WEBVTT 00:00.570 --> 00:04.510 Prof: Okay, let's begin. 00:04.510 --> 00:11.830 We continue Monday's look at Goldman Sachs and Goldman Sachs' 00:11.830 --> 00:17.320 role in the world of financial capitalism, 00:17.320 --> 00:23.080 and as on Monday, we have my good friend Paolo 00:23.077 --> 00:25.377 Zanonni with us. 00:25.380 --> 00:30.390 He remarked after Monday's class that he didn't get a 00:30.385 --> 00:33.845 single nasty question or gesture, 00:33.850 --> 00:40.200 or anything of that nature here, and then he spoke to his 00:40.196 --> 00:45.296 chairman Lloyd Blankfein, who has been going around Ivy 00:45.303 --> 00:49.723 schools talking lately, and Blankfein reported no 00:49.720 --> 00:53.460 hostile response at Columbia or-- 00:53.460 --> 00:55.060 where else did he go? 00:55.060 --> 01:06.540 Paolo Zanonni: Columbia and Princeton. 01:06.540 --> 01:09.510 Prof: Let's try an anonymous poll here. 01:09.510 --> 01:13.880 We'll use the technology of humming, 01:13.879 --> 01:19.869 and what I'd like you to do is if you think that a great many 01:19.869 --> 01:25.759 people who are in responsible positions at Goldman Sachs and 01:25.759 --> 01:31.549 similar banks make more money than they really should. 01:31.549 --> 01:34.369 Paolo Zanonni: Don't be shy. 01:34.370 --> 01:39.520 Prof: And those who don't think so? 01:39.519 --> 01:47.299 I read that as 65/35 in the affirmative. 01:47.300 --> 01:53.980 At any rate the--what we're going to do today is begin with 01:53.982 --> 02:01.132 an informal discussion looking at some of Paolo's work over the 02:01.125 --> 02:05.695 years at Goldman, whereas, last time we focused 02:05.701 --> 02:09.001 within the firm, today we're going to focus on 02:09.000 --> 02:12.010 the firm as an actor in the larger world, 02:12.008 --> 02:19.208 and Paolo is going to be--going to respond to a few questions 02:19.210 --> 02:25.570 about other endeavors and then he is going to take the 02:25.568 --> 02:32.768 microphone and lecture on the case of the huge Spanish energy 02:32.770 --> 02:38.050 company and battle for control of it, 02:38.050 --> 02:43.600 and you'll see when he does that that the activities of an 02:43.599 --> 02:48.759 investment banker are pretty challenging and extremely 02:48.760 --> 02:49.930 complex. 02:49.930 --> 02:57.370 But we'll continue with--well let's start with--do any of you 02:57.366 --> 03:02.816 own any garments from Dolce & Gabbana? 03:02.819 --> 03:07.929 Does anybody know what it is? 03:07.930 --> 03:18.120 What, pray tell? 03:18.120 --> 03:19.890 Student: They're a designer. 03:19.889 --> 03:21.269 Prof: Okay, they're a designer. 03:21.270 --> 03:25.010 Do they just draw things or do they--they sell things. 03:25.008 --> 03:25.898 Student: Make and sell as well. 03:25.900 --> 03:27.120 Prof: Okay. 03:27.120 --> 03:30.010 Are they for the value conscious shopper? 03:30.009 --> 03:30.719 Student: No. 03:30.720 --> 03:37.300 Prof: No, they are the inverse of 03:37.303 --> 03:39.163 Wal-Mart. 03:39.160 --> 03:42.560 Who's higher on the price schedule than them Paolo, 03:42.560 --> 03:43.240 anybody? 03:43.240 --> 03:44.120 Paolo Zanonni: Hermes, 03:44.116 --> 03:44.476 I believe. 03:44.479 --> 03:47.689 Prof: Hermes may be higher, but it's a luxury goods 03:47.690 --> 03:50.640 company, and Paolo who dresses well, 03:50.639 --> 03:56.009 but so far as I can tell, doesn't care a bit about luxury 03:56.006 --> 04:00.686 goods, is its chairman. 04:00.688 --> 04:03.128 Tell us about, just in a few minutes, 04:03.128 --> 04:07.798 about what the object of your role there is and how it relates 04:07.799 --> 04:12.009 to the CEO and the strategic challenges that come in. 04:12.008 --> 04:15.828 Paolo Zanonni: My role is--the company 04:15.826 --> 04:20.486 Dolce & Gabbana is about twenty-three or twenty-four 04:20.492 --> 04:21.682 years old. 04:21.680 --> 04:26.590 It was started by the two designers and by the CEO. 04:26.589 --> 04:35.259 It has grown at a rate of about 20% to 25% per year. 04:35.259 --> 04:42.339 Right before the credit crunch was-- 04:42.339 --> 04:45.839 when the multiples were about, let's say, 04:45.839 --> 04:52.539 thirteen to fourteen times EBITDA, the company was more or 04:52.543 --> 04:57.133 less worth about $6 billion dollars, 04:57.129 --> 05:02.499 but the culture of the company has remained like the small 05:02.495 --> 05:06.255 company the two designers started it, 05:06.259 --> 05:12.419 and so the reason why--we developed a friendship out of 05:12.422 --> 05:13.452 chance. 05:13.449 --> 05:16.709 They have an excellent CEO. 05:16.709 --> 05:21.009 I believe it's probably--in a country where ladies CEOs are 05:21.009 --> 05:24.199 rather unusual, but I think she might be the 05:24.197 --> 05:27.087 only one of a company of that size. 05:27.089 --> 05:31.009 She's really formidable, one of the best CEOs I have 05:31.012 --> 05:35.242 met, and so we developed a friendship with her first and 05:35.242 --> 05:38.092 with the two designers afterward. 