Advisory Group on Privatisation Thirteenth Plenary Session Privatisation

Advisory Group on Privatisation Thirteenth Plenary Session Privatisation, Capital Market Development and Pension Funds Patterns of change in corporate finance and their impact on the governance and organisation of enterprises Italian Privatisations and Corporate Governance Issues in the New Euro Environment Paris, 21 -22 September 1999 Pietro Ciucci - General Manager - IRI Spa

Fig. 1 - INTEREST RATES CONVERGENCE Euroland LONG TERM SHORT TERM 16, 0 14, 0 12, 0 10, 0 8, 0 6, 0 4, 0 2, 0 0, 0 RIBOR 1 M (ITA) LIBOR 1 M (UK) PIBOR 1 M (FRA) MIBOR 1 M (SPA) FIBOR 1 M (GER) ge n 9 m 3 ag -9 3 se t-9 3 ge n 94 m ag -9 4 se t-9 4 ge n 95 m ag -9 5 se t-9 5 ge n 9 m 6 ag -9 6 se t-9 6 ge n 9 m 7 ag -9 7 se t-9 7 ge n 9 m 8 ag -9 8 se t-9 8 ge n 9 m 9 ag -9 9 18, 0 29 /0 1/ 31 93 /0 5 30 /93 /0 9/ 31 93 /0 1/ 31 94 /0 5/ 30 94 /0 9/ 31 94 /0 1/ 31 95 /0 5/ 29 95 /0 9 31 /95 /0 1/ 31 96 /0 5/ 30 96 /0 9/ 31 96 /0 1/ 30 97 /0 5/ 30 97 /0 9 30 /97 /0 1/ 29 98 /0 5/ 30 98 /0 9/ 29 98 /0 1/ 31 99 /0 5/ 99 18, 0 GOVT 10 YR (ITA) GOVT 10 YR (UK) GOVT 10 YR (DH) GOVT 10 YR (SPA) Source: IRI - Economic Research Department /Bloomberg Financial Markets. GOVT 10 YR (FRA)

Fig. 2 - YIELD CURVES Italy vs Germany 5, 5 ECOFIN 1/5/1998 5 5 4, 5 4 4 3, 5 3 9/4/1999 3 7/9/1999 2, 5 3 MO 6 MO 1 YR 2 YR 3 YR 4 YR 5 YR 6 YR 7 YR 8 YR 9 YR 10 YR 2 3 MO 6 MO 1 YR 2 YR 3 YR 4 YR 5 YR 6 YR 7 YR 8 YR ITA GOVT (BPT) 1/5/98 GER GOVT 1/5/98 ITA GOVT (BTP) 5/1/98 GER GOVT 5/1/98 ITA GOVT (BPT) 11/3/99 GER GOVT 11/3/99 ITA GOVT (BTP) 9/7/99 GER GOVT 9/7/99 Source: IRI - Economic Research Department / Bloomberg Financial Markets. 9 YR 10 YR

Fig. 3 - STOCK MARKETS GROWTH PERFORMANCES Major European Markets Usa - Europe - Japan 350 300 250 200 150 100 50 m ar -9 gi 4 u 9 se 4 t-9 di 4 c 9 m 4 ar -9 gi 5 u 9 se 5 t-9 di 5 c 9 m 5 ar -9 gi 6 u 9 se 6 t-9 6 di c 96 m ar -9 gi 7 u 9 se 7 t-9 di 7 c 9 m 7 ar -9 gi 8 u 9 se 8 t-9 8 di c 98 m ar -9 gi 9 u 99 0 NIKKEI 500 (JAP) Source: IRI - Economic Research Department / Bloomberg Financial Markets DOW JONES INDUSTRIAL (US) FTSE EUROTOP 100 (EU)

Fig. 4 - KEY FIGURES OF EUROLAND (1998; billion US$) (*) 1997 Source: IRI - Economic Research Department / DRI Standard & Poors data

