Sunday, May 17, 2015

Asian multinationals — the Italian job

So the recent flurry of big-ticket Asian investment deals in Italy has come as a surprise. In late 2013, Mitsui of Japan invested in Basilicata’s Tempa Rossa, the largest onshore oil field in Western Europe. In 2014, State Grid Corporation of China (SGCC) acquired a 35 per cent stake in CDP Reti, the government-controlled vehicle that holds separate 30 per cent stakes in Terna (the first grid operator for electricity transmission in Europe) and Snam (an integrated group of gas infrastructures). This latest deal is the largest ever single overseas investment made by SGCC and the largest ever made by Chinese investors in a non-listed European company. SGCC representatives have now joined the board of Terna and Snam, both of which are listed on the Milan Stock Exchange.

In another high-profile deal, in February 2014 Japanese industrial conglomerate Hitachi snapped up Finmeccanica rail assets in a €809 million (US$905 million) cash deal. One month later, in what is one of the biggest Chinese overseas acquisitions ever, ChemChina — the country’s largest chemicals company — cut two separate but related deals to acquire a controlling stake in Pirelli, the multinational tyre company. For the past few weeks, two-time former Italian prime minister Silvio Berlusconi has been in talks with a group of Chinese and Thai investors to relinquish control over AC Milan.

The aggregate outcome is noteworthy. According to recent research by Dagong (the Chinese credit agency that has its European headquarters in Milan), China accounted for 27 per cent of incoming foreign investment in Italy in 2014. Italy ranked as the second most attractive European destination after the UK. By deals’ value, in 2012 Japan was already the fifth-largest foreign acquirer in Italy.

Although Ren Jianxin, chairman of ChemChina, is a senior member of the Chinese Communist Party, public opinion in Italy has been much more calm than in other European and Western countries, where the ‘China challenge’ is regularly criticised. Soul-searching will definitely be much greater if the second Milan soccer giant comes under Asian ownership (the Indonesian tycoon Erick Thohir bought a 70 per cent stake in Milan’s other team, FC Inter Milan, in November 2013).

Such high-profile corporate events testify to a new openness to foreign multinationals in Italy. On the one hand, Italy is slowly emerging from a painful three-dip recession. Investment, at 17.8 per cent of GDP in 2013, is now 1.5 percentage points lower than in the European Union as a whole. Many top corporations are starved of capital.

On the other hand, Italian companies appear to be a perfect match for Asian investors seeking technology, market access and brand names. AC Milan and Pirelli are both known and celebrated internationally. For Japan’s Hitachi, companies like Ansaldo STS, which makes rail signalling equipment, and AnsaldoBreda, which builds the record-breaking ETR 500 high-speed train, will strengthen the company’s position in Europe and then allow it to expand into emerging economies.

Against the background of China’s ‘new normal’ of slower growth and lower reliance on construction and heavy industry, Chinese and other Asian multinationals are investing in high-tech manufacturing and services. It is fair to anticipate more such deals in Italy in the coming years. The potential for Asian investment is huge. The stock of Chinese investment in Italy in 2013 was less than one-fourth of that in Sweden. In Japan’s case, only 1 per cent of its European foreign direct investment stock is in Italy. For South Korea, the stock in Italy is one-third of that in France.

This is not to say that — as the Italians do — sarà tutto rose e fiori (it will all be roses and flowers). Post-merger integration is a complex game. For all the talk about respect for Pirelli’s corporate history and admiration for chief executive Marco Tronchetti Provera, ChemChina is a strategic industrial player that aims to create value from the investment. Similarly, Hitachi first has to turn round AnsaldoBreda’s business — and probably shed quite a few jobs — before it can successfully compete in new markets outside of Europe. Asian players will also jostle among themselves in the crowded global market for Italian assets. Hitachi was competing with two Chinese rivals for the Finmeccanica subsidiaries, while Pirelli had long been coveted by other Western tyre-makers.

At the end of the day, the ultimate goal of Asian multinationals buying Italian companies is to take them global. Ownership doesn’t necessarily matter. But the key for Asian multinationals will be the ability to allow these companies to operate fairly autonomously, instead of trying to merge very different firms too quickly.

Andrea Goldstein is a senior economist at the OECD, Paris; the views expressed are his own.


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