Capitalism: Success, Crisis, and Reform

PLSC 270 - Lecture 22 - Guest Lecture by Paolo Zanonni, Part II

Chapter 1. Introduction and Class Agenda [00:00:00]

Professor Douglas W. Rae: Okay, let's begin. We continue Monday's look at Goldman Sachs and Goldman Sachs' role in the world of financial capitalism, and as on Monday, we have my good friend Paolo Zanonni with us. He remarked after Monday's class that he didn't get a single nasty question or gesture, or anything of that nature here, and then he spoke to his chairman Lloyd Blankfein, who has been going around Ivy schools talking lately, and Blankfein reported no hostile response at Columbia or — where else did he go?

Paolo Zanonni: Columbia and Princeton.

Professor Douglas W. Rae: Let's try an anonymous poll here. We'll use the technology of humming, and what I'd like you to do is if you think that a great many people who are in responsible positions at Goldman Sachs and similar banks make more money than they really should.

Paolo Zanonni: Don't be shy.

Professor Douglas W. Rae: And those who don't think so? I read that as 65/35 in the affirmative. At any rate the — what we're going to do today is begin with an informal discussion looking at some of Paolo's work over the years at Goldman, whereas, last time we focused within the firm, today we're going to focus on the firm as an actor in the larger world, and Paolo is going to be — going to respond to a few questions about other endeavors and then he is going to take the microphone and lecture on the case of the huge Spanish energy company and battle for control of it, and you'll see when he does that that the activities of an investment banker are pretty challenging and extremely complex.

Chapter 2. Paolo Zanonni's Experience in the Luxury Goods Industry [00:02:49]

But we'll continue with — well let's start with — do any of you own any garments from Dolce & Gabbana? Does anybody know what it is? What, pray tell?

Student: They're a designer.

Professor Douglas W. Rae: Okay, they're a designer. Do they just draw things or do they — they sell things.

Student: Make and sell as well.

Professor Douglas W. Rae: Okay. Are they for the value conscious shopper?

Student: No.

Professor Douglas W. Rae: No, they are the inverse of Wal-Mart. Who's higher on the price schedule than them Paolo, anybody?

Paolo Zanonni: Hermes, I believe.

Professor Douglas W. Rae: Hermes may be higher, but it's a luxury goods company, and Paolo who dresses well, but so far as I can tell, doesn't care a bit about luxury goods, is its chairman. Tell us about, just in a few minutes, about what the object of your role there is and how it relates to the CEO and the strategic challenges that come in.

Paolo Zanonni: My role is — the company Dolce & Gabbana is about twenty-three or twenty-four years old. It was started by the two designers and by the CEO. It has grown at a rate of about 20% to 25% per year. Right before the credit crunch was — when the multiples were about, let's say, thirteen to fourteen times EBITDA, the company was more or less worth about $6 billion dollars, but the culture of the company has remained like the small company the two designers started it, and so the reason why — we developed a friendship out of chance. They have an excellent CEO. I believe it's probably — in a country where ladies CEOs are rather unusual, but I think she might be the only one of a company of that size. She's really formidable, one of the best CEOs I have met, and so we developed a friendship with her first and with the two designers afterward. At one point they thought that the main challenge of the company was to become more institutionalized because if you look — especially if you look at luxury good companies, few of them are institutionalized. Because for instance just to take a few, Armani is not, Prada is not, Dolce & Gabbana is not. Gucci is institutionalized.

Professor Douglas W. Rae: Help us — make sure we understand what's meant by institutionalized.

Paolo Zanonni: Institutionalized I mean companies where, let's say, the corporate functions are very small, and company's where you have culture and processes, and personalities, and recruitment policies, and leadership selection policies that are likely to make the company successful over the long period, regardless of the influence and the survival of the founder.

Professor Douglas W. Rae: So the firm, its strategies, and the job structure, the structure of employment responsibilities becomes permanent enough to transcend the founding group?