Fig. 5 - THE RISE OF THE EURO CORPORATE BOND MARKET Euro-denominated bond issuance ($ bn) Source: Bank of America

Fig. 6 - THE EURO CORPORATE BOND MARKET Rating features International Corporate Bond issues 1998 International Corporate Bond issues 1 Q 1999 A 21% AA 24% AA 23% Other 13% AAA 42% Source: Bank of America AAA 23% A 29% Other 25%

Fig. 7 - EUROPEAN FUND MANAGEMENT INDUSTRY (1997; billion US$) Source: IRI - Economic Research Department / Bank for International Settlements, 68 th Annual Report.

Fig. 8 - HOUSEHOLDS’ FINANCIAL ASSETS Share (in %) managed by institutional investors (1997) Source: Rapporto IRS sul mercato azionario, 1999

Fig. 9 - COMPANIES’ CAPITAL STRUCTURE Usa, Japan, Euroland (1998) Source: projections IRI - Economic Research Department on National Accounts.

Fig. 10 - MODELS OF EXTERNAL CAPITAL MARKETS Anglo Saxon Model (Usa - UK) Non-stable shareholders Non influential shareholders Speculative Sell or Buy decisions Oriented to transactions Fluid capital Fragmented shareholdings External information Renan Model (Ger - Jap) Oriented to stable relationships Stable shareholders Influential shareholders Dedicated capital Sell or Buy decisions relatively independent from speculative Source: M. E. Porter in K. Ohmae (ed. ), ”The Evolving Global Economy”, (1998) Concentrated shareholdings Inside information

Fig. 11 - MOBILE NETWORK OPERATORS IN ITALY The map of existing licenses (*) Ownership structure before Telecom take-over by Olivetti Source: IRI - Economic Research Department / Ministry of Communications (updated march 1999)

Fig. 12 - FIXED NETWORK OPERATORS IN ITALY The map of existing licenses (*) Ownership structure before Telecom take-over by Olivetti Source: IRI - Economic Research Department / Ministry of Communications (updated march 1999)

Fig. 13 a - PRIVATISATIONS’ PROCEEDS BY TYPE OF OFFERING (Five major European countries, U$ billion, 1981 -98) 160 18. 4 140 120 100 22. 7 80 60 1. 6 135. 3 40 59. 9 20 0 UK Italy Public Offers 23. 0 4. 5 21. 4 38. 2 63. 1 France Germany Private Sales Source: IRI - Economic Research department / IFR-Thomson Privatisation International Spain

Fig. 13 b - PRIVATISATIONS IN EUROPE (Five major European countries, 1992 -98) FINANCIAL TECHNIQUES USED Million US$ (1998 prices) FRANCE Public Offers % Private Sales % Total % 49, 453 26, 6 1, 452 2, 4 50, 905 20, 6 GERMANY 17, 971 9, 7 20, 995 34, 3 38, 966 15, 8 ITALY 57, 267 30, 8 21, 987 35, 9 79, 254 32, 1 SPAIN 36, 572 19, 7 4, 336 7, 1 40, 908 16, 6 UNITED KINGDOM 24, 381 13, 1 12, 418 20, 3 36, 799 14, 9 185, 644 100 61, 188 100 246, 832 100 TOTAL EUR-5 (in %) (75, 6%) (24, 4%) Source: IRI - Economic Research Department / IFR-Thomson Privatisation International (100%)

