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The Biggest Test for Italy's Mr. Fixit


Paolo Scaroni, the new chief executive of Italian energy giant Enel, spent half of his summer holiday climbing the steep, rocky slopes of the Dolomites. Good thing he relishes a challenge. Overhauling Enel and grooming it for full privatization will be an endurance test even for an experienced turnaround hand like Scaroni. The $25 billion ex-monopoly is still 68% state-owned, saddled with high costs, and ill-prepared for competition. A poorly timed diversification into telecoms by prior management is now draining some $1.4 billion a year from Enel's cash reserves. "One of their big failings was plowing so much money into telecoms," says Chris Rowland, energy analyst for Dresdner Kleinwort Benson in London.

Scaroni couldn't agree more. Mapping out his strategy on Sept. 12 after three months on the job, Scaroni vowed to exit from telecommunications, refocus on electricity and gas, slash costs, and transform Enel into a streamlined global player. "There are no material synergies between telecommunications and energy," he said. He concedes, though, that it will be hard to unload Enel's 78% stake in Wind Telecomunicazione before 2004.

A successful restructuring of Enel is key to full privatization, one of Prime Minister Silvio Berlusconi's avowed policy goals. A selloff would also help step up the pace of Europe's stalled energy liberalization. But getting Enel into shape won't be easy. Energy costs in Italy are 40% higher than in the rest of Europe, and a breakneck diversification drive by Scaroni's predecessor, Franco Tato, left Enel saddled with a hodgepodge of assets, including water and waste services. Analysts say this giant needs to shrink its staff of 73,000 by as much as 40% to become efficient. And, of course, everything about Enel is highly politicized. "Scaroni's biggest challenge is cutting costs aggressively and massively improving efficiency. I'm not sure whether he has free rein to do that," says Neil Bradshaw, energy analyst for J.P. Morgan in London.

No question, Scaroni will have to negotiate with the government and unions to slim down the workforce. But the government's two goals--buoying Enel's sagging share price, which is down 37% since its initial public offering in 1999, and selling a second tranche--should help Scaroni's effort. The new CEO already is taking difficult steps. On Sept. 12, he announced a write-down of $1.5 billion on the valuation of Wind. Enel's revenues for the first half were down 2.4% to $14.7 billion, while net profit rose 41.3% to $1.4 billion, on extraordinary gains from asset sales.

Treasury officials certainly knew who they were hiring. A Columbia University MBA and ex-McKinsey & Co. manager who speaks five languages, Scaroni, 55, drove a dramatic turnaround at ailing British glassmaker Pilkington PLC after being appointed CEO in 1997. He cut 10,000 jobs over five years, reducing employment by 40%. "Paolo saved Pilkington and transformed it into a world leader," says Pilkington Chairman Nigel Rudd.

At Enel, Scaroni's secret brief may be to forge a national champion, analysts say. French energy giant Electricite de France enraged Italian politicians in 2001 by taking a stake in Enel's Italian rival Edison, because EdF's home market in France is effectively closed to competition. Berlusconi may position a revitalized Enel to expand in France and other European countries as liberalization slowly pries markets open. "Enel can still become a global player. Not many Italian companies have accomplished that. It's an additional objective," says Scaroni, who insists his instructions from the government are simply "to create shareholder value."

A key challenge is to reduce Enel's heavy dependence on high-cost oil to fire up its power plants. To do that, he'll have to convert plants to coal, hydro, or other cheap fuels. That's vital: As European markets open to cross-border competition, Enel could lose its Italian customers to lower-cost producers, such as EdF and Spain's Endesa. Scaroni's goal: to have 75% of Enel's total capacity running on cheaper fuels by 2007. "We will have lower costs than new entrants in the market," he insists. Scaroni's energy may yet give Enel a new jolt. By Gail Edmondson in Rome


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