Bargain of the century

BUSINESS

Italian business

Feb 17th 2005
From The Economist print edition

How to double your money in Italian retailing

THERE are many ways of making money quickly in retailing. Philip Green, a British entrepreneur, took just two years to make a paper profit of £1 billion ($1.9 billion) by reviving BHS, a once-struggling British high-street chain. Another lucrative strategy is illustrated by the joint-venture between IFIL, a listed Italian investment company controlled by the Agnelli family (which also controls Fiat, Italy's largest industrial group), and Auchan, a private firm that is France's third-largest supermarket operator.

IFIL and Auchan are jointly breaking up La Rinascente, until two years ago a listed Italian retail firm. The process is nearly complete. This week, Lazards, an investment bank, opened bids for Grandi Magazzini and UPIM, La Rinascente's department-store chains. Analysts anticipate that the bids for the stores, whose value lies mainly in their property, will exceed €800m ($1.04 billion).

This money will be split between the two partners in the joint-venture that began in 1997. On completion of the sale of the department stores, IFIL will have turned its share of the joint-venture into cash—some €1.75 billion in total when other sales are also counted. Auchan has taken its share in a mixture of cash and assets. In March 2003, when IFIL and Auchan completed an offer for the 41% of La Rinascente's shares that they did not own, thereby delisting it, the implied value of the whole group was €1.77 billion. So IFIL and Auchan have doubled their money since taking La Rinascente private.

In 2003, La Rinascente's operating profit improved only modestly amid stiff competition. So how did IFIL and Auchan do it? The timing of their offer to La Rinascente's minority shareholders was certainly opportune: the price of the ordinary shares had slumped from an average of €5.90 in 2000 to €3.34 just before they made their offer which, at a 33% premium to that price, was accepted by most minority shareholders.

Offer documents sent to shareholders are supposed to contain sufficient information to allow a proper evaluation of the offer. In those sent to La Rinascente's shareholders, which were approved by Consob, Italy's stockmarket regulator, IFIL and Auchan did not hint at a break-up of the group. On the contrary, they talked of their own “implementation of medium-to long-term strategies” and of plans for La Rinascente to continue “in the various sectors in which [it] operates”. The joint-venture agreement would run until 2022 (though, from 2012, IFIL could force Auchan to buy it out).

Astonishingly, the offer documents contained no information about the market value of La Rinascente's extensive property portfolio. This portfolio, whose book value at historic cost was €1.27 billion, included plums such as 38 shopping centres (most with an Auchan hypermarket), shops in prime city-centre sites, and the valuable Rinascente building in the heart of Milan.

Yet just months after the offer was completed, the market value of the 38 shopping centres (alone) was established at €861m, following competitive bidding. An American property group was selected to buy 49% of a new La Rinascente subsidiary, Gallerie Commerciali Italia (GCI), to which the centres were sold. Following this deal La Rinascente in effect paid a special dividend worth nearly €300m each to IFIL and Auchan.

Late last year, Auchan agreed to pay €1.06 billion to IFIL to buy it out of La Rinascente's supermarket chains and of the controlling stake in GCI. This deal thus valued La Rinascente's food-retailing arm at €2.12 billion. Curiously, IFIL did not seek expert opinion on the appropriateness of the price for this, the most valuable part of the joint-venture. Nor did it invite competitive tenders—which might also have yielded a significantly higher price.

IFIL says that as La Rinascente is still pursuing its medium-term to long-term strategy, statements in the offer documents are consistent with the subsequent break-up. It adds that no valuation of the property assets was included in the offer documents because these contained public information only; and that there was no third-party involvement in the sale of the food business to Auchan because IFIL's board members felt confident about the terms of the deal. Consob, one of whose jobs is to ensure that investors are provided with meaningful information in offer documents, said that the relevant officials were too busy to respond to The Economist's questions.

Just under 1% of La Rinascente's shares remain in the hands of minority shareholders, who declined the opportunity to sell to IFIL and Auchan. These shareholders, too, have doubled their money. Asked who these shareholders are, IFIL replied: “We do not know.”

Copyright © 2005 The Economist Newspaper and The Economist Group. All rights reserved.