Paolo Zanonni: Yes and usually the best way — the best way, one of the effective ways to do it, so we'll go back to Monday, one of the effective ways to do it is to turn it into a public liability company, and have showed us, and have the discipline, and the function of the public market imposes on you. Thus, the entrepreneurs sometimes don't like to do it and so it's — to try to institutionalize the company in that way, without turning to the public market, which is something that the two owners — they own 90% of the company. The remaining 10% is owned by a few of the senior management. The company is a strange company. Since they don't want to access the public market, institutionalize a company with so — such strong personalities involved not only in designing of the goods but in the everyday life of the company is not easy. They say that I could — that I could be helpful. So far we haven't done very much, but — anyways it's a lot of fun. I have to tell you it's a lot of fun.

Chapter 3. Paolo Zanonni's Experience in the Automobile Industry [00:08:27]

Professor Douglas W. Rae: Another industrial sector that you have very substantial experience with is cars, with Ford, Fiat, Volvo and General Motors. Have I got that right?

Paolo Zanonni: Yeah.

Professor Douglas W. Rae: Did I miss something?

Paolo Zanonni: No. I have less — unless you want to talk about trucks.

Professor Douglas W. Rae: Well —

Paolo Zanonni: The two sectors are different, but you have trucks in — for people who used to have trucks, there's a fair number of truck companies.

Professor Douglas W. Rae: I actually thought your experience with helping to bring General Motors and Fiat together, and then helping them to separate themselves was very interesting, and your views about the sort of informal compact that seemed, at that time, to regulate the Detroit car companies, and which probably wasn't a great influence on the survivability of General Motors, seemed like a very interesting topic if you could give us some a few minutes on that.

Paolo Zanonni: Okay. One of the peculiarities of the car industry worldwide, definitely the car industry in Europe, is that it's one of the few industries that has been plagued by over capacity for at least the last thirty years, and one of the few industries in which this over capacity have never been taken out of the system, but in which the players have — at least until last year it was easier to survive. This is a very peculiar situation, because if you look at most private industries in which there is a large degree of private ownership, and more or less, the rules of capitalism apply, at least to a large extent, you really seldom have such a high degree of over capacity and the survival of all the players. Not only — but I'm not up to date so — but let's say that up to five years ago or six years ago when I used to be up to date, capacity had been not taken off the system but added. There is — we will have to search long and hard to find situations, in which productive facilities have been shut down, and on the contrary, we find a lot of instances in which new productive facilities have been built, but none has been shut down. Actually you could argue with that number; that you could argue that actually the over capacity has grown worse.

Players — the players have been — I mean they are not stupid people, they are conscious of the fact that they're operating in the industry which is, or which was, but I think still is plagued by over capacity, and so except for drastic reduction in capacity start closing down factories, they have been trying to address this situation in every possible way. One the ways — one of the most traditional ways that have been used has been different types of joint ventures and/or mergers and acquisitions. One of the actions that was supposed to change the face of the industry was the acquisition of Chrysler by Daimler-Benz but I think that they — the absorption didn't work well. Daimler lost a lot of money, and afterward, Chrysler was sold to a private equity firm. The only case that I know of, of a reasonably large car company being shut down, is the old British [inaudible] that was sold to a private equity firm and Dr [inaudible]. The brand was sold to a Chinese producer that wanted to have a European brand.

Professor Douglas W. Rae: Without getting down to details — well broad details but the compact that seemed to operate —

Paolo Zanonni: [inaudible]

Professor Douglas W. Rae: — between management and labor have adequate —

Paolo Zanonni: And government.

Professor Douglas W. Rae: About the management of another.

Paolo Zanonni: The government.

Professor Douglas W. Rae: And the government — spell that out a little bit.