Fig. 14 - EVOLUTION OF THE ITALIAN REGULATORY FRAMEWORK Law 359/1992 Iri, Eni, Ina, Enel trasformed in s. p. a. (p. l. c. ) Determination of net assets and evaluation procedures Share conferred to Treasury Power to Treasury for the preparation of a Reorganisation plan CIPE 30. 12. 92 CIPE 15. 10. 93 Start-up of proce. Regulation of dures for dismisprivatisation sal of entire holprocedures: ding in Enel, Ina, * public offers Comit, Imi, * public tenders Credit, Stet, * private sales Agip Law 474/1994 Possibility of: * Special powers * List vote and limits to share ownership * Partly Paid * Authorities for public utilities Law 481/1995 Setting up of Authorities for Tlc, Gas & Electricity Gvmt Decree (may 1999) Gvmt decree: redefines the perimeter of application of L. 474; special temporary powers maintained only for public order, health, defence New law proposal: powers to the Government for: * Privatisations’ regulation reordering * Acceleration of dismissal processes Obligation for Discipline of pro. Setting up of the Obligation, in the Government cedures for: case of legal or Privatisations to define modaeffective control * determination Commitee lities for public on a company priof participation utilities’ privatisavatised through value tion and consepublic offer, of: * selection of quent expression Acceleration of * making public of an advice by procedures for Advisor and parasocial Parliament Global Coord. Credit, Comit e agreements Measures supported * launching public Imi by EU Commission offers which opposes the Golden Share’s use except extraordinary cases

Fig. 15 a - Italy: equity base by typology of investors 100% 90% 80% Foreign Capital 24% CGSS 30% 50% 40% INDUSTRY 13% INSURANCE 17% 70% 60% BANKS 40% MUTUAL FUNDS 30% Domestic Capital 76% Institutional INSURANCE 31% Investors PENSION FUNDS 7% 37% MUTUAL FUNDS 62% 30% 20% Market 10% 33% 0% Source: projections IRI - Economic Research Department on Technimetrics/Bloomberg Financial Markets data (April 1999)

Fig. 15 b - France: equity base by typology of investors 100% 90% 80% Foreign BANKS 16% Capital CGSS 24% (noyau dur) 38% 70% 60% Domestic Institutional 50% Capital Investors 40% 76% 25% MUTUAL FUNDS 29% INDUSTRY 16% INSURANCE 30% EMPLOYEES 9% INSURANCE 63% PENSION FUNDS 8% MUTUAL FUNDS 28% 30% 20% Market 10% 37% 0% Source: projections IRI - Economic Research Department on Technimetrics/Bloomberg Financial Markets data (April 1999)

Fig. 16 a - PRIVATISATIONS’ CONTRIBUTION TO THE ITALIAN STOCK MARKET GROWTH (January 1993 - August 1999) STOCK MARKET CAPITALISATION (in % of GDP) COMIT INDEX 2. 1. 1993 116 Bil. US$ 11. 2% 451 276 Mil. US$ (average ‘ 93) 27. 8. 1999 586 Bil. US$ 50. 3% 1507 2, 100 Mil. US$ (average ‘ 98) Source: IRI - Economic Research Department 1999 DAILY EXCHANGES ON THE STOCK MARKET

Fig. 16 b - PRIVATISATIONS’ CONTRIBUTION TO THE ITALIAN STOCK MARKET GROWTH (January 1993 - August 1999) CONTRIBUTION OF IRI PRIVATISATIONS ITALIAN PRIVATISATIONS 51. 8% of 1/1/93 capitalisation 10. 2% the present capitalisation 20. 9% of 1/1/93 capitalisation 4. 1% of present capitalisation Italian stock market still relatively limited, but capable of further significant development (Ita 37% of 1998 GDP; Ger 44%, Fra 57%, Spa 61%, Gbr 155%; Jap 56%; USA 113%) Recent estimastes by CONSOB: Number of companies potentially able to be listed: 450/550 Capitalisation potential: at least 106 billion US$ (19% of present capitalisation) Source: IRI - Economic Research Department 1999 / Consob, Annual Report 1997

Fig. 17 - THE ITALIAN STOCK MARKET (ROE - Long term interest rate Spread) % 15, 0 10, 0 5, 0 0, 0 -5, 0 -10, 0 1993 1994 1995 1996 1997 1998 1999* 2000* ROE Long term interest rate * expected Source: IRI - Economic Research Department / Euromobiliare Spread