05:38.089 --> 05:41.929 At one point they thought that the main challenge of the 05:41.930 --> 05:45.980 company was to become more institutionalized because if you 05:45.980 --> 05:48.110 look-- especially if you look at 05:48.108 --> 05:50.858 luxury good companies, few of them are 05:50.855 --> 05:52.595 institutionalized. 05:52.600 --> 05:58.520 Because for instance just to take a few, Armani is not, 05:58.516 --> 06:03.226 Prada is not, Dolce & Gabbana is not. 06:03.230 --> 06:06.070 Gucci is institutionalized. 06:06.069 --> 06:08.979 Prof: Help us--make sure we understand what's meant by 06:08.980 --> 06:09.950 institutionalized. 06:09.949 --> 06:14.089 Paolo Zanonni: Institutionalized I mean 06:14.088 --> 06:18.708 companies where, let's say, the corporate 06:18.708 --> 06:26.558 functions are very small, and company's where you have 06:26.555 --> 06:32.915 culture and processes, and personalities, 06:32.923 --> 06:39.583 and recruitment policies, and leadership selection 06:39.579 --> 06:47.429 policies that are likely to make the company successful over the 06:47.425 --> 06:51.265 long period, regardless of the influence and 06:51.274 --> 06:53.014 the survival of the founder. 06:53.009 --> 06:54.829 Prof: So the firm, its strategies, 06:54.829 --> 06:59.209 and the job structure, the structure of employment 06:59.211 --> 07:03.951 responsibilities becomes permanent enough to transcend 07:03.951 --> 07:06.011 the founding group? 07:06.009 --> 07:07.749 Paolo Zanonni: Yes and usually the best 07:07.745 --> 07:09.745 way-- the best way, 07:09.745 --> 07:14.685 one of the effective ways to do it, 07:14.689 --> 07:18.279 so we'll go back to Monday, one of the effective ways to do 07:18.279 --> 07:21.499 it is to turn it into a public liability company, 07:21.500 --> 07:25.590 and have showed us, and have the discipline, 07:25.589 --> 07:29.859 and the function of the public market imposes on you. 07:29.860 --> 07:33.840 Thus, the entrepreneurs sometimes don't like to do it 07:33.841 --> 07:38.091 and so it's-- to try to institutionalize the 07:38.088 --> 07:42.528 company in that way, without turning to the public 07:42.526 --> 07:44.926 market, which is something that the two 07:44.928 --> 07:50.608 owners-- they own 90% of the company. 07:50.610 --> 07:55.690 The remaining 10% is owned by a few of the senior management. 07:55.690 --> 07:59.270 The company is a strange company. 07:59.269 --> 08:02.839 Since they don't want to access the public market, 08:02.838 --> 08:06.568 institutionalize a company with so-- 08:06.569 --> 08:10.829 such strong personalities involved not only in designing 08:10.829 --> 08:16.019 of the goods but in the everyday life of the company is not easy. 08:16.019 --> 08:19.429 They say that I could--that I could be helpful. 08:19.430 --> 08:24.340 So far we haven't done very much, but--anyways it's a lot of 08:24.339 --> 08:24.839 fun. 08:24.839 --> 08:26.769 I have to tell you it's a lot of fun. 08:26.769 --> 08:32.049 Prof: Another industrial sector that you have very 08:32.051 --> 08:36.391 substantial experience with is cars, with Ford, 08:36.389 --> 08:39.689 Fiat, Volvo and General Motors. 08:39.690 --> 08:40.860 Have I got that right? 08:40.860 --> 08:41.120 Paolo Zanonni: Yeah. 08:41.120 --> 08:42.260 Prof: Did I miss something? 08:42.259 --> 08:44.389 Paolo Zanonni: No. 08:44.389 --> 08:48.049 I have less--unless you want to talk about trucks. 08:48.049 --> 08:50.379 Prof: Well-- Paolo Zanonni: 08:50.381 --> 08:52.391 The two sectors are different, 08:52.389 --> 08:57.269 but you have trucks in--for people who used to have trucks, 08:57.269 --> 08:59.639 there's a fair number of truck companies. 08:59.639 --> 09:04.379 Prof: I actually thought your experience with helping to 09:04.384 --> 09:07.604 bring General Motors and Fiat together, 09:07.600 --> 09:12.810 and then helping them to separate themselves was very 09:12.807 --> 09:17.217 interesting, and your views about the sort 09:17.222 --> 09:21.552 of informal compact that seemed, at that time, 09:21.553 --> 09:24.373 to regulate the Detroit car companies, 09:24.370 --> 09:30.060 and which probably wasn't a great influence on the 09:30.062 --> 09:35.782 survivability of General Motors, seemed like a very interesting 09:35.784 --> 09:38.824 topic if you could give us some a few minutes on that. 09:38.820 --> 09:42.270 Paolo Zanonni: Okay. 09:42.269 --> 09:50.319 One of the peculiarities of the car industry worldwide, 09:50.320 --> 09:54.240 definitely the car industry in Europe, 09:54.240 --> 10:02.130 is that it's one of the few industries that has been plagued 10:02.126 --> 10:09.476 by over capacity for at least the last thirty years, 10:09.480 --> 10:15.510 and one of the few industries in which this over capacity have 10:15.511 --> 10:19.271 never been taken out of the system, 10:19.269 --> 10:24.639 but in which the players have--at least until last year 10:24.635 --> 10:27.315 it was easier to survive. 