ITALY'S STATE OWNED ENI STRUGGLES TOWARD PRIVATIZATION

Privatization of Ente Nazionale Idrocarburi SpA will prove nettle-some for Italy's huge state petroleum company during the next 18-24 months.

ENI's privatization, placed on track in mid-1992, is proceeding in fits and starts, hamstrung by Italian political infighting and the wildly disparate financial performance of its operating units.

The process will be further complicated in 1993 as the holding company grapples with massive debt and restructuring of a byzantine group of 325 operating units, subsidiaries, and affiliates.

Privatization of ENI, Italy's second biggest industrial entity, is part of a broader effort by Italy to privatize its major state owned holding companies, including electric utility ENEL, one of the world's biggest natural gas importers. That effort proceeded in earnest last summer amid sharp criticism from antitrust officials of the European Community Commission aimed at heavy state subsidies for Italian state industries. Italy's new government, under Prime Minister Guiliano Amato, has stepped up the pace of privatization as European economic and political unification approached.

The fallout from ENI privatization could be substantial: the possible entry of major new players across the breadth of petroleum industry operations if key assets are sold, removal of at least some heavily subsidized competitors in the petroleum industry, and dramatic restructuring of Italy's petroleum industry as efficiencies are introduced and capacities shrink.

BACKGROUND

The first steps toward privatization of Italy's state owned industries, including ENI and ENEL, began only 40 days after the election of the Amato coalition government last summer.

Under an Aug. 7, 1992, decree, ENI, ENEL, and other state holding groups became joint stock companies owned by a single shareholder, the Italian treasury. Under the new decree, only the treasury is entitled to sell, collect, aggregate, and place on the market shares of the many companies controlled by ENI and ENEL.

Amato's move is seen as an effort to curb interference of Italy's ruling political parties in the public sector before some of the biggest state owned businesses in Italy could be offered on the market. With the decree, more than 80 members of those companies' boards supervising the multi-billion dollar companies in the interests of their respective parties suddenly lost their jobs.

Even with the dismantling of ENI's 14 member board, ENI Pres. Gabriele Cagliari has been reconfirmed in his position for 1 year. However, he will have to share management of the energy conglomerate with new Managing Director Franco Bemabe and Director Giuseppe Ammassari, who will serve as the treasury's watchdog.

At ENEL, Pres. Franco Viezzoli also was confirmed for 1 year and must share management with Managing Director Alfonso Limbruno and Director Vittorio Barattieri.

TRANSITION

The new managing committees of Italy's state holding companies must handle a delicate phase of transition to publicly held companies. It involves the sale of stock and assets expected to bring $6 billion to a treasury coping with a large budget deficit.

The government has not decided about relinquishing the majority share of the new joint stock companies. Italian financial analysts have recommended the state could begin by selling 20% of the ownership and later consent to sell a majority share to private investors. But so far key Italian private companies such as Fiat, Olivetti, and Pirelli have been circumspect toward the intended privatization, letting it be known they are not interested in owning minority shares of state holdings that might conceal huge debts.

Traditionally, Italy's big state owned companies such as ENI and ENEL have been big financial contributors to Italy's major political parties. They also account for a big part of Italy's budget deficit by absorbing several billion dollars of government grants and subsidies. And they have come under heavy attack by the EC antitrust commission. Accordingly, European economic and monetary union has made privatization unavoidable.

"The companies must be reorganized into new conglomerates highly desirable for the market," Amato said after the Italian parliament's approval of the privatization decree.

Effective Aug. 13, 1992, ENI SpA became a joint stock company capitalized at 7.999 trillion lire ($5.68 billion U.S. at current exchange rates). At yearend 1991, ENI had net assets of $12.8 billion and net working capital of $1.5 billion.

FIRST PUBLIC OFFERING

The first test for privatization was to come this past fall with the entry of ENI's oil and gas companies Agip and Snam into the Italian and international stock markets.

They are considered the jewels of the ENI group. Agip's profit in 1991 was $917 million on revenues of $9.13 billion. Snam posted 1991 net earnings of $529 million on revenues of $9.56 billion.

At the same time, ENI Group logged 1991 income of $900 million against revenues of $41 billion and ended the year facing a total debt of $19.1 billion-a debt to net equity ratio of 1.29 vs. 1.33 in 1990-largely because of heavily indebted operating companies such as chemicals unit Enichem and metallurgy unit Nuova Samim. ENI said only its most profitable companies, such as Agip and Snam, would enter the domestic and international markets. However, Agip and Snam public offerings were sidetracked by political scuffling.

