Roberto Casati

An unusually high level of M&A activity in politically-sensitive, highly-regulated sectors in Italy has revived the debate at national and European level on a number of delicate issues for the country. Italy seems to have responded well to these bids, creating the conditions for a flow of significant deals, both inbound and outbound. While that process is certainly not over yet, domestic consolidation may lay the foundations for further cross-border deal flow in the not-too-distant future. The role of the European Commission (EC) will be key in this process.

This shift has been most visible in the Italian banking sector, which has recently seen an unprecedented wave of transactions, both cross-border and domestic, which has changed and is still changing the industry landscape.

The much-needed consolidation has brought about the first large entry of a foreign bank into the Italian market. ABN Amro's acquisition of Antonveneta was a front-page saga for more than a year and uncovered to an unprecedented extent the tangle of political and business ties (both legitimate and less so) that had made prior bids fail in the Italian market.

The role of the Italian authorities in this saga is widely documented. Suffice to say that the aftermath of the scandals included a number of benefits for the Italian market. There has certainly been a change in the regulatory mood, one of those intangible aspects of any acquisition process that can make the difference between a successful deal and an unsuccessful one.

Besides the appointment of a new Governor of the Bank of Italy (but also as a consequence of that appointment), the change in mood is clearly reflected in the abolition of the rule that imposed pre-notification of takeover plans to the Bank of Italy under its supervisory guidelines for banks.

Authorisation from the Bank of Italy is normally due prior to the actual acquisition of control (or stakes exceeding certain thresholds). However, under the previous regime, even the intent to acquire control of an Italian bank, or to enter into a transaction that would trigger a mandatory tender offer on an Italian bank, had to be notified to the Bank of Italy prior to a formal decision being taken by the competent body of the acquirer.

The regulatory shift is a clear signal that the Bank of Italy intends to take a step back in the consolidation process, minimising or virtually eliminating its role in the pre-disclosure phase of acquisitions, and avoiding any political involvement in these matters. The shift of merger control powers in the banking sector from the Bank of Italy to the Italian Antitrust Authority is another substantive step in the same direction.

This impact can be clearly viewed in the market. BNP Paribas' acquisition of Banca Nazionale del Lavoro is a striking example of the new regulatory mood. Likewise, UniCredito's acquisition of German bank HVB was a healthy sign of the vitality of the Italian cross-border M&A market in the banking sector, although in this case in the outbound direction.

Having said this, besides the above cases, the rest of the recent wave of transactions hitting the Italian banking sector have been domestic. Highly significant deals such as the Intesa/San Paolo combination, the Banche Popolari Unite/Banca Lombarda & Piemontese merger or the Banco Popolare di Verona & Novara merger with Banca Popolare Italiana have been domestic matters, without any involvement or interest from abroad.

However, part of that is due to the fact that many of the recent deals have involved so-called 'banche popolari' i.e. cooperative banks whose size, territorial coverage and/or corporate structure generally makes them less attractive targets for foreign acquirers. Also, a domestic deal of the size and magnitude of the Intesa/San Paolo union was widely expected (if Italian players are to survive in the consolidating European arena). In this sense, the slowdown in the foreign acquisition momentum should not be seen as a sign that Italy is closing its gates again to cross-border deals. On one side, the example of UniCredito could be followed by a group of the size of Intesa San Paolo (although, not in the near future), while a couple of other major Italian banking groups have still not taken sides in the consolidation process and may very well combine with large international groups.

Also, while many deals in the lower size band and in the banche popolari sub-sector have so far been domestic matters, they are also creating larger national players, which could become stronger acquirers or more attractive merger partners or targets in a second phase.

It remains to be seen whether smaller regional banks will be swept up by major domestic players, form alliances with similar regional players in Italy or abroad, or whether they will be acquired by foreign banks.

Certainly, the regulatory and political environment is significantly more favourable to this type of deal now than it was two years ago and will presumably remain so in the medium term.

In all of this, the EC has played a significant role in opening up national barriers. By enforcing European Union (EU) rules on the freedom of establishment and movement of capital across Europe, the EC is perceived increasingly by market players as a key factor in facilitating M&A (and the EC also appears increasingly willing to assume such a role), as opposed to just representing a regulatory hurdle in the process due to its competition clearance function. In this respect, the speed and effectiveness of the EC's action will be crucial, especially in the context of contested, competitive bids. We can expect that the assessment of EU law issues will play a more central role in the strategic planning of European cross-border transactions both in the near future and the long term.

Similar considerations can be made with respect to another fast-consolidating sector. Europe has seen and is still seeing intense M&A activity in the electricity industry. Again, Italy has been at the forefront of this process. The entry of Electricite de France (EDF) into the Italian market back in 2001 was not an easy one due to the political and regulatory opposition in the country. EDF invested together with Fiat and other Italian investors in the holding company that launched a tender offer for Italian electricity company Edison (at the time, Montedison). However, so-called Law 301 effectively froze EDF's voting rights in Italian electricity companies at 2%. That barrier, which came under scrutiny by the EC and the Court of Justice, was finally lifted by the Italian Parliament in 2005 when EDF, together with Milan-grown utility AEM, finally acquired control of Edison. Endesa has a significant presence in the country following its acquisition of one of Enel's generating companies in 2001. Here again, a number of purely domestic transactions are consolidating the industry at a national level.

The creation of companies such as Hera, Enia and Iride through the combination of utility companies from various cities, is putting new, larger players in the foreground. Milan's AEM and ASM Brescia are currently working on their own combination. It remains to be seen whether these larger companies will be part of a Europe-wide consolidation process or whether they will continue to be independent players.

Enel's completed, attempted and/or planned acquisitions beyond the Italian borders, like UniCredito/HVB, are an example of significant Italian outbound investments in this sector.

Here again, the EC has an opportunity to play a key role in supporting the Europe-wide consolidation of the industry. Fast and effective responses from the EC will be an important facilitating factor in this process.