10:27.320 --> 10:29.900 This is a very peculiar situation, 10:29.899 --> 10:35.689 because if you look at most private industries in which 10:35.691 --> 10:40.841 there is a large degree of private ownership, 10:40.840 --> 10:44.940 and more or less, the rules of capitalism apply, 10:44.940 --> 10:50.370 at least to a large extent, you really seldom have such a 10:50.365 --> 10:56.855 high degree of over capacity and the survival of all the players. 10:56.860 --> 11:01.230 Not only--but I'm not up to date so-- 11:01.230 --> 11:04.720 but let's say that up to five years ago or six years ago when 11:04.719 --> 11:09.179 I used to be up to date, capacity had been not taken off 11:09.178 --> 11:11.228 the system but added. 11:11.230 --> 11:15.840 There is--we will have to search long and hard to find 11:15.841 --> 11:20.161 situations, in which productive facilities 11:20.158 --> 11:24.488 have been shut down, and on the contrary, 11:24.488 --> 11:30.658 we find a lot of instances in which new productive facilities 11:30.662 --> 11:35.292 have been built, but none has been shut down. 11:35.288 --> 11:37.898 Actually you could argue with that number; 11:37.899 --> 11:44.899 that you could argue that actually the over capacity has 11:44.898 --> 11:46.678 grown worse. 11:46.678 --> 11:50.408 Players--the players have been--I mean they are not stupid 11:50.405 --> 11:52.665 people, they are conscious of the fact 11:52.672 --> 11:55.362 that they're operating in the industry which is, 11:55.360 --> 11:59.640 or which was, but I think still is plagued by 11:59.636 --> 12:04.416 over capacity, and so except for drastic 12:04.418 --> 12:11.048 reduction in capacity start closing down factories, 12:11.048 --> 12:14.958 they have been trying to address this situation in every 12:14.961 --> 12:16.031 possible way. 12:16.028 --> 12:21.748 One the ways--one of the most traditional ways that have been 12:21.754 --> 12:27.584 used has been different types of joint ventures and/or mergers 12:27.576 --> 12:29.576 and acquisitions. 12:29.580 --> 12:36.930 One of the actions that was supposed to change the face of 12:36.926 --> 12:45.036 the industry was the acquisition of Chrysler by Daimler-Benz but 12:45.044 --> 12:52.164 I think that they-- the absorption didn't work well. 12:52.158 --> 12:55.308 Daimler lost a lot of money, and afterward, 12:55.307 --> 12:58.677 Chrysler was sold to a private equity firm. 12:58.678 --> 13:03.698 The only case that I know of, of a reasonably large car 13:03.695 --> 13:07.595 company being shut down, is the old British 13:07.596 --> 13:10.286 > 13:10.288 --> 13:13.718 that was sold to a private equity firm and 13:13.721 --> 13:16.151 Dr> 13:16.149 --> 13:22.429 The brand was sold to a Chinese producer that wanted to have a 13:22.428 --> 13:24.178 European brand. 13:24.178 --> 13:29.008 Prof: Without getting down to details--well broad 13:29.014 --> 13:33.504 details but the compact that seemed to operate-- 13:33.500 --> 13:37.130 Prof: --between management and labor have 13:37.125 --> 13:38.355 adequate-- Paolo Zanonni: 13:38.361 --> 13:38.651 And government. 13:38.649 --> 13:40.789 Prof: About the management of another. 13:40.788 --> 13:41.858 Paolo Zanonni: The government. 13:41.860 --> 13:44.610 Prof: And the government--spell that out a 13:44.614 --> 13:45.364 little bit. 13:45.360 --> 13:48.830 Paolo Zanonni: It was--it's different in 13:48.825 --> 13:50.295 different nations. 13:50.298 --> 13:56.428 Let's say that--let's be general, which is my impression 13:56.427 --> 14:02.997 in working for them was that there were little incentives in 14:03.000 --> 14:08.680 vigorously addressing the situation with the kind of 14:08.682 --> 14:13.142 action that you would be needing, 14:13.139 --> 14:17.339 and that was because, let's take for instance, 14:17.340 --> 14:24.370 let's take an adversary view of a relationship in the workplace, 14:24.370 --> 14:28.920 let's suppose the management would have liked to close down 14:28.921 --> 14:30.021 one factory. 14:30.019 --> 14:35.989 The degree of unionization, the degree of-- 14:35.990 --> 14:39.320 in the whole company, the degree of a relationship in 14:39.323 --> 14:43.113 countries different from the United States between the union 14:43.107 --> 14:47.397 and political parties, the degree of influence of the 14:47.403 --> 14:52.253 union's own government, and in addition the degree to 14:52.249 --> 14:56.919 which the life of the company itself depends on the 14:56.921 --> 14:58.231 government. 