Fig. 18 a - THE HIT PARADE OF INTERNATIONAL STOCK MARKETS (Capitalisation and number of listed companies) 3, 000 2, 669 10, 271 Billion US$ - December 1998 2, 500 5, 068 1, 890 2, 423 2, 000 1, 500 3, 525 1, 097 1, 000 425 356 243 1, 433 484 680 500 276 268 Source: International Federation of Stock Exchanges Market capitalisation Br us s el s m kh ol oc g on H St Ko ng rid ad M nt o ro To no ila er d st Am Number of listed companies M am h ric Zu Pa ris Fr an kf ur t on Lo nd o ky To da as N N YS E q 0

Fig. 18 b - STOCK EXCHANGES’ DAILY TURNOVER (billion $, average 1998) Source: Rapporto IRS sul mercato azionario, 1999

/94 /95 /96 /97 Volume (mln. of shares) /97 /98 DAX Index 600 500 400 3000 300 2000 1000 0 0 CAC Index * lhs: monthly turnover; rhs: prices index Source: IRI - Economic Research Department / Bloomberg Financial Markets Volume (mln. of shares) /96 /96 /97 /98 /98 /99 /94 /94 /95 /95 /96 /97 30 /97 /01 /98 31 /03 /98 29 /05 /98 31 /07 /98 30 /09 /98 30 /11 /98 29 /01 /99 31 /03 /99 31 /05 /99 30 /07 /99 /11 /09 /97 /07 30 31 /05 /97 /03 /97 /01 /96 /11 30 /96 /09 /07 /96 /05 31 31 /03 29 /01 31 /11 /95 /09 30 29 /07 /95 /05 31 31 /03 31 /01 31 /11 /94 /09 30 30 /07 /94 /05 29 31 /03 /01 31 31 /99 /07 30 /05 /99 /03 31 31 29 /98 /01 /99 /11 /98 /09 /07 /98 /05 31 29 /03 /01 30 /11 28 /09 /97 /07 30 31 /97 /05 30 /03 /97 /01 31 31 /11 29 /09 /96 /07 30 31 /05 /96 /03 31 28 /95 /01 29 31 /95 /11 31 31 /95 /09 30 29 /95 /07 29 31 0 30 /95 /05 0 /94 /03 /94 31 /05 /94 29 /07 /94 30 /09 /94 30 /11 /94 31 /01 /95 31 /03 /95 31 /05 /95 31 /07 /95 29 /09 /95 30 /11 /95 31 /01 /96 29 /03 /96 31 /05 /96 31 /07 /96 30 /09 /96 29 /11 /96 31 /01 /97 31 /03 /97 30 /05 /97 31 /07 /97 30 /09 /97 28 /11 /97 30 /01 /98 31 /03 /98 29 /05 /98 31 /07 /98 30 /09 /98 30 /11 /98 29 /01 /99 31 /03 /99 31 /05 /99 30 /07 /99 /95 /94 /03 31 31 7000 14000 7000 6000 12000 6000 5000 1000 4000 800 3000 6000 3000 2000 4000 2000 1000 200 /01 /94 /01 31 /11 1600 31 /94 /09 30 30 /94 /07 30 30 /94 /05 29 31 /94 /03 /01 31 31 31 1800 31 /99 /07 30 /99 /05 /99 /03 31 31 /99 /01 29 /11 /98 /09 30 30 /98 /07 /98 /05 31 29 /98 /03 /98 /01 31 30 /11 /97 Volume (mln. of shares) 28 /09 /97 /07 30 31 /97 /05 30 /97 /03 31 /01 /96 /11 31 29 /09 /96 /07 30 31 /96 /05 31 /96 /03 29 /01 /95 /11 31 30 /09 /95 /07 29 31 /95 /05 31 /95 /03 31 /01 /94 /11 31 30 /09 /94 /07 30 29 /94 /05 31 /94 /03 /01 31 31 Fig. 18 c- MAJOR EUROPEAN STOCK EXCHANGES Price trends and daily turnover (mln. of shares)* 1400 1200 600 400 0 0 UKX Index 25000 30000 4500 20000 25000 3500 15000 20000 2500 15000 10000 1500 10000 500 5000 0 0 MIBTEL Index