Paolo Zanonni: It was — it's different in different nations. Let's say that — let's be general, which is my impression in working for them was that there were little incentives in vigorously addressing the situation with the kind of action that you would be needing, and that was because, let's take for instance, let's take an adversary view of a relationship in the workplace, let's suppose the management would have liked to close down one factory. The degree of unionization, the degree of — in the whole company, the degree of a relationship in countries different from the United States between the union and political parties, the degree of influence of the union's own government, and in addition the degree to which the life of the company itself depends on the government. You have seen an example in the last credit crunch in which the purchase of new cars is in fact subsidized by the government. This is new in the states, but it's not new in Europe, it's — as far as I'm concerned this is the third one that I've seen in Europe, it's not the first one. You have this very strange situation in which management, the union, and the government become, to some extent, dependent on each other and the last thing they want is to upset this balance, and the result, no extra capacity is taken off the system. No serious restructuring is being done.

Professor Douglas W. Rae: So the —

Paolo Zanonni: Now it is, now it is; now probably it is with the use of Chapter 11.

Professor Douglas W. Rae: Yes.

Paolo Zanonni: It's a huge — with a huge financial crisis and the use of Chapter 11, which has allowed — I'll tell you a personal story. I worked for Fiat, as a manager, for about fifteen years and I worked with Goldman for about fifteen years. In sum — fourteen and fifteen years in sum — if there is one deal that I tried to do three times has been Fiat's acquisition of Chrysler, and I failed three times.

Professor Douglas W. Rae: Aren't you lucky?

Paolo Zanonni: No. I think it was one of the deals that make more sense in the industry, and this time, Fiat management was successful, but why it was successful? It was successful because Chrysler was not sold by the owner; it was practically given to them by the Federal government in exchange for an industrial product, and practically debt free. As you can see, the industry is changing, but again it's changing because one — because of Chapter 11 and because of the size of this financial crisis. The compact between the three players has broken down, totally broken down.

Professor Douglas W. Rae: Well and —

Paolo Zanonni: Same thing with General Motors.

Professor Douglas W. Rae: The car industry preserving these legacy firms runs against the tide of creative destruction that you expect in capitalist industries —

Paolo Zanonni: Totally.

Professor Douglas W. Rae: — and that's highlighted by the fact that you go back to the beginning of the twentieth century there were 1,200 firms making automobiles in the United States. There obviously had to be a meltdown there because it's an industry with huge scale economies that encourages centralization.

Paolo Zanonni: Yeah but tell who is — tell me who in the United States or in France has restructured or changed the landscape in car making in the last twenty years? With the exception of some Europeans and some Japanese that have started productive procedures.

Professor Douglas W. Rae: The Japanese and Koreans are enforcing some changes I think. At any rate let's — I'm going to get offstage and let Paolo talk about an extremely complex and interesting cross border transaction which centers on Spain but involves several European countries at once.

Chapter 4. Case Discussion: Endesa Takeover Battle [00:19:14]

Paolo Zanonni: Let me try to look at one case, which is actually — let's take it one step backward. The case I would like to discuss is the attempt by the new management of a large utility company, Enel, which is only electrical, but not the only electrical utility company in Italy, to change the structure and the characteristic of the company totally, and the attempt by the management over a period of six or seven years to turn a major utility company depending mostly on one single nation, into a different company that will diminish the risk by being present into several nations, but at the same time, that will totally change the characteristic of that company.

Let me try to explain. If you take a utility, usually utility has very little risk because it lives in a regulated sector. It makes — it has an agreement with a regulator that the utility will may — would make certain level of capital investment, and in exchange, will be able to impose on the customer some tariffs. If you can imagine, utilities would be a very, very safe investment for the small investor, it would be similar to a bond. You have to do capital investment, because capital investments are a reward through a tariff system, and if you invest in the company it's like investing in a bond. If you look at utilities, have small capital appreciation, and pay high dividends.