14:58.230 --> 15:04.000 You have seen an example in the last credit crunch in which the 15:04.003 --> 15:09.873 purchase of new cars is in fact subsidized by the government. 15:09.870 --> 15:13.230 This is new in the states, but it's not new in Europe, 15:13.230 --> 15:15.950 it's--as far as I'm concerned this is the third one that I've 15:15.945 --> 15:18.345 seen in Europe, it's not the first one. 15:18.350 --> 15:25.600 You have this very strange situation in which management, 15:25.600 --> 15:28.850 the union, and the government become, 15:28.850 --> 15:33.130 to some extent, dependent on each other and the 15:33.134 --> 15:37.704 last thing they want is to upset this balance, 15:37.700 --> 15:41.700 and the result, no extra capacity is taken off 15:41.702 --> 15:42.862 the system. 15:42.860 --> 15:47.240 No serious restructuring is being done. 15:47.240 --> 15:49.370 Prof: So the-- Paolo Zanonni: 15:49.365 --> 15:50.515 Now it is, now it is; 15:50.519 --> 15:53.039 now probably it is with the use of Chapter 11. 15:53.039 --> 15:54.039 Prof: Yes. 15:54.038 --> 15:57.008 Paolo Zanonni: It's a huge--with a huge 15:57.009 --> 16:00.369 financial crisis and the use of Chapter 11, which has 16:00.368 --> 16:03.208 allowed--I'll tell you a personal story. 16:03.210 --> 16:05.970 I worked for Fiat, as a manager, 16:05.971 --> 16:11.141 for about fifteen years and I worked with Goldman for about 16:11.135 --> 16:12.735 fifteen years. 16:12.740 --> 16:16.180 In sum--fourteen and fifteen years in sum-- 16:16.178 --> 16:20.318 if there is one deal that I tried to do three times has been 16:20.316 --> 16:26.206 Fiat's acquisition of Chrysler, and I failed three times. 16:26.210 --> 16:27.360 Prof: Aren't you lucky? 16:27.360 --> 16:27.830 Paolo Zanonni: No. 16:27.830 --> 16:31.600 I think it was one of the deals that make more sense in the 16:31.596 --> 16:35.166 industry, and this time, Fiat management was successful, 16:35.171 --> 16:37.121 but why it was successful? 16:37.120 --> 16:42.110 It was successful because Chrysler was not sold by the 16:42.106 --> 16:45.466 owner; it was practically given to 16:45.467 --> 16:51.167 them by the Federal government in exchange for an industrial 16:51.168 --> 16:54.838 product, and practically debt free. 16:54.840 --> 16:57.980 As you can see, the industry is changing, 16:57.984 --> 17:02.784 but again it's changing because one--because of Chapter 11 and 17:02.778 --> 17:06.628 because of the size of this financial crisis. 17:06.630 --> 17:10.060 The compact between the three players has broken down, 17:10.057 --> 17:11.477 totally broken down. 17:11.480 --> 17:13.150 Prof: Well and-- Paolo Zanonni: 17:13.148 --> 17:14.168 Same thing with General Motors. 17:14.170 --> 17:18.400 Prof: The car industry preserving these legacy firms 17:18.404 --> 17:22.284 runs against the tide of creative destruction that you 17:22.275 --> 17:25.045 expect in capitalist industries-- 17:25.049 --> 17:26.319 Paolo Zanonni: Totally. 17:26.318 --> 17:30.748 Prof: --and that's highlighted by the fact that you 17:30.747 --> 17:35.327 go back to the beginning of the twentieth century there were 17:35.329 --> 17:39.679 1,200 firms making automobiles in the United States. 17:39.680 --> 17:43.280 There obviously had to be a meltdown there because it's an 17:43.277 --> 17:46.367 industry with huge scale economies that encourages 17:46.369 --> 17:47.569 centralization. 17:47.568 --> 17:48.858 Paolo Zanonni: Yeah but tell who is-- 17:48.858 --> 17:53.898 tell me who in the United States or in France has 17:53.897 --> 17:59.877 restructured or changed the landscape in car making in the 17:59.880 --> 18:02.190 last twenty years? 18:02.190 --> 18:05.180 With the exception of some Europeans and some Japanese that 18:05.181 --> 18:07.091 have started productive procedures. 18:07.088 --> 18:11.828 Prof: The Japanese and Koreans are enforcing some 18:11.828 --> 18:13.378 changes I think. 18:13.380 --> 18:20.280 At any rate let's--I'm going to get offstage and let Paolo talk 18:20.276 --> 18:26.276 about an extremely complex and interesting cross border 18:26.281 --> 18:32.291 transaction which centers on Spain but involves several 18:32.288 --> 18:35.958 European countries at once. 18:35.960 --> 19:14.690 19:14.690 --> 19:20.840 Paolo Zanonni: Let me try to look at one 19:20.844 --> 19:28.574 case, which is actually--let's take it one step backward. 19:28.568 --> 19:33.518 The case I would like to discuss is the attempt by the 19:33.518 --> 19:37.718 new management of a large utility company, 19:37.720 --> 19:43.180 Enel, which is only electrical, but not the only electrical 19:43.182 --> 19:49.222 utility company in Italy, to change the structure and the 19:49.215 --> 19:53.595 characteristic of the company totally, 19:53.598 --> 19:59.488 and the attempt by the management over a period of six 19:59.492 --> 20:06.392 or seven years to turn a major utility company depending mostly 20:06.387 --> 20:12.477 on one single nation, into a different company that 20:12.479 --> 20:19.429 will diminish the risk by being present into several nations, 20:19.430 --> 20:24.330 but at the same time, that will totally change the 20:24.328 --> 20:27.628 characteristic of that company. 