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This past spring The Italian financial services industry was the setting for ferocious battles, as two foreign banks attempted to dominate Italian institutions for the first time. Rumors, allegations, behind-the-scenes maneuvering — and, finally, a court-ordered financial-police raid on one of the Italian banks attempting to repel the invaders — defined the tenor of an international confrontation whose outcome will influence outside investment in Italy for years to come. Will nationalism win out and the foreigners be turned back? Or will the rule of law — both Italian and European Union-related — prevail? On April 30 a shareholders’ meeting in Padua pitted ABN Amro Holding N.V., Holland’s biggest bank, against Banca Popolare di Lodi S.c.r.l., a regional Italian bank based 20 miles south of Milan. The prize for the winner: Padua-based Banca Antonveneta S.p.A. With 1,000 branches and both private and business clients in Italy’s prosperous northeast, Antonveneta represents a generous slice of Italy’s lucrative consumer banking market, ranked among the most profitable in Europe because of Italians’ proclivity to save and the high fees charged for services. ABN had been the biggest investor in Antonveneta since 2002 and entered the meeting with 18 percent of its outstanding shares, four members on the board, and the group’s backing for a proposed $8 billion takeover. However, ABN’s dominance had shrunk in the month running up to the meeting, just as Lodi’s had burgeoned, with its stake in Antonveneta growing from 5 percent to almost 30 percent. Lodi owed its freshly minted preeminence to Rome-based Banca d’Italia, or Bank of Italy, the country’s central bank and the regulator of its financial services sector. The regulator’s chairman, Antonio Fazio, had approved Lodi’s plans to raise its stake in Antonveneta after having blocked ABN’s attempts to build up its position for three years. Fazio’s contention: The banking sector was too important to the national interest to allow foreign investors to control Italian banks. He has also argued that foreign banks would be less interested than homegrown ones in loaning to the small and medium-sized Italian companies that dominate Italy’s economy. Three weeks later in Rome, Spain’s second-biggest bank, Banco Bilbao Vizcaya Argentaria S.A., went mano a mano with a legion of Italian real estate moguls and others for control of yet another Italian financial institution, Banca Nazionale del Lavoro S.p.A., the country’s sixth-largest bank. The Spaniards exited the May 21 meeting with eight seats out of 15; at press time BBVA had not yet announced an official bid for BNL, though one was expected. There were similarities in the would-be suitor banks’ experiences. As with ABN, the Bank of Italy was reluctant to approve BBVA’s share purchases, though this time it did so in time for the foreigners to succeed in installing a friendly board. Like Janus, the ancient Roman god who looked both forward and backward, investing in Italy has two faces — one of frustration for foreigners who try to crack the financial services sector, especially banking, and one of optimism for investors in other more hospitable areas, such as cellular phones, transportation, and the retail industry. The problems in banking are belied by an overall upward trend in foreign investment. The number of acquisitions of Italian companies by foreign buyers has risen in three of the past four years, according to the research firm Thomson Financial. Through April of this year, non-Italians had bought or announced they would purchase Italian companies worth a total of $25.7 billion, as compared to $17.9 billion in all of 2004. “Italy is generally favorable to foreign investors, with the notable exception of banking, which in the past was closed to foreigners,” says Pietro Fioruzzi, an attorney in Milan for Cleary Gottlieb Steen & Hamilton. “But even in that industry, there have been signs of an opening.” His firm advises non-Italian companies seeking to invest there, including increasing numbers of private equity funds. Increased competition in the sectors where outsiders have made inroads has, predictably, meant better services for customers — a change that consumer associations have lauded. In the mobile phone industry, the aggressive rollout of a new network by Milan-based H3G Italia S.p.A., Italy’s youngest cellular-phone company, which is 91 percent owned by Hong Kong’s Hutchison Whampoa Limited, forced three more established corporations — Telecom Italia Mobile S.p.A., the Italian subsidiary of the British-owned Vodafone Group Plc, and Wind Telecomunicazioni S.p.A. � to speed up completion of their new networks. In banking, where there is no comparable competition and consumer advocates’ pleas for change have fallen on deaf ears, Italian bank customers pay the highest fees among 19 countries surveyed by business consultant Capgemini. If ABN or BBVA were to win a takeover fight, that picture would change. But before that could happen, the two banks had work to do. In the weeks leading up to the April meeting, tension had been building between ABN and Lodi, Antonveneta’s two biggest shareholders. Lodi’s chief executive, Gianpiero Fiorani, was promising to save Antonveneta from the Dutch with an “Italian solution.” For its part, ABN was determined to be the first foreign bank to take over an Italian one. With operations in more than 60 countries on six continents, the Dutch bank knows a thing or two about investing outside its home market. Its timing was good. The tide was running against the Italians as European Union laws requiring countries to open their markets to fellow members, along with increased numbers of European bank consolidations and purchases, were making it difficult for the Bank of Italy to hide behind claims of national interest. Under intense pressure from ABN and the EU, the Bank of Italy did soften its stance, eventually approving ABN’s takeover offer. However, it was, as they say, all in the timing. Approval did not come until after Lodi had strengthened its position, and it was effectively too late for ABN to pull ahead. The shareholders’ meeting was attended by disgruntled individual investors and phalanxes of lawyers. For ABN, they included partner Roberto Casati, counsel Francesco De Biasi, and associate Ferdinando Emanuele of Cleary Gottlieb Steen & Hamilton. Managing partner Francesco Gianni and partner Filippo Troisi of Gianni, Origoni, Grippo & Partners were at the meeting as independent shareholders, though their firm is representing Lodi in its dispute with ABN. At the end of the gathering, Antonveneta had a new board, ABN had been stripped of its seats, and its takeover offer had been declared hostile. ABN moved to plan B. It filed suit in a Rome court, disputing the Bank of Italy’s decision to block it from raising its stake in Antonveneta until just days before the meeting. The Dutch bank then filed suit in a court in Padua to overturn the decisions taken at the shareholders’ meeting, including the installation of the new board. The court ruled in ABN’s favor; however, at press time an appeal by Lodi was still being considered. “We knew that this was not going to be easy,” says ABN spokesman Jochem van de Laarschot. “It was no secret that the Bank of Italy didn’t want foreigners buying Italian banks.” Nor was BBVA’s top brass surprised at the difficulties the Spanish bank faced, says a BBVA employee who requested anonymity. ABN’s bid, which was offered to Antonveneta’s other shareholders, kicked off May 19 and was slated to run through June 22. When Corporate Counsel went to press, Italy’s market regulator had not yet given Lodi the green light for its bid. The outcome of both banks’ efforts promises either to encourage more foreign investment in Italian industries and give external institutions a key role in ongoing bank consolidation or to close the door to this sector for years to come. “This is a litmus test for the rule of law in Italy and will dictate how much foreign investment we will see in the future,” says Umberto Mosetti, who heads the Milan office of Deminor, a European association that advocates for the rights of minority shareholders. Mosetti is unequivocal about what happened in Padua: “Italian securities laws were broken in the Antonveneta case.” Several Italian organizations appear to agree. The Italian stock market regulator, Consob, has criticized Lodi’s actions leading up to the April 30 meeting and hinted that the results obtained there were not valid. And a Milan court added Lodi’s Fiorani to its list of those being investigated for stock price manipulation; it authorized Italian financial police to raid the bank’s offices on May 17 in a search for evidence. At press time no charges had been filed, and the bank had denied any wrongdoing on Fiorani’s part. In Italy an ever-increasing proportion of foreign investment comes from private equity funds. Between 2001 and 2003, total private investments climbed 38 percent to $3.8 billion, according to Milan-based AIFI, the Italian Private Equity and Venture Capital Association. The trend in Italy tracks similar changes in the rest of Europe, where private equity firms spent $26.2 billion on buyouts last year, as compared with $23.2 billion in 2003 and $21.3 billion in 2002, according to a study commissioned by the European Private Equity and Venture Capital Association in Brussels. A decade’s worth of European Union reforms that facilitate cross-border mergers and acquisitions have fueled the expansion, along with clearer market rules, the continuing globalization of the world’s financial markets, and the downturn of equity markets. The number of large deals in Italy is, however, still somewhat behind that of other big European countries, with private equity firms concluding three to five a year, as compared to nine to ten annually in both Germany and France, according to Giancarlo Aliberti, managing director in the Milan office of the New York- based private equity firm Apax Partners Inc. In one of the most recent Italian deals involving private equity firms, former state electricity monopoly Enel S.p.A. in May sold Wind, its fixed-line and mobile phone unit, to a group of investors led by an Egyptian businessman for $12.5 billion, including assumed debt. Other private equity groups that have been active in Italy are New York-based The Blackstone Group L.P., which led a consortium that came close to buying Wind; Apax, which this year sold part of its holding in Italian asset manager Azimut S.p.A. through an IPO; and Texas Pacific Group, in Fort Worth, which teamed with Apax in April to purchase Telecom Italia S.p.A.’s Greek wireless unit. “Structurally, investing here is similar to what you find in the United Kingdom, Germany, or France,” says Aliberti. “In Italy, as in those countries, you are well protected from a legal point of view.” The differences, he says, lie in the need to be more involved in an Italian company once it has been acquired and the necessity to raise capital elsewhere because Italy’s debt market is underdeveloped compared with those of other major European countries. Currently he sees buying opportunities in the nonbanking facets of the Italian financial services industry and in the retail sector. Despite the consensus that Italy is generally open to outsiders, the lawyers who make sure everything sails through smoothly sound a note of caution. “Italy has a lot of laws — more than other European countries,” says Annalisa Malfatti, in-house counsel for mobile phone company H3G. “There are opportunities here, but to invest, you must have good local legal help.” Cleary Gottlieb’s Fioruzzi, whose firm has worked on most of Italy’s big private equity deals in the past five years, agrees: “Compared with the United States, Italy is certainly overregulated, but compared with the rest of Europe, things are evening out as Italian regulations are simplified.” Another caveat: Though the 2003 multibillion-dollar bankruptcy of family-controlled dairy and food conglomerate Parmalat Finanziaria S.p.A. inspired other Italian firms voluntarily to appoint more independent directors, Italy still does not have a tradition of protecting the rights of minority shareholders. And a law to toughen penalties for financial fraud, proposed after the Parmalat debacle, fell victim to domestic politicking. Mosetti of Deminor, which has advised BBVA in its $8.3 billion bid for Banca Nazionale del Lavoro, worries that ABN’s and BBVA’s experiences will scare investors away from the Italian banking industry, and indeed Italy as a whole. He and other legal experts claim that the Bank of Italy’s nationalistic stance has damaged the country’s financial system. “If others wishing to invest in the banking sector run into the same obstacles as ABN and BBVA have encountered,” Mosetti says, “sooner or later no one will want to invest in Italy.”

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