Fig. 19 - PRIVATISATIONS IN ITALY (1992 - 98) The role of IRI Million US$ (1998 prices) 50 40 5, 817 30 37, 530 13, 865 20 17, 972 2, 305 10 1, 765 0 TREASURY Public offers IRI OTHERS Private sales Source: IRI - Economic Research Department / IFR-Thomson Privatisation International

Fig. 20 - IRI GROUP PRIVATISATIONS (1992 -98) (million U$, 1998 prices) Privatisations (A) Debts (B) Others (C) * Dismissals (D=A+C) Total (E=A+B+C) IRI S. p. A. Total 1992 -98 20, 819 9, 538 2, 099 22, 918 32, 456 8, 919 10, 632 31, 837 43, 088 SECTOR HOLDINGS Total 1992 -98 3, 240 1, 713 5, 679 IRI GROUP (TOTAL) Total 1992 -98 24, 059 * Minority shares and real estate assets Source: IRI Spa 11, 251 7, 778

Fig. 21 - IRI GROUP PRIVATISATIONS (1992 -98) (Million US$, 1998 prices) Privatisations Others 10, 632 7, 778 11, 251 Sector Holdings 24, 059 32, 456 Debts IRI Spa Privatisations Debts Others Source: IRI - Economic Research Department Sector Holdings IRI Spa

Fig. 22 - IRI Spa: PROFITABILITY PERFORMANCE (Million $) 4, 000 2, 977 1, 818 2, 000 -2, 767 -5, 886 -846 -199 106 0 -730 -2, 000 -4, 000 -302 -648 -20 -1, 544 -3, 440 -3, 501 -6, 000 -8, 000 1992 1993 1994 1995 Operating Income* * Net of extraordinary revenue items Source: IRI’s Administration and Accounting Department 1996 1997 Net Income 1998

Fig. 23 - THE MIXED MODEL - PRIVATISATIONS IN THE PIPELINE The competitors for the hard core 45, 8% already on the stock market Present stock market capitalisation 889 mil Euro * (De Benedetti) • British Airports Authority (Gbr) • Banca di Roma Present stock market capitalisation 4. 526 mil Euro * AEROPORTI DI ROMA S. p. A 51, 2% hard core • GRUPPO CIR 14% already on the stock market 3% local authorities • HERMES • GEMINA • Ed. Holding (Benetton) • Pirelli • Caltagirone • San Paolo IMI • Ras • Falck • Impregilo • BC Partners • Italpetroli • Mc Donald’s AUTOSTRADE S. p. A 30% hard core • ABN Amro (Neth) • Schiphol (Amsterdam Airport) (Neth) • Frankfurt Airport (Ger) • B. Pop. Milano 56% public offer ED HOLDING (BENETTON) 16% • Fondazione Crt • Unicredito • Ina • Acesa (Autos. Catalane) • Felsinea (Guidalb. Guidi & C. ) 4% 2% 2% 4% 2% • MC DONALD’S • BRISA (Portuguese Highways) • AUTOS. TO-MI (Gavio) • BARCLAYS (Gbr) • DOUGHTY HANSON (Gbr) • SEA (Milano’s airports) • ITT - Sheraton (Usa) • MACQUARIE (Bank) (Asl) * 4 Sep. 1999 - Source: various press releases and articles. IRI has not yet officially announced the names of bidders. Interest for Ad. R has been expressed by 5 groups of investors and 11 single entities; for Autostrade preliminary offers by 2 groups of investors and 4 single entities.