20:27.630 --> 20:29.740 Let me try to explain. 20:29.740 --> 20:35.630 If you take a utility, usually utility has very little 20:35.627 --> 20:40.737 risk because it lives in a regulated sector. 20:40.740 --> 20:46.220 It makes--it has an agreement with a regulator that the 20:46.220 --> 20:52.060 utility will may-- would make certain level of 20:52.063 --> 20:57.663 capital investment, and in exchange, 20:57.656 --> 21:06.356 will be able to impose on the customer some tariffs. 21:06.358 --> 21:11.618 If you can imagine, utilities would be a very, 21:11.615 --> 21:16.635 very safe investment for the small investor, 21:16.637 --> 21:20.607 it would be similar to a bond. 21:20.608 --> 21:24.388 You have to do capital investment, because capital 21:24.394 --> 21:28.414 investments are a reward through a tariff system, 21:28.410 --> 21:31.520 and if you invest in the company it's like investing in a 21:31.520 --> 21:31.910 bond. 21:31.910 --> 21:35.920 If you look at utilities, have small capital 21:35.921 --> 21:39.561 appreciation, and pay high dividends. 21:39.558 --> 21:43.108 The new management of Enel, when Enel was sort of 21:43.105 --> 21:46.645 privatized, decided that they were trying 21:46.650 --> 21:51.930 to change that completely and tried to make the boring utility 21:51.929 --> 21:56.689 into a company that was going to offer more growth, 21:56.690 --> 22:04.900 more risk, less dividend, and more capital appreciation. 22:04.900 --> 22:08.670 When you try to do that to--with a giant-- 22:08.670 --> 22:11.670 that at the time that they decided to do it I think that 22:11.665 --> 22:13.895 Enel was worth about 40 billion Euros, 22:13.900 --> 22:17.620 which would make it $60 billion dollars at today's exchange 22:17.619 --> 22:18.069 rate. 22:18.069 --> 22:22.619 It's a major task. 22:22.618 --> 22:30.138 The way the management decided to do it was through changing 22:30.142 --> 22:36.902 the product mix and getting into renewable energy, 22:36.900 --> 22:43.260 but also in trying to start the policy of aggressive 22:43.259 --> 22:48.889 diversification, moving into other countries. 22:48.890 --> 22:52.990 First they moved into Eastern Europe, 22:52.990 --> 22:59.340 to some extent and Russia, but one thing that you learn 22:59.344 --> 23:06.644 when you take the helm of a $60 billion dollar corporation, 23:06.640 --> 23:13.190 is that if you try to change the characteristic of the 23:13.190 --> 23:19.000 company by a set of small size acquisitions, 23:19.000 --> 23:22.110 you run out of time, because if you are a 23:22.106 --> 23:25.896 professional-- if you have a professional 23:25.901 --> 23:30.961 management team executing-- execute, making and executing a 23:30.960 --> 23:34.140 small deal, it takes as much time and 23:34.138 --> 23:37.318 effort in as executing a huge one, 23:37.318 --> 23:42.348 and so what is different is the amount of risk. 23:42.348 --> 23:48.968 So the management of Enel starts looking around at one 23:48.973 --> 23:56.603 single move that would have changed the company completely. 23:56.598 --> 24:02.648 One of the areas in the nations where they looked at was Spain. 24:02.650 --> 24:04.940 Why it was Spain? 24:04.940 --> 24:12.820 First, Spain has a first rate--as generally has a first 24:12.824 --> 24:19.704 rate public elite, it's usually--I would say it's 24:19.698 --> 24:25.028 a country where their regulatory system, 24:25.028 --> 24:29.818 especially for utilities, it's very good, 24:29.818 --> 24:33.948 it's very stable, it's well regulated, 24:33.950 --> 24:42.600 there is a centuries old structure of tariff-- 24:42.598 --> 24:45.408 regulation and tariff behavior that is very good, 24:45.410 --> 24:48.540 and this has created as you can see, 24:48.538 --> 24:52.438 in a country that is really small or reasonably small, 24:52.440 --> 25:01.310 the presence of at least five or six utilities that are of a 25:01.306 --> 25:03.406 decent size. 25:03.410 --> 25:10.080 So there was--there is room for consolidation in America that is 25:10.083 --> 25:15.383 very attractive from the economic point of view. 25:15.380 --> 25:22.430 Obviously Spain was one of the first nations where the Enel 25:22.431 --> 25:27.771 management looked at, moreover as you can see, 25:27.767 --> 25:33.907 it's true there are six players but when you go to electricity 25:33.911 --> 25:39.351 you only have two players that are very important, 25:39.349 --> 25:43.029 Endesa and Iberdrola. 