Other ENI's companies will have more trouble in public offerings because of their high level of debt.

"Many state owned companies will only burden the state banks appointed to place the new stocks on the market," said Jody Vender, managing director of Italian stockbroker Sopaf.

He noted that stock markets prefer to buy shares in operating units rather than in holding company conglomerates. Accordingly, holding company offerings should reflect a discount against their nominal value. In any event, Vender said, "What the stock market investors expect is that the state will surrender its majority share in the companies."

CRUX OF THE PROBLEM

That dilemma points to the crux of ENI's privatization concerns: The spunoff companies must be made profitable through entrepreneurship because they no longer will have access to state subsidies.

But that's problematic for any government in Italy, given a deeply entrenched political bureaucracy that has based its power on control of Italy's biggest companies. Italy ran up against EC antitrust commission criticism of earlier privatization proposals retaining Italian government subsidies, which the commission maintained effectively allow Italian public companies to survive while nonsubsidized competitors in other European countries go out of business.

Such criticism and political squabbling caused the government to scrap an earlier version of the privatization plan for ENI in lieu of a more market oriented plan.

After weeks of heated debate on the percentage of ownership the state should retain, the new privatization decree simply provides for new special measures of control by the treasury in case more than 20% of the stock of state owned companies are sold. That implicitly allows for a majority share to go private by not fixing a ceiling on what can be sold.

PRIVATIZATION APPROACHES

Meanwhile, financial and political officials continue to argue whether Italian privatization should follow the path of the new French "public" companies, with their large number of small domestic stockholders and the state retaining 20-25% interest in strategic sectors, or follow the U.K. model, selling all state company interests to big and small investors alike.

Amato's administration in late July 1992 gave itself 3 months to present a coherent privatization plan to Parliament.

ENI's new privatization plan was unveiled near the end of last November, a push given added urgency by deterioration in the group's debt rating.

The most endangered companies of ENI-with the highest debt to equity ratios-are Enichem and Nuova Samim. ENI International Bank, which lends money to the parent companies unable to obtain credit elsewhere, is now under close scrutiny by Moody's and Standard & Poor's debt rating agencies. ENI ratings have been slightly changed because of lengthy uncertainty over the new structure and ownership of the holding group.

Among the concerns of ENI's creditors is that it is not yet clear who will guarantee ENI companies' debt after the group goes private. But it is likely new owners will share part of that debt, ENI officials said, noting the company as a whole is sound and can accommodate its current debt level. Currently, ENI's biggest debtholder is Chase Manhattan Bank, with $2 billion in debt guaranteed by the Italian treasury.

COPING WITH DEBT

Debt is the first emergency ENI will face in 1993.

ENI currently confronts spiraling debt that accumulates at the rate of $3 billion/year.

A timely recovery will depend on three essential measures, Bernabe said: revision of investment and business plans of subsidiaries, sale of non-core businesses, and dismantling of obsolete plants and companies.

Company strategy was outlined by ENI officials at a Nov. 24, 1992, meeting in Rome of all the chairmen and directors of ENI Group companies.

According to the new business plan, ENI will maintain its core operations in basic hydrocarbons through Agip and Snam and in petrochemicals through Enichem.

Under restructuring, ENI will cut capital spending by $4.5-5.3 billion from levels projected earlier by subsidiary companies. It also plans to withdraw wholly or partly from certain noncore business operations by selling assets, entering into joint ventures with Italian or foreign partners, and shutting down noncore business units. Companies to be sold include Agip Coal, heating appliance and textile equipment unit Savio, and Nuovo Pignone, which designs and manufactures equipment for the petroleum and other industries. Conditions of the first sale, involving Nuovo Pignone, were to be announced by about yearend 1992.

Companies that will be dismantled include certain mining operations that have produced no income for years and some chemical companies not directly linked to petrochemicals, such as Enichem Agricoltura.

Bemabe said restructuring ENI will take 18 months, and the resulting enhanced value of ENI's energy group should pave the way for the holding company's entry into the stock market. But when asked whether Agip and Snam might separately enter the market, as had been planned in 1992, Bernabe said "The government's privatization plan is considering different possibilities. We will study and discuss them, choosing what seems the best direction for the group and Italy."

