After Pirelli, Chinese shopping spree in Italy to continue

By Silvia Aloisi and Paola Arosio

MILAN (Reuters) - After years of economic decline, Italy has become a hunting ground for Chinese companies keen to take control of prized but cash-strapped corporate names such as Pirelli, and they are no longer investing from the back seat.

"The Chinese have the capital, Italy has the brands, the products and the know-how, but no money," said a banker with direct knowledge of the Pirelli deal.

State-owned China National Chemical Corp (ChemChina) is to buy the world's fifth-largest tyre-maker in a 7.1-billion-euro ($7.7 billion) deal that will put the 143-year-old Italian company in Chinese hands.

 

The planned takeover, announced on Sunday, is one of the biggest acquisitions by a Chinese company in Europe and comes after a string of buys by Chinese investors in the euro zone's third largest economy, which is struggling to emerge from its longest recession since World War Two.

The Chinese shopping spree has included power grid firms Terna and Snam , turbine maker Ansaldo and luxury yacht maker Ferretti, as well as a number of small stakes bought by the Chinese central bank in Italian blue-chips.

China's European deals have usually targeted sizeable stakes but not the outright control ChemChina will get on Pirelli.

"I think this is a clear signal that they do not want to invest behind the scenes any longer. They want to play a leading role, in the limelight," said Alberto Forchielli, managing director of Mandarin Capital Partners.

NO SHORTAGE OF TARGETS

China's growing importance as an investment partner in Europe was underlined last week when Italy joined Britain, France and Germany in backing the China-led Asian Infrastructure Investment Bank despite opposition from the United States.

A study published by KPMG before the Pirelli deal said Chinese acquisitions in Italy totalled 10 billion euros over the past five years, half of which in 2014. Last year nearly a third of foreign purchases in Italy were Chinese, it said.

There is no shortage of targets. Bankers say China's Sunrise Duty Free is among the potential bidders to buy a stake in travel retailer World Duty Free from the Benetton family, as is South Korea's Lotte group <023530.KS> .

Troubled lender Monte dei Paschi di Siena , which is looking for a buyer, is also attracting Chinese interest, sources close to the matter have told Reuters. And oil services group Saipem was courted by unknown Chinese suitors last year, sources have said.

"Asian investors are coming big time, make no mistake," an investment banker said. "Italy is one of the most open European markets and it's under-invested."

Italian Prime Minister Matteo Renzi's government has signalled it is not going to stand in their way.

The main drawbacks to foreign investments in Italy have long been lack of growth and a Byzantine legal and regulatory framework, bankers say.

CHINESE IN CHARGE

Renzi has pledged to modernise the economy and cut red tape. After more than a year in power he still seems to be enjoying a honeymoon period with overseas investors. And this year's expected pick-up in the economy is helping.

Renzi, an inveterate tweeter on all subjects, has been uncharacteristically silent about the Pirelli takeover but his government has made no protectionist noises over ChemChina, even as it snapped up one of Italy's best-known corporate names.

Bankers say Italy's attitude is encouraging Asian investments while Italian companies gain exposure to the huge Chinese market.

Joel Backaler, author of "China Goes West", said Chinese companies also needed to invest in Europe to compensate for their own very competitive domestic market.

"With labour and energy costs rising and the pressure on margins increasing, Chinese companies that want to sell at a premium price need to have something different, for example better quality tyres than those you can find in China," he said.

He and other experts said the Pirelli deal, under which ChemChina will get a majority stake in the new holding controlling the tyre-maker, could also signal a more muscular investment approach than in the past.

The agreement envisages the board of the new holding will be divided equally between the Chinese and Pirelli's existing shareholders, and the Italian management will stay on.

Under the deal, a "super-majority" equal to 90 percent of the capital will be needed to move the headquarters of Pirelli outside Italy or transfer its intellectual property to third parties, giving its Italian shareholders a veto power.

But bankers said there was little doubt over who would be increasingly calling the shots at Pirelli.

"I think we are going to see a clear power shift over the years. Ultimately, the Chinese will be in charge."

(Additional reporting by Stephen Jewkes and Agnieszka Flak; Editing by Janet Lawrence)