25:43.029 --> 25:51.099 So Enel--the management of Enel paid very close attention to the 25:51.096 --> 25:57.876 development in the Spanish market and to opportunities 25:57.884 --> 26:02.754 opening up in the Spanish markets. 26:02.750 --> 26:07.190 What happened at one point was that-- 26:07.190 --> 26:10.090 I don't know how familiar you are with Spanish as a political 26:10.090 --> 26:15.580 economic system, so let me step back for one 26:15.575 --> 26:21.005 second and give you a few-- you can ask questions. 26:21.009 --> 26:23.569 By the way, you can interrupt and ask questions any time you 26:23.571 --> 26:24.511 want, because if not, 26:24.508 --> 26:29.148 this gets very boring, because it's very confusing 26:29.152 --> 26:31.622 possibly as well. 26:31.618 --> 26:37.478 A Spanish political economic system from the political point 26:37.477 --> 26:42.987 of view, it's a very stable democracy, 26:42.988 --> 26:49.538 where you tend to have two large parties, 26:49.538 --> 26:53.498 that usually occupy the government for some-- 26:53.500 --> 27:00.320 for a reasonable amount--for a reasonably long time and change 27:00.319 --> 27:02.679 orderly, and there's the division 27:02.681 --> 27:03.861 between the two parties. 27:03.858 --> 27:08.558 One is a conservative parties linked with, 27:08.558 --> 27:13.438 to some extent, linked with the old Catholic 27:13.436 --> 27:19.306 heritage of Spain, and the other is a democratic 27:19.311 --> 27:23.181 socialist party, more or less linked with the 27:23.178 --> 27:26.928 socialist heritages of Spain, which is also significant. 27:26.930 --> 27:31.110 I don't know how many of you are--well I suppose most of you 27:31.111 --> 27:35.011 are familiar with the Spanish Civil War of 1975-1977. 27:35.009 --> 27:41.859 At the same time these two parties live in a culture where 27:41.864 --> 27:48.004 regional differences and regional cleavages are very 27:47.996 --> 27:49.676 important. 27:49.680 --> 27:52.670 These are the main characteristic of the Spain--of 27:52.673 --> 27:55.953 the political system; we'll come to the economic 27:55.952 --> 27:59.262 system in a while, so two large groups strongly 27:59.262 --> 28:03.442 identified with the two main traditions in the country. 28:03.440 --> 28:10.150 One is socialist and the other is Catholic and having-- 28:10.150 --> 28:14.710 also living in a situation in which you have a high degree of 28:14.712 --> 28:18.062 differentiation between different regions. 28:18.058 --> 28:22.188 Everybody knows about the Basque areas, 28:22.190 --> 28:25.400 but at the same time, you're also to consider that 28:25.397 --> 28:28.407 Catalonia, the area where Barcelona is, 28:28.411 --> 28:32.371 had been striving for autonomy, if not independence, 28:32.368 --> 28:33.918 for a very long time. 28:33.920 --> 28:35.760 These are the characteristics of the political economic 28:35.761 --> 28:36.071 system. 28:36.068 --> 28:40.448 As far as the model of development that Spain has 28:40.452 --> 28:43.022 followed, especially in the last twenty 28:43.021 --> 28:47.061 to twenty-five years, is a model of development that 28:47.057 --> 28:52.027 is largely biased toward construction and real estate 28:52.029 --> 28:57.609 development, and so-and very entrepreneurial. 28:57.608 --> 29:03.128 So you have--you have especially in the late 1990s and 29:03.132 --> 29:08.252 in the early 2000, the creation of a lot of very 29:08.250 --> 29:12.620 entrepreneurial, very aggressive, 29:12.623 --> 29:19.443 very wealthy companies that-- which line of business were 29:19.442 --> 29:22.232 mostly construction and real estate. 29:22.230 --> 29:24.150 The entrepreneurs in these companies-- 29:24.150 --> 29:28.530 you say what does that have to do with utilities, 29:28.528 --> 29:32.348 and what does it have to do with the opportunities open to 29:32.348 --> 29:35.028 Enel to enter into the Spanish market? 29:35.029 --> 29:40.469 It has to do--as you can see, one of the diversification 29:40.471 --> 29:45.621 policies used by these entrepreneurial companies that 29:45.616 --> 29:51.746 have made most of the money on real estate and construction was 29:51.750 --> 29:56.600 to buy stakes into large utility companies. 29:56.599 --> 29:58.889 Why? 29:58.890 --> 30:02.170 It's a good diversification policy. 30:02.170 --> 30:06.960 It pays stable dividends, as we saw at the beginning, 30:06.960 --> 30:11.140 and plus you enter into an industrial sector that is 30:11.143 --> 30:14.643 fractionalized, and so assuming that there is 30:14.636 --> 30:16.556 consolidation, > 30:16.558 --> 30:19.328 or seven players, you are likely to be paid a 30:19.327 --> 30:21.777 premium for the shares that you have. 30:21.778 --> 30:24.198 So what I tried to do there is very complex, 30:24.200 --> 30:27.220 and so you have to excuse me and you have to ask questions, 30:27.220 --> 30:31.810 is that--this is different from the utility sector in any 30:31.806 --> 30:35.576 country that I have-- that I know of. 30:35.578 --> 30:40.408 You have large, or you had, large construction 30:40.411 --> 30:46.531 companies as minority but significant shareholders in many 30:46.529 --> 30:50.609 of the utility companies in Spain. 