of Wind, Italy’s number two fixed-line telephone company and third biggest cellular operator, will be second largest private equity deal in history. Quite a coup for Italy, which already lays claim to Europe’s largest LBO yet; the €5.79bn acquisition of 61.5% of SEAT Pagine Gialle from Telecom Italia in 2003.

The twin peaks of activity in both 2002, with the €1bn buyout of Galbani and €664m public-to-private of Ferretti, and 2003, which also saw the €1.6bn buyout of FiatAvio and secondary buyouts of FL Selenia (€670m) and Piaggio (€320m), alerted Anglo-Saxon private equity firms fully to Italy’s charms. Hitherto it had often been placed in the ‘too difficult’ box.

Yet with regard to deals, 2004 was far quieter for Italy. According to the Italian Private Equity & Venture Capital Association (AIFI), 248 private equity-backed deals totalling €1.5bn were recorded last year. This compares with 336 worth a combined €3bn in 2003 and 301 worth an aggregate €2.6bn in 2002.

The largest private equity deal announced in Italy last year was the buyout of Leaf Italia, the Cremona-based producer of confectionery products, as part of the €850m LBO of CSM’s sugar confectionery arm in The Netherlands, led by CVC Capital Partners and Nordic Capital. At the end of last year Conserve Italia, backed by the Italian PE firms Mps Venture, San Paolo-Imi Private Equity and BCC Capital, acquired the Italian assets of bankrupt Cirio Finanziaria for €168m.

However, despite last year’s lull and even if the Wind mega-deal falters, the Italian private equity market is far from running out of steam. Major deals announced so far this year have included buyouts of the Italian department stores La Rinascente and Gruppo Coin. La Rinascente, Italy’s best-known retail chain, was being sold by Eurofine, an Italian-French holding company owned jointly by Ifil Finanziaria di Partecipazini (the Agnelli family holding company) and the French supermarket group Auchan. Financial bidders included the Italian property manager Beni Stabili alongside BC Partners with Morgan Stanley, CVC Capital Partners and PAI Partners also thought to be interested, as well as trade buyers such as Galleries Lafayette of France.

With two-thirds of its value in real estate, La Rinascente was ultimately secured for €888m by a financial consortium led by Pirelli Real Estate and including the private equity fund Investitori Associati, Deutsche Bank Real Estate and the Italian businessman Maurizio Borletti. The Borletti family had previously owned the chain until selling it to the Agnelli family in the 1970s.

The La Rinascente deal was followed, at the end of March, by the public-to-private of Gruppo Coin with an agreement by the Coin family to sell its 62% stake to the French private equity firm PAI Partners for €181m. Four private equity funds had been short-listed to buy the stake.

The Coin family, led by brothers Piergiorgio and Vittorio Coin, had rejected a higher bid by Bridgepoint and L Capital in February 2003. “Our original bid didn’t complete because, at the eleventh hour, the family decided not to sell. With hindsight, this was a mistake. It has now taken two and a half years to conclude a deal which, in the end, is not very satisfactory for the family or minority shareholders,” observes Guido Belli of Bridgepoint in Milan.

“A motivation, other than maximising value, is everywhere in Italy. It is the normality, even if a company is listed. There are always family interests, which makes things difficult and the ownership market remains very closed,” he says. After the earlier offer collapsed, Coin was recapitalised with a bridge loan and the family burdened by the debt repayments.

PAI’s bid for control of the group is expected to close in the first half of June. PAI Partners, via investment vehicle Canaletto, will then launch a €118m public offer for the remaining shares in Gruppo Coin. Finally Finanziaria Coin, the holding company of Gruppo Coin, will indirectly subscribe to a 45% stake in Canaletto. (The Coin family wants to retain an influence in the company after its sale by setting up a new company with the winning bidder.) Gruppo Coin announced in January that it would post a net loss in its 2004 financial results after Christmas sales came in below expectations. The company made a loss of nearly €200m in 2003. La Rinascente is also regarded as a turnaround situation.

The LBO of debt-laden Wind is also a difficult deal, with Enel planning an IPO of the company by the end of 2006 if the private equity offers do not come up to scratch. The two final round bidders are the Weather consortium led by Naguib Sawiris, the Egyptian businessman, and a US-based financial team led by Blackstone, the private equity group.