The new management of Enel, when Enel was sort of privatized, decided that they were trying to change that completely and tried to make the boring utility into a company that was going to offer more growth, more risk, less dividend, and more capital appreciation. When you try to do that to — with a giant — that at the time that they decided to do it I think that Enel was worth about 40 billion Euros, which would make it $60 billion dollars at today's exchange rate. It's a major task. The way the management decided to do it was through changing the product mix and getting into renewable energy, but also in trying to start the policy of aggressive diversification, moving into other countries. First they moved into Eastern Europe, to some extent and Russia, but one thing that you learn when you take the helm of a $60 billion dollar corporation, is that if you try to change the characteristic of the company by a set of small size acquisitions, you run out of time, because if you are a professional — if you have a professional management team executing — execute, making and executing a small deal, it takes as much time and effort in as executing a huge one, and so what is different is the amount of risk.

So the management of Enel starts looking around at one single move that would have changed the company completely. One of the areas in the nations where they looked at was Spain. Why it was Spain? First, Spain has a first rate — as generally has a first rate public elite, it's usually — I would say it's a country where their regulatory system, especially for utilities, it's very good, it's very stable, it's well regulated, there is a centuries old structure of tariff — regulation and tariff behavior that is very good, and this has created as you can see, in a country that is really small or reasonably small, the presence of at least five or six utilities that are of a decent size. So there was — there is room for consolidation in America that is very attractive from the economic point of view. Obviously Spain was one of the first nations where the Enel management looked at, moreover as you can see, it's true there are six players but when you go to electricity you only have two players that are very important, Endesa and Iberdrola. So Enel — the management of Enel paid very close attention to the development in the Spanish market and to opportunities opening up in the Spanish markets.

What happened at one point was that — I don't know how familiar you are with Spanish as a political economic system, so let me step back for one second and give you a few — you can ask questions. By the way, you can interrupt and ask questions any time you want, because if not, this gets very boring, because it's very confusing possibly as well. A Spanish political economic system from the political point of view, it's a very stable democracy, where you tend to have two large parties, that usually occupy the government for some — for a reasonable amount — for a reasonably long time and change orderly, and there's the division between the two parties. One is a conservative parties linked with, to some extent, linked with the old Catholic heritage of Spain, and the other is a democratic socialist party, more or less linked with the socialist heritages of Spain, which is also significant.

I don't know how many of you are — well I suppose most of you are familiar with the Spanish Civil War of 1975-1977. At the same time these two parties live in a culture where regional differences and regional cleavages are very important. These are the main characteristic of the Spain — of the political system; we'll come to the economic system in a while, so two large groups strongly identified with the two main traditions in the country. One is socialist and the other is Catholic and having — also living in a situation in which you have a high degree of differentiation between different regions. Everybody knows about the Basque areas, but at the same time, you're also to consider that Catalonia, the area where Barcelona is, had been striving for autonomy, if not independence, for a very long time. These are the characteristics of the political economic system.

As far as the model of development that Spain has followed, especially in the last twenty to twenty-five years, is a model of development that is largely biased toward construction and real estate development, and so-and very entrepreneurial. So you have — you have especially in the late 1990s and in the early 2000, the creation of a lot of very entrepreneurial, very aggressive, very wealthy companies that — which line of business were mostly construction and real estate. The entrepreneurs in these companies — you say what does that have to do with utilities, and what does it have to do with the opportunities open to Enel to enter into the Spanish market? It has to do — as you can see, one of the diversification policies used by these entrepreneurial companies that have made most of the money on real estate and construction was to buy stakes into large utility companies. Why? It's a good diversification policy. It pays stable dividends, as we saw at the beginning, and plus you enter into an industrial sector that is fractionalized, and so assuming that there is consolidation, [inaudible] or seven players, you are likely to be paid a premium for the shares that you have.