30:50.608 --> 30:53.848 They are there for two reasons--for three reasons; 30:53.848 --> 30:59.088 diversification of risk because you are in a very stable 30:59.090 --> 31:05.190 business, totally different from construction and real estate. 31:05.190 --> 31:08.540 You get high dividends for the stake that you have bought, 31:08.542 --> 31:11.252 and so you get a good yield on your capital. 31:11.250 --> 31:14.900 Third, there is likely to be consolidation and so you are 31:14.895 --> 31:19.125 likely to be paid a premium for the shares that you purchased, 31:19.130 --> 31:22.900 so a very nice position to be in. 31:22.900 --> 31:28.340 But look at this for a second, in every company in which there 31:28.344 --> 31:30.354 is-- for the same reason that I 31:30.348 --> 31:33.708 tried to tell you, every utility company where 31:33.712 --> 31:37.682 there is one of these construction companies as a 31:37.684 --> 31:42.654 shareholder does not have a very solid shareholder base, 31:42.650 --> 31:46.780 because one of the main shareholders is there not 31:46.778 --> 31:52.368 because of commitment to that particular industry or anything, 31:52.368 --> 31:56.648 but just for having built while it lasts and for selling the 31:56.645 --> 32:00.265 shares at a premium when there is consolidation. 32:00.269 --> 32:03.639 If you look from the point of view of someone that wants to 32:03.637 --> 32:08.247 enter the market, you have very attractive market 32:08.251 --> 32:14.491 because the regulatory regime is very good and you have a 32:14.490 --> 32:20.950 situation of not totally stable shareholder base in each of 32:20.950 --> 32:23.290 these countries. 32:23.288 --> 32:28.988 As everybody expected, at the end of 2005, 32:28.988 --> 32:36.628 the fact that the structure of the industry had too many 32:36.633 --> 32:41.223 players, it started changing. 32:41.220 --> 32:45.240 One of the companies, Gas Natural, 32:45.240 --> 32:50.360 decided to launch an hostile bid on Endesa, 32:50.358 --> 32:53.648 counting on two things. 32:53.650 --> 32:57.010 Counting on the fact that Endesa, where the shareholder 32:57.005 --> 33:00.925 would have been the seller, for the same reason that I gave 33:00.933 --> 33:04.383 you before, and on the fact that where 33:04.384 --> 33:10.554 synergies and economies of scale and scope that could have been 33:10.548 --> 33:16.318 achieved or implemented by putting together Gas Natural and 33:16.316 --> 33:17.506 Endesa. 33:17.509 --> 33:22.359 They launched the hostile bid, but something that they didn't 33:22.361 --> 33:29.661 count on happened immediately, which is that the reactions to 33:29.663 --> 33:37.083 that bid was not very friendly by two entities; 33:37.078 --> 33:42.098 the regulators, as you can see the C&E, 33:42.102 --> 33:45.572 and the Spanish government. 33:45.568 --> 33:52.478 Why was not the Spanish government reaction favorable? 33:52.480 --> 33:57.280 First, you have a deal that makes perfect sense from the 33:57.277 --> 34:00.677 economic and financial point of view. 34:00.680 --> 34:04.820 The shareholders of Endesa are happy because they get paid a 34:04.821 --> 34:10.021 decent premium on their stock, the company remains Spanish, 34:10.023 --> 34:13.943 synergies are going to be extracted, 34:13.940 --> 34:17.430 there is not a lot of overlapping and so there are not 34:17.431 --> 34:21.491 going to be a lot of layoffs, the ensuing company will be 34:21.489 --> 34:24.189 very strong, will definitely be a national 34:24.188 --> 34:26.818 champion, probably a European champion; 34:26.820 --> 34:30.680 so why doesn't the government like it? 34:30.679 --> 34:42.239 It happens to be that Endesa is Madrid based and Gas Natural is 34:42.242 --> 34:46.162 based on Barcelona. 34:46.159 --> 34:51.829 It also happens to be that at the same time there is a big 34:51.833 --> 34:57.413 fight in the political arena between the government party 34:57.407 --> 35:01.497 socialist, and the opposition party, 35:01.501 --> 35:08.061 the conservative and one of the issues that they are fighting on 35:08.057 --> 35:13.987 is decentralization of power within different regions. 35:13.989 --> 35:19.389 It also happens that while a large part of the power base of 35:19.385 --> 35:22.675 the socialist party is in Madrid, 35:22.679 --> 35:28.009 a reasonably large base of the power of the conservative party 35:28.014 --> 35:29.594 is in Barcelona. 