Fig. 24 - THE PRIVATISATION OF TELECOM ITALIA (Oct. 1997) The Group at a Glance TELECOM ITALIA 60, 4% 100% TIM 88% 100% 77, 2% 52% FINSIEL SIRTI 50% Nuova Telespazio Telecom Italia Mobile 12% STET STREAM Internatio nal Telecommunication Services Multimedia I. T. (Software & Systems) ITALTEL Manufacturing and Equipment

Fig. 25 - THE PRIVATISATION OF TELECOM ITALIA (Oct. 1997) Key figures - 1998 Net sales US$ 26. 2 Bn Operating income US$ 5. 3 Bn Net income US$ 2. 2 Bn 21. 5 Bn Shareholder equity US$ Long term debt US$ 5. 6 Bn

Fig. 26 - PRIVATISATION OF TELECOM ITALIA (Oct. 1997) Core Group of Stable Shareholders (6, 6% of share capital) Fondazione Cariplo 0, 5 Ina 0, 5 Alleanza 0, 4 Rolo Banca 0, 3 Imi 0, 75 Montepaschi 0, 5 Comit 0, 5 Ifil 0, 6 Credito Italiano 0, 7 Credit Suisse Group 0, 67 Compagnia S. Paolo 0, 6 Generali 0, 6

Fig. 27 - PRIVATISATION OF TELECOM ITALIA Shareholder Structure pre-tender (March 1999) Market retail 21% Foreign investors 53% Italian investors 26% CGSS Imi - S. Paolo Generali Ina Credit Suisse (SVI) Unicredito Italiano Alleanza Ifil Banca Intesa Comit Mps Rolo Total (*) Italian Istitutional investors 1, 4% 1, 1% 0, 9% 0, 7% 0, 6% 0, 5% 0, 3% Treasury Bank of Italy Employees 3, 5% 2, 3% 2, 2% Core group shareholders Others 7, 1% 10, 9% N. italian funds 7, 8% (*) It was 6, 6% in Oct. 1997, at the moment of the privatisation (99) Foreign institutional investors State Street (USA) Nomura (GIA) Merrill Lynch (USA) Bankers Trust (USA) F&F Deutsche B. (GER) Credit Suisse (SVI) Calpers (USA) Janus (USA) Standard Life (USA) Bernstein (USA) TIAA Inv. (USA) Rowe (USA) Schroder (USA) Santander (SPA) Others 1, 9% 1, 8% 1, 1% 1, 0% 0, 8% 0, 7% 0, 5% 0, 4% 0, 3% 42, 6% N. foreign funds (1335)

Fig. 28 - PRIVATISATION OF TELECOM ITALIA (Oct. 1997) The Core Group of Stable Shareholders (CGSS) - A SWOT analysis STRENGTHS WEAKNESSES • Board representation: the switch from public capital to private capital dominance • Gradual introduction of private management methods and styles • • • Golden Share: it made possible privatisation of large public utilities CGSS relatively small and fragmented Weakness of alliances Lack of hierarchy in CGSS Negative impact of CGSS on foreign stakeholders due to cultural gap Potential conflict among Board members Golden Share: reduced presence of foreign shareholders Golden Share: more open attitude to internationalisation and globalisation The physiology of contendibility OPPORTUNITIES Golden Share: potential fall back to public ownership Contendibility The pathology of contendibility THREATS

Fig. 29 - OLIVETTI’S TENDER OFFER Post-tender Shareholder Structure of Telecom Italia Tecnost Olivetti Minority shareholders (a) 2. 4% 70. 5% Tecnost 27. 1% Telecom Italia tendering shareholders 51. 02% Telecom Italia 48. 98% (a) Assuming all Tecnost minority shareholders participate in the rights issue Telecom Italia non-tendering shareholders

Fig. 30 - OLIVETTI’S TENDER OFFER The cash component Olivetti 12 Euro bn Rights Issue Tecnost 18. 5 Euro bn Rights Issue Telecom Italia tendering shareholders 7. 9 Euro bn Proceeds from Sale of Oliman 2. 6 Euro bn Rights Issue 6. 5 Euro bn Syndacated loan Mannesman Olivetti shareholders Banks