So what I tried to do there is very complex, and so you have to excuse me and you have to ask questions, is that — this is different from the utility sector in any country that I have — that I know of. You have large, or you had, large construction companies as minority but significant shareholders in many of the utility companies in Spain. They are there for two reasons — for three reasons; diversification of risk because you are in a very stable business, totally different from construction and real estate. You get high dividends for the stake that you have bought, and so you get a good yield on your capital. Third, there is likely to be consolidation and so you are likely to be paid a premium for the shares that you purchased, so a very nice position to be in. But look at this for a second, in every company in which there is — for the same reason that I tried to tell you, every utility company where there is one of these construction companies as a shareholder does not have a very solid shareholder base, because one of the main shareholders is there not because of commitment to that particular industry or anything, but just for having built while it lasts and for selling the shares at a premium when there is consolidation. If you look from the point of view of someone that wants to enter the market, you have very attractive market because the regulatory regime is very good and you have a situation of not totally stable shareholder base in each of these countries.

As everybody expected, at the end of 2005, the fact that the structure of the industry had too many players, it started changing. One of the companies, Gas Natural, decided to launch an hostile bid on Endesa, counting on two things. Counting on the fact that Endesa, where the shareholder would have been the seller, for the same reason that I gave you before, and on the fact that where synergies and economies of scale and scope that could have been achieved or implemented by putting together Gas Natural and Endesa. They launched the hostile bid, but something that they didn't count on happened immediately, which is that the reactions to that bid was not very friendly by two entities; the regulators, as you can see the C&E, and the Spanish government.

Why was not the Spanish government reaction favorable? First, you have a deal that makes perfect sense from the economic and financial point of view. The shareholders of Endesa are happy because they get paid a decent premium on their stock, the company remains Spanish, synergies are going to be extracted, there is not a lot of overlapping and so there are not going to be a lot of layoffs, the ensuing company will be very strong, will definitely be a national champion, probably a European champion; so why doesn't the government like it? It happens to be that Endesa is Madrid based and Gas Natural is based on Barcelona. It also happens to be that at the same time there is a big fight in the political arena between the government party socialist, and the opposition party, the conservative and one of the issues that they are fighting on is decentralization of power within different regions. It also happens that while a large part of the power base of the socialist party is in Madrid, a reasonably large base of the power of the conservative party is in Barcelona.

So oddly enough, or naturally enough, the ruling socialist party sees the attempt by a gas company from Barcelona to try to buy the biggest, or one of, the second biggest, depends on how you count, utility company based in Madrid, as almost a political move instead of an industrial move, and they just don't like it. And so they tried to stop it, as you can see from the statement, they tried to stop it making it difficult so the regulatory agency and just trying to fight it with all the weapons that they have.

Enel, the Italian utility company, has not been the only one looking at the Spanish market. If the Spanish is that attractive, as I tried to describe it to you that means that someone else — a few other people have been looking for opportunities to enter the Spanish market and get hold of one of those prizes. One of the companies that's been looking for that is the German giant called E.On. E.On is an exceedingly sophisticated company, exceedingly. They are sophisticated, they have been a leading utility for so many years, they know all the complexities of operating in a regulated sector where you depend on the investment you make in the tariffs, so they are very sophisticated in understanding the political environment in which you operate, and which heavily influences your outcome and your choices. They see an opening, they say wait a second, and the government doesn't like the Gas Natural bid. Gas Natural doesn't have a lot of cash, so it will be difficult for them to raise — it would be difficult for them to raise the bid, at the same time, they don't seem to have political support. So maybe here there is a space for a foreign bidder that will table for the shareholders a bid that is higher than the bid of Gas Natural for Endesa.

Gutsy move, because if you look at hostile bid, cross border in Europe, in a regulated sector, I think this is the first one. Very gutsy move, very well structured, very well done, very well timed. E.On moves, and, as you noticed, the bid is significantly higher than the previous one; €27 instead of €21. In a very sophisticated way, which is worse if the company that E.On is, they also start a sophisticated lobby with the European Commission because they believe that the main threat; it is not another bidder. The main threat is the Spanish Government doesn't want a German utility own the leading champion in Madrid. There's no reason why, if they didn't like Barcelona to own it, why shouldn't like — I don't remember what year it's based, it's based in the [inaudible] somewhere, but I don't remember, I think it's near Frankfurt, but —

Student: It's Dusseldorf.

