Barzelletta pneumatica

26 March 2015 By Rob Cox

In the old joke about a European version of hell, the cooks are British, the lovers Swiss and the mechanics French. With the $7.7 billion reshuffle of its ownership unveiled this week, Pirelli risks becoming the corporate equivalent: the management is Italian (as in the joke), its new owner will be a Chinese state enterprise, and other key partners are Russian. Minority investors won’t be laughing.

On Monday, Marco Tronchetti Provera, the chief executive who married into the Pirelli family and rose through the ranks to become its guiding shareholder, engineered a transaction by which the famed tire group will eventually be sold to a consortium led by China National Tire & Rubber. The company is a subsidiary of state-owned China National Chemical, known as ChemChina.

If that sounds like the sad end of an Italian industrial tragedy, it’s not that simple. For Tronchetti, it is the culmination of a career dedicated to exerting outsized control over industrial enterprises while wielding relative slivers of capital. Sadly for Pirelli shareholders, the transaction bears all the marks of the same faded blueprint for post-war Italian capitalism.

Milanese bank Mediobanca, through shareholder pacts and cascading holding companies, used to call the shots for industrial Italy from the so-called “salotto buono,” or good drawing room. Tronchetti is the last man standing in that salon. Mediobanca, a Pirelli shareholder, didn’t even get a role on the deal ticket.

With capital scarce at home, Tronchetti has had to stretch like never before to keep Pirelli’s tires on the track of his choosing. For starters, he is selling the 26 percent stake in Pirelli that he controls through an investment vehicle, Camfin, and then reinvesting the proceeds to become partner with a company that ultimately takes its orders from the Chinese Communist Party.

ChemChina can boast some entrepreneurial gumption in the guise of Chairman Ren Jianxin. Though he runs a behemoth with “six strategic business units, two directly affiliated units, 112 production and operation enterprises, six overseas enterprises, 24 research institutes and design academies and nine A-share listed companies,” Ren comes from plucky beginnings.

Like seemingly all Chinese of his generation, Ren did some downtime during Chairman Mao Zedong’s Cultural Revolution. But in the 1980s he bootstrapped his way into free enterprise, founding a company that started out washing tea urns, according to China Daily, and eventually became China’s first professional chemical cleaning business.

Even so, slipping under the covers with ChemChina is likely to present significant challenges to any red-blooded capitalist. Tronchetti has other strange bedfellows to keep in line, too. A year ago he brought a private investment firm directed by Rosneft, the Russian energy company, into Pirelli’s capital structure. He did that deal to chase out a private equity firm, Clessidra. Originally sought to snuff out a feud with another shareholder, the Malacalza family, the Clessidra investment became a problem because it came with a right to force Pirelli into a sale.

The Russian investment bought Tronchetti a few more years at the helm, but it quickly proved uncomfortable. A month after the ink had dried, the U.S. government slapped sanctions on Igor Sechin, Rosneft’s president, for his close association with President Vladimir Putin.

ChemChina’s arrival may offset some of the anxiety stemming from the Sechin connection. Yet it all promises to create a complicated shareholding structure atop Pirelli. ChemChina, Tronchetti’s holding company, another vehicle indirectly controlled by Tronchetti with stakes held by two Italian banks and Long Term Investments Luxembourg, the Russian investment company, will all soon be jostling at the table.

Some public investors, who own more than half of Pirelli’s stock, may decide they don’t like it. After all, they are being offered only 15 euros for their shares when the market price is a few percent higher, in part due to an expected dividend payment. Various analysts, including Mediobanca, peg Pirelli’s value higher, somewhere between 16 and 21 euros a share.

They could resist Tronchetti’s band of investors by refusing to tender their shares. But if the Tronchetti-ChemChina combo wins the agreement of more than 66 percent of Pirelli’s owners – including Camfin’s 26 percent holding – it can force a merger that would leave any remaining minority shareholders stuck with unlisted securities that carry essentially no rights.

Even if Tronchetti & Co garner less than two-thirds support, today’s investors would continue to hold their securities at the very bottom of an ownership and governance cascade that includes an Italian boss, Russian partners and a Chinese owner. Rather than a joke, that could turn into investor purgatory.

 

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