Bernabe also said ENI considers its chemical sector one of its core businesses but noted, "It must be restructured in order not to produce losses."

CHOICES AHEAD

Italian industry officials note Agip and Snam are anxious to enter the New York Stock Exchange because the Italian stock market is too small to absorb a massive offering.

However, if the two units left ENI's core business only with Enichem-remaining interests of which the state acquired 3 years ago for $3 billion and which has lost money since then-ENI would face a grim future.

Cagliari said ENI will review policies and finances the next 18-24 months, adding, "After that period, the state will be able to put the holding company on the market. Indeed, all energy groups in the world are rated in the stock exchange as holdings and not as separate subsidiaries. Integration is considered by the markets as the fundamental factor of success in the energy sector."

ENICHEM'S WOES

It remains to be seen how ENI will deal with its major problem, Enichem, expected to lose $1.1 billion in 1992.

Enichem Chairman Giorgio Porta said most cuts will take place in downstream petrochemical and fertilizer operations. Fertilizers alone account for one third of Enichem's losses. In plastics, Enichem also is experiencing losses as a result of lagging demand in domestic automotive and electronics industries and a price war, notably for intermediate derivatives.

If Enichem is to follow the government's "Green Book,' its publication providing privatization guidelines, it will have to concentrate on its core business, polyethylene. Enichem will thus have to find buyers for its fertilizers division in Gela, its elastomers division Enichem Elastomeri, and its detergents division Enichem Augusta.

Porta said Enichem's 4 year plan was to be ready by yearend 1992.

OTHER COMPANIES

The other main companies of the ENI Group are involved in mining and nonferrous metals, coal extraction, ceramics, and abrasives.

All were concentrated in 1991 in a new company, Enirisorse, which in its first year tallied losses of $415 million, equal to about one fourth of its revenues. In 1992, Enirisorse losses were projected at $436 million, about 30% of revenues, while its debt grew.

ENI's stragglers are crimping its winners. ENI conferred a sizable chunk of Enirisorse stock to the profitable Snam, which has had to pay $461 million to help cover debt Enirisorse accumulated in 1991 and first half 1992. The only Enirisorse company currently showing an operating profit is Agip Coal, projected to post 1992 operating income of $17 million on revenues of $429 million but recently stung by a $38 million charge for a joint venture investment in Australia.

According to Green Book economists, Agip Coal probably will be sold, while other Enirisorse units will have to be liquidated: Nuova Samim, Agip Miniere (mining), and Samatee (ceramics and abrasives).

PARTY WARFARE

ENI privatization is unfolding against a backdrop of a broad privatization push in Italy that has become a battlefield for warring political parties.

That push, spurred by the surging Italian budget deficit and tightening EC Commission antimonopoly policies, must contend with deep entrenchment of state companies in Italy's economy and politics. State owned companies represent at least 20% of Italy's economy. And those companies' boards long have been controlled by Christian Democrat and Socialist parties that have dominated Italy's political scene for 40 years.

The intrusion of political parties in state owned enterprises has saddled many with poor management and high expenses, company officials contend. Companies have had to finance newspapers and subsidize obsolete plants and redundant jobs for the benefit of trade unions and parties seeking to protect members and votes.

With Italy's budget deficit worsening, a commission of 11 members headed by the ministers of finance, treasury, and industry began last summer to study the revamped privatization plan, which was submitted to Parliament Nov. 17.

Parliament's proposed amendments were to be submitted to the government by mid-December 1992. Once approved, the new joint stock companies will be able to get privatization in full swing, presumably to enter financial markets with the backing of state banks that are undergoing their own measure of privatization.

Parliamentary debate currently centers on which parties will retain maximum influence over the remnants of state control of the new joint stock companies, similar to what is happening in Russia's petroleum industry.

A crucial question is who will lead the privatization process: a public official nominated by the prime minister to chair an oversight committee, a committee of Italy's three economic ministers chaired by the prime minister, or a department of the treasury ministry. Representation of political parties on any of those entities is just as critical. In any case, Parliament will have to make its choices soon. It faces the economic pressure of $100 billion in debt accumulated by state owned enterprises, almost equal to the national deficit.

THE GREEN BOOK

According to the Green Book, released last November, the petroleum group of companies in ENI accounts for most of ENI's profits. In the group are Agip, Agip Petroli, Snam, Snam-progetti, Saipem, and the basic petrochemicals business of Enichem.