Paolo Zanonni: Dusseldorf, sorry, you are right I was wrong. E.On starts lobbying the European Commission and hopes to have an opening by the German regulators. An opening, really no bigger position comes, but an opening really doesn't come, and the Spanish government stalls, so rightly so. E.On looks at the ownership structure of Endesa and sees that there are a lot of sellers. It says, "Okay this is going to be a financial fight, let me just up the ante, I raise my bid to €34 per share, significantly higher than the offer by Gas Natural, and they think that they have a winning hand. In addition, they have all the resources. I think that it — I seem to remember that at that time E.On has cash on the balance sheet for about €100 billion — it's going to cost about $40 or $42 billion?

Again, they don't go anywhere and they get stalled, at that point, Enel, that has been watching the situation, sees an opportunity. There is a bid by Gas Natural that doesn't seem to go anywhere because of political opposition, and because it's cheap. There is a bid by the leading European champion, a utility, that is a lot richer and can become a lot richer, but doesn't go anywhere because the Spanish government is reluctant to sell or to have one of the utility — one of the national champions end up in German hands. Enel sees an opening and a strategy based on three variables. One they say, maybe we can pay as much as E.On, we don't have the same cash on the balance sheet but we have no debt, so we can try to fight it on that. Second, is we might be more acceptable to the Spanish government and that needs to be found out, and the third is, and this is really in my opinion the winning — this is really the winning perception of Enel, they say why should we buy off those construction companies, for the biggest construction company that are — that is in the capital. That can be our ally in unlocking the situation. Why should we try to buy them out? Why don't we simply go and talk to the entrepreneur — this construction is usually one entrepreneur for each company, why don't we go and talk to the entrepreneur and see what do you want. You want cash? We'll give it to you. If you want a piece of the company, we will make a deal with you. What do you want?

Oddly — naturally, now the entrepreneur says, "No, no, no the reason why I'm here is because I want to diversify my risk, I want significant opportunities to growth — to grow and so what I really want is not cash but is a piece of Endesa." Enel says, okay let's discuss, rationally now the entrepreneur, which is Acciona, stalls. Enel tried to force his hand does something very unusual. In very, very unusual in a cross border takeover company, goes into the market, and buys 10% of Endesa in the market, which according to Spanish regulation you can do, and Enel has not launched a bid yet. It's someone coming out of the left field, so they go into the market and they buy 10%, €39 per share, higher than the bid for the bid by E.On. At that point they sit around the table with the entrepreneur and say, "See, we are very serious, so we are either going — either we are going to buy this company or E.On is going to buy it, or we make a deal and together we buy it." Long negotiations start with the entrepreneur, and at the end, a deal in this negotiation Enel again — the entrepreneur stalls again or tried to get more, so Enel again decides to be aggressive and does an equity swap for a remaining 14% or 14.99% of the capital which is the maximum permitted under Spanish regulation. It tells the entrepreneur, "See we are here to stay, we now own 25% of the company, we own more than you do, and you will not get rid of us. At the same time they show E.On that they own 25% and so that they are possibly in a position to block the takeover.

So this is a battle being fought with two fronts. One, the only opportunity to win, Enel rightly decides is to make a deal with the entrepreneur; and two at the same time they have to fight the offer by E.On which, as you can see, increases this offer to €40 per share. At the same time, Enel has been negotiating with entrepreneur and they strike a deal in which 25% is going to be owned directly by Enel, but 51% of the shares are going to be owned by a joint venture company made by Enel and the entrepreneur who is Acciona, where the entrepreneur has 51%, and the entrepreneur who is scared about being trapped into a situation that is not liquid also has — also negotiate with Enel, a right of put, to put to Enel his own shares for — his own shares in Endesa, for the same price that it has been negotiated, the €41 per share. As you have seen — sorry I moved it — as you have seen the final battle is won by Enel, it made a deal with E.On on the side in which E.On is going to be sold about $10 billion dollar asset, €10 billion asset and so E.On also gets a foothold in the Spanish market but Endesa stays more or less what it is, and the situation is Enel, Acciona, with Acciona has a right of put to Enel for the shares that they own. Am I going too fast?