Another major Italian private equity deal that could emerge this year is a sale by Pirelli of controlling stakes in its energy and telecommunications cable businesses for some US$1.9bn. Possible bidders include Goldman Sachs’ private equity arm, Texas Pacific Group, Permira, Apollo Management and Bain Capital.

A prospective secondary buyout could come from Investitori Associati’s exit from the Speedo swimwear manufacturer Arena, acquired in 2001.

A smaller Italian business that might go to financial buyers is Cassina, the troubled designer furniture maker, owned by the French group Fimalac and the Cassina family. It was put up for auction in November. Possible bidders include Opera (which already controls furniture group B & B Italia), Investitori Associati, BS Private Equity, L Capital and Bridgepoint.

As well as landmark deals, Italy also saw several successful fund raisings last year. The most significant of these was by Clessidra Capital Partners, which raised a debut €800bn fund, Italy’s largest-ever dedicated private equity fund.

Clessidra, which means ‘hour glass’ in Italian, was formed by Claudio Spositio, former chief executive of Italian Prime Minister Silvio Berlusconi’s family holding company Fininvest, in May 2003. With a strategy to buy stakes in closely held Italian companies, Clessidra has already invested in Societa Gasdotti Italian and jointly into the Italian telecommunications network company Sirti, alongside Investindustrial and trade partners Technit, Stella International and James Jones.

Another large fund was raised last year by Investitori Associati. At €700m it exceeded its original target by €100m. Meanwhile BS Private Equity closed its fourth fund at over €500m. “Although deal flow has been pretty good for us and it is encouraging that we raised our new fund so easily, it can be difficult to find the right opportunities and the Italian economy is weak,” says Stefano Miccenelli, senior partner of Investitori Associati.

“Italy has become a far more mature private equity market over the last few years but there is still the perception that it is a good place to invest, with less competition than parts of northern Europe or the UK,” he says.

“But while returns in the 1990s in Italy were generally better than elsewhere in Europe, now they are levelling off,” Miccenelli continues. “As competition increases, target prices also keep rising. And so while having more players focusing on Italy is good for its development, for us it is not so good,” he says.

“There is a lot of liquidity following recent fund raisings, but firms may find it difficult to get the right deals,” agrees Roberto Ricci of the mid-market Italian M&A intermediary Newport Partners. “The major deals are now highly competitive and the IRRs might not stack up. But on the smaller side there is more room for margin growth through overseas expansion, operating efficiencies and outsourcing production to Asia, for example,” he says.

This is the particular preserve of players such as Cimino & Associati Private Equity (CAPE), which last summer, alongside Natexis Private Equity, announced the final closing of Cape Natexis Private Equity Fund at €120m, ahead of its original target of €80m to €110m.

Cape Natexis Private Equity’s focus is on small to mid-cap buyouts in the North of Italy, particularly in the Milan-Padua-Bologna triangle. Paris-based Natexis Private Equity International has been supporting the team since 2001 with a co-investment agreement. Although a cornerstone investor in the fund, Natexis Private Equity scaled down its original commitment of €40m to allow new international investors access to the fund.

Cape Natexis Private Equity Fund is the fourth pool of capital advised by the Cape team since its inception in 1999. With 14 transactions completed it has so far achieved a realised IRR of 73%.

Although Italy has hosted some headline deals in recent years, it is the middle market which provides the staple deal diet. This has been spurred on by trickle-down from the mega-deals, increasing competitive pressures in most industries and family succession issues. The Italian corporate sector is distinguished by its high number of family-run businesses; it has the highest concentration of such companies in Europe. However, buyers must tread carefully.

“The trend is often for Italian owner-managers to take everything out of their businesses,” warns David Strempel of intermediary Strempel & Partners. “They may have reinvested just enough to keep their company competitive but, typically, you can’t leverage these businesses any further and the owners may have an unrealistic view of their worth,” he says.

There can also be ‘transparency issues’. “Reliable accounting is a systemic problem in Italy which goes back generations. Tax avoidance is also a national sport. But private equity could play a big role. Firms bring professionalism to the table and this has got to be beneficial for the business community,” says Strempel.

“But although Italy can be a tough country in which to do deals, if private equity investors have good relationships then, as in all inefficient markets, it can be a worthwhile investment exercise. There is often room for greater upside than in many of the more developed European markets,” he says.