They form the core businesses ENI management wants to focus on.

Nonprofitable companies include Nuovo Pignone, Agip Coal, Enichem Augusta, Fibre, Enirisorse, and the daily newspaper II Giorno, the Green Book said. The publication said activities that must be eliminated as soon as possible are Enichem's agricultural division, the minerals division of Enirisorse, Nuova Samim, Savio, and Terfin (various businesses). Their combined 1991 losses were $1 billion.

The Green Book recommended that to reduce ENI debt the group should proceed with total or partial sale of Snamprogetti, Nuovo Pignone, and Saipem. Enirisorse should abandon coal and metallurgy either by liquidating those subsidiaries or finding new buyers, Savio should be sold, and Terfin liquidated.

The government publication also analyzed ENI's chemical business, with a core identified as ethylene and polyethylene, polystyrene, polyvinyl chloride, and elastomers. That core is expected to yield combined profits of $221 million by 1995.

Noncore chemical businesses-fibers, detergents, and specialty chemicals-can be sold, the Green Book said. Some activities-fertilizers and intermediate products for dyes-have to be terminated immediately because they otherwise would generate a loss of $1 billion by 1995. It also recommended liquidating Enichem Agricoltura, which lost $384 million 1991.

TACKLING TOUGH ISSUES

Now that the Green Book has prescribed the medicine for what ails ENI, the biggest challenge for the group may be to survive the cure.

Once the companies showing a loss have been taken care of, ENI will be able to enter the stock exchange, the Green Book recommended, adding, "Meanwhile, its most important subsidiaries could be offered on the stock exchange."

The Green Book recommended that a public offering of profitable ENI units be made at prices that would warrant later appreciation. A cabinet leak early in November relayed to the press some details of the ENI privatization plan (OGJ, Nov. 16, 1992, Newsletter). Early indications were that interests in Nuovo Pignone and Snamprogetti will be sold in 1993, followed in 3-4 years by Snam, Saipem, Agip Coal, and the daily newspaper II Giorno. But so far the list has not been confirmed, pending formal vote of Parliament.

Another pressing question is whether significant shares of the most profitable companies will be sold. If the state kept a "golden share" in the those companies, industry officials say, privatization would falter because party politics would maintain a role at the expense of sound management, dampening purchasers' interest.

There are other stumbling blocks ahead for ENI privatization. Moody's, the international debt rating service, has lowered its rating of ENI debt to -2 from -1, suggesting concern over whether Italy's treasury will fully guarantee ENI debt and possibly further dampening interest in buying a minority stake in the spunoff companies. The Green Book recommends that after 3-4 years of restructuring, the treasury will be left with highly meaningful shares but nevertheless a minority in many strategic sectors, including energy.

On the other hand, the Italian government has declared its aim to own "stable control cores," or blocks of stock that would expedite the transition of ownership to a broad group of small stockholders and pension and investment funds. But the latter have either performed badly or are yet to be created in Italy. In fact, the Italian stock market is choked with huge volumes of government bonds issued to service the national debt, and it remains to be seen whether the creation of such broad based public companies, notably in the energy sector, will be possible at all.

AGIP, SNAM ROLES

A chief concern in the privatization of ENI is how it will survive the spinoff of Agip and Snam interests while being dragged down by a debt ridden Enichem and other units.

It is clearly the intent of the Italian government and the companies' management to keep Agip and Snam Italian for prestige as well as convenience. "Agip is not for sale," said Agip Chairman Pasquale Santoro. "Agip is in a condition to go and fetch money where it can be found, keeping itself whole and staying Italian."

But it's not clear whether the two currently profitable units will be able to maintain their historically high rate of capital investment while refinancing debt without state subsidies.

Perhaps ironically, it could fall to ambitious new projects in the newly privatizing Russian petroleum industry to provide ENI upstream businesses with key revenue sources.

Trade in Russian gas that ENI now purchases at the lowest international market price will be expanded throughout Europe during the 1990s. Agip and British Gas plc last summer agreed to a joint venture to develop supergiant Karachaganak field in Kazakhstan (OGJ, Aug. 3, 1992, p. 16). And ENI units are heavily involved in helping rehabilitate the deteriorated Russian gas pipeline system and infrastructure. That leaves lessons in privatization to be learned by both sides.