Professor Douglas W. Rae: You're doing fine, but you've only got about three or four minutes left.

Paolo Zanonni: I know but the rest is just the end of it. The situation is that the Endesa/E.On folds, and Endesa is now owned by Enel and Acciona. Now in the meantime, what happens in the world — and what happens is that there is a credit crunch, which, in the case of Spain, overlaps with a very severe downturn in construction and real estate. You have — we need to differentiate here between different countries. You have to think that the reliance on debt and the reliance on construction and real estate, in the case of Spain, was so high that while in Europe you have an unemployment rate that is below 10% and in the states you have one that is 10%. In Spain you have an unemployment rate which is 24%, if well counted. The whole model of development of the Spanish economy is in doubt, or is in crisis, because of the severe crisis in construction and real estate.

It's easier to add that most of the companies that have been operating there, including Acciona, the partner of E.On had been buying shares with loans by the Spanish banks. Not only you have the collapse in the prices of the real estate asset, you have also the trouble in refinancing the loan that have been — the money that has been borrowed by the construction companies. So for instance, Enel partner starts running into financial trouble, it starts running into financial troubles that are so big that probably the only security that he can give to the banks, or renewing the loan that they have extended to him, is the put of the 25% of Endesa that he owns, or 25 point something to Enel. That put, by the way, is at a price, that is the price of the bid, which is 41. At the same time the price of the Endesa shares of the market have gone down to 20 or 25, between 20 and 25, but that doesn't mean much. Enel sees the opportunity to get control of all of the Endesa shares, approaches the entrepreneur and says, okay you have the right of put for 2011, why don't we negotiate a situation in which we would pay you less than €31 per share, you will get some assets, and we will get your 25% of the shares, so there is an extensive negotiation, and Enel ends up buying the 25% of Acciona, dissolving the joint venture and getting control of 92% of Endesa.

However, you can see what this does to Enel. The bid was largely based on debt, the purchase; the accelerated purchase of the shares has increased the debt, so now Enel finds itself with $22 or $23 billion dollar market cap, equity market cap of $65 billion dollar debt. The change in — the change that the management wanted has occurred, but what happened is that because of the way that the management, and because of the circumstances, there is a huge load of debt on the company and it is true that they wanted to have a more risky company with a higher potential of goals, but investors are not very happy about having invested in a company in which the equity — the debt to equity ratio is 3:1, or 3.2:1.

Enel thinks that a capital increase in order to — a dividend reduction and a capital increase. What is the problem? The problem is nothing, probably there is enough room, we advise them, there is enough room — there is enough appetite in the market to do a capital decrease, but the problem is that the Italian government directly through the treasury is — holds 32% of Enel, and as you know, these are not European and American governments these days are saddled with a large amount of debt that they will have to repay. So at the level of the Italian government there is very little appetite for subscribing the rights issue. On the other hand, there is very little appetite for being diluted and make Enel into a totally public company, because when you own more than 30%, according to Italian law more or less, you nominate 100% of the board or 90% of the board. There is the final effort by the management is a negotiation, this time not with the Spanish government, but with the Italian government, in order to try to convince the government to let the capital increase go forward and either be diluted or subscribed, and this is not concerned to the class, but the government eventually gave up and found a way in which they could subscribe to the capital increase without increasing the government deficit of the country.

Professor Douglas W. Rae: Thanks Paolo, we look forward to having you back in the Spring.

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