Recent mid-market deals from family shareholders have included, at the beginning of this year, the €360m acquisition of a 75% interest in Cesare Fiorucci, a Pomezia-based producer of cured meats, sausage and gastronomic products, from the Fiorucci family by a management-led investor group backed by Vestar Capital Partners.

At the end of last year Permira and Private Equity Partners acquired a 33% stake in Europe’s largest tile manufacturer, Marazzi Cermiche Gruppo, from the Marazzi family.

“This was a typical Italian deal, a classic acquisition of a family-owned business with scope to develop internationally,” notes Fabio Sattin, co-founder of Private Equity Partners in Milan. This year the group has duly acquired Welor-Kerama Group, the leading ceramic tile manufacturer in Russia, to strengthen its existing position in Russia, and continues to seek further overseas acquisitions as part of its development plan.

Also in the mid-market, last year Barclays Private Equity backed management to acquire a 67% stake in family-owned Autocaravans Rimor, a Sienna-based wholesaler of camper vans, in a €76m deal.

“But generally in Italy, as elsewhere in Europe, there is currently more money than opportunities,” asserts David Stempel. He points out that many investors also have an aversion to risk; hence there is relatively little traditional venture capital in Italy. “There is always a high concentration of firms chasing the same deals. So they risk paying too high a price. Yet there is a whole segment of capital, seed/expansion capital, which is missing in Italy,” he says. “The money for the big deals is here in force but what’s really needed is more players in the €5m to €50m range,” he says.

According to AIFI, last year seed and start-up investments accounted for just 2% of unquoted capital invested in Italy. Expansion and replacement capital amounted to 37% while buyouts took the lion’s share at 62%.

However, last year did see Bridgepoint acquire a majority stake in Milan-based Societa Europea Autocaravan (SEA), Italy’s largest producer of motor caravans. Unusually for the mid-market, this business was venture capital-backed rather than family-owned.

“The vendors were venture capitalists who, with management, had built the company from scratch since 2000. Ours was the company’s third round of financing with the management team, who already had a minority stake, seeking an equity sponsor to fund European expansion,” says Bridgepoint’s Guido Belli.

In terms of exits from PE-backed companies, there were few IPOs in Italy last year. But secondary buyouts remain active. A notable example at the end of last year was Palamon’s sale of the Italian software firm TeamSystem to Bain Capital for a reputed €280m. Palamon had hoped to float TeamSystem on the Milan stock exchange earlier in the year but failed to generate sufficient investor interest. The sale to Bain Palamon, which paid €25m for its 67% stake in 2000, generated a return of some six times its initial investment.

Although private equity fund raising is becoming increasingly international, Italy remains primarily a local market with experience, a consolidated local presence and domestic decision-making autonomy seen to be the keys to success.

Non-Italian firms in the country, which are based, predominantly, in Milan, include 3i, ABN AMRO Capital, Advent, Apax Partners, BC Partners, Bridgepoint, Carlyle, CVC, Doughty Hanson, Permira and Vestar. Candover is considering opening an Italian office.

“This year presents an interesting market with some good players and good opportunities but it is a highly selective market and activity tends to be concentrated among a few firms,” says Fabio Sattin of Private Equity Partners.

“There have been some big, but not enormous, new funds raised. They will not be easy but also not impossible to invest and the good players will continue to make good money,” Sattin maintains. “I also think there is still room for more private equity capital in Italy. After all, the country’s GDP is as big as the UK’s and the market is changing and opening up to private equity activity all the time,” he says.

But Guido Belli maintains that despite a number of significant changes in recent years, Italy remains a small unquoted equity market. “There were no big deals in Italy last year and transaction volumes were also quite low compared with elsewhere in Europe,” he says. “Every year people expect the Italian private equity market to ‘explode’ but, generally, aside from the rare few mega-deals, it remains relatively quiet,” he says.

“It is still a market with dynamics which are different from anywhere else (although maybe Germany is similar.) There is resistance to change of ownership and the ownership model is often closed to outside investors,” says Belli.

Italy may still be relatively small in global private equity terms, yet it is, nonetheless, a fully-formed market with the dynamics, infrastructure and outside interest necessary for future growth. “And the fact that almost every firm currently appears set on investing in Italy confirms, and will ultimately fulfil, its potential,” Belli concludes.