Italy Inc. May Have an Answer


By Maureen Kline Paolo Colonna, chairman of the Italian operations of European private-equity fund Permira, has just returned home from a visit to the annual Miami Boat Show. "I love boats," he says. No wonder: when Permira took one of its holdings, yacht manufacturer Gruppo Ferretti, public in 2002, the fund reaped a return of 54 times its original investment in four years. And a year later, Colonna decided that wasn't enough. Permira bought Ferretti a second time, paying 70% more than the initial public offering price in the hope of extracting even more untapped bounty.

Since 1998, Colonna and his team have helped the yachting group make 10 acquisitions, while cutting distribution, engineering, and purchasing costs. Revenue has soared fourteenfold, from $61 million in 1997 to an expected $780 million this year. Moreover, the gains didn't simply come from acquisitions: Permira says 80% of the revenue increase has reflected growth of the business itself.

ACTIVE OWNERS. In 1998, for example, Ferretti acquired Cantieri Navali dell'Adriatico, which makes Pershing brand yachts. Back then, it had revenues of $10 million. In 2004, revenues were in excess of $100 million.

Ferretti's growth juggernaut highlights the allure of private equity for Europeans, who long distrusted handing over control to foreign owners (see BW Online, 3/7/05, "A Red Carpet For Americans"). Indeed, Permira's skills were vital in helping Ferretti make smart international acquisitions, and that kind of active ownership is "just what Italy needs," says Giampio Bracchi, head of AIFI, the Italian Private Equity & Venture Capital Assn. "Companies with private-equity owners [who exited after the IPO], compared with comparable listed companies, have grown more, had better profits, invested more in research, exported more, and have better corporate governance."

With a large chunk of Italy Inc. up for sale, private equity may be the answer. Corporate buyers of the past spent money on previous privatizations and are now burdened with debt, and the ill fortunes of the likes of Fiat (FIA) and Parmalat have taken out buyers and swelled the list of sellers. Italian banks are saddled with write-offs, restructurings, and debt-for-equity swaps. Plus, the Italian stock market never entirely blossomed, and the corporate bond market has been poisoned by a slate of defaults.

JUICY RETURNS. Indeed, Italy is expected to close a record number of large private-equity deals in 2005. Electricité de France is hoping to sell its majority stake in Italian electricity utility Edison and is looking at a number of private-equity firms among possible buyers. Department-store chains Coin and Rinascente, and Pirelli's cable business, are expected to be sold to private-equity investors. Blackstone's $16.6 billion preliminary offer for Wind, Italy's third-largest mobile-phone operator, signals bigger transactions ahead, too, as record-size U.S. and British funds start chasing the biggest deals in Europe.

Private-equity investments in Italy have yielded average annual returns of 17% over the last 10 years, according to AIFI. This is higher than the 12.9% average for the U.S., according to Thomson Venture Economics, and the European average (including Italy) of 11.9%, according to the European Private Equity Assn. London-based Dealogic, which tracks private-equity data, says the value of such deals in Italy shot up from $932 million in 2001 to $3.5 billion in 2002, and to $13.9 billion in 2003, when Italy overtook Germany to place third in Europe.

In 2004, that value shrank to $3.9 billion, as negotiations for several big deals in the pipeline carried over into 2005. So far this year, Italy has racked up more than $1 billion in private deals, putting it ahead of Germany but behind the suddenly booming Spanish market.

ROLLED UP SLEEVES. Private equity works especially well for Italian fashion and luxury-goods companies, where design, quality, and brand recognition are high but management structures and skills are weak. In the 1990s, languishing luxury brand Gucci was turned around by Investcorp, and luxury motorcycle brand Ducati, practically bankrupt, was bought and then listed at a profit by Texas Pacific Group.

In these cases, the buyers didn't just invest but they also took management control and engineered a turnaround. "Active private-equity investment, more than other forms of financing, brings industrial restructuring," says Roger Abravanel, a director at McKinsey & Co. in Milan.

McKinsey recently analyzed 60 large private-equity deals in North America and Europe in order to pinpoint the factors that fed into the greatest returns. Hitting the jackpot on exit occurred where investors rolled up their sleeves and helped with everything from strategy and dealmaking to systems.

Just look at Ferretti. It's now No. 1 in Europe in the luxury motoryacht sector and No. 2 globally, and Colonna plans to relist it by 2008, confident that Ferretti will be able to navigate on its own. And if private equity can continue to replicate the model, Italy Inc. should sail more smoothly as well. Kline is a Milan-based freelance writer


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