35:29.590 --> 35:34.000 So oddly enough, or naturally enough, 35:34.000 --> 35:42.130 the ruling socialist party sees the attempt by a gas company 35:42.132 --> 35:48.202 from Barcelona to try to buy the biggest, 35:48.199 --> 35:51.949 or one of, the second biggest, depends on how you count, 35:51.949 --> 35:56.879 utility company based in Madrid, as almost a political 35:56.876 --> 36:00.406 move instead of an industrial move, 36:00.409 --> 36:02.329 and they just don't like it. 36:02.329 --> 36:04.989 And so they tried to stop it, as you can see from the 36:04.994 --> 36:08.484 statement, they tried to stop it making it 36:08.478 --> 36:13.748 difficult so the regulatory agency and just trying to fight 36:13.751 --> 36:17.571 it with all the weapons that they have. 36:17.570 --> 36:22.730 Enel, the Italian utility company, has not been the only 36:22.731 --> 36:26.111 one looking at the Spanish market. 36:26.110 --> 36:30.300 If the Spanish is that attractive, as I tried to 36:30.295 --> 36:34.835 describe it to you that means that someone else-- 36:34.840 --> 36:38.830 a few other people have been looking for opportunities to 36:38.829 --> 36:43.319 enter the Spanish market and get hold of one of those prizes. 36:43.320 --> 36:50.140 One of the companies that's been looking for that is the 36:50.141 --> 36:53.491 German giant called E.On. 36:53.489 --> 36:56.199 E.On is an exceedingly sophisticated company, 36:56.197 --> 36:57.057 exceedingly. 36:57.059 --> 37:00.049 They are sophisticated, they have been a leading 37:00.045 --> 37:04.385 utility for so many years, they know all the complexities 37:04.389 --> 37:09.139 of operating in a regulated sector where you depend on the 37:09.139 --> 37:12.389 investment you make in the tariffs, 37:12.389 --> 37:16.729 so they are very sophisticated in understanding the political 37:16.733 --> 37:19.343 environment in which you operate, 37:19.340 --> 37:24.270 and which heavily influences your outcome and your choices. 37:24.268 --> 37:27.568 They see an opening, they say wait a second, 37:27.568 --> 37:31.708 and the government doesn't like the Gas Natural bid. 37:31.710 --> 37:34.540 Gas Natural doesn't have a lot of cash, 37:34.539 --> 37:37.889 so it will be difficult for them to raise-- 37:37.889 --> 37:40.489 it would be difficult for them to raise the bid, 37:40.489 --> 37:44.679 at the same time, they don't seem to have 37:44.682 --> 37:46.782 political support. 37:46.780 --> 37:52.700 So maybe here there is a space for a foreign bidder that will 37:52.702 --> 37:58.822 table for the shareholders a bid that is higher than the bid of 37:58.824 --> 38:01.494 Gas Natural for Endesa. 38:01.489 --> 38:06.129 Gutsy move, because if you look at hostile bid, 38:06.130 --> 38:10.670 cross border in Europe, in a regulated sector, 38:10.670 --> 38:14.100 I think this is the first one. 38:14.099 --> 38:19.379 Very gutsy move, very well structured, 38:19.378 --> 38:24.228 very well done, very well timed. 38:24.230 --> 38:26.970 E.On moves, and, as you noticed, 38:26.972 --> 38:31.932 the bid is significantly higher than the previous one; 38:31.929 --> 38:38.489 €27 instead of €21. 38:38.489 --> 38:44.879 In a very sophisticated way, which is worse if the company 38:44.876 --> 38:50.276 that E.On is, they also start a sophisticated 38:50.280 --> 38:56.570 lobby with the European Commission because they believe 38:56.572 --> 39:02.142 that the main threat; it is not another bidder. 39:02.139 --> 39:06.989 The main threat is the Spanish Government doesn't want a German 39:06.989 --> 39:10.509 utility own the leading champion in Madrid. 39:10.510 --> 39:13.250 There's no reason why, if they didn't like Barcelona 39:13.251 --> 39:15.411 to own it, why shouldn't like--I don't 39:15.407 --> 39:17.947 remember what year it's based, it's based in the 39:17.947 --> 39:19.457 > 39:19.460 --> 39:24.150 somewhere, but I don't remember, I think it's near 39:24.150 --> 39:26.500 Frankfurt, but-- Student: It's 39:26.498 --> 39:26.798 Dusseldorf. 39:26.800 --> 39:28.630 Paolo Zanonni: Dusseldorf, 39:28.628 --> 39:30.568 sorry, you are right I was wrong. 39:30.570 --> 39:35.670 E.On starts lobbying the European Commission and hopes to 39:35.672 --> 39:39.592 have an opening by the German regulators. 39:39.590 --> 39:44.660 An opening, really no bigger position comes, 39:44.659 --> 39:51.849 but an opening really doesn't come, and the Spanish government 39:51.853 --> 39:54.923 stalls, so rightly so. 39:54.920 --> 39:59.700 E.On looks at the ownership structure of Endesa and sees 39:59.695 --> 40:02.645 that there are a lot of sellers. 40:02.650 --> 40:06.570 It says, "Okay this is going to be a financial fight, 40:06.570 --> 40:13.890 let me just up the ante, I raise my bid to €34 per 40:13.889 --> 40:18.739 share, significantly higher than the 40:18.739 --> 40:24.769 offer by Gas Natural, and they think that they have a 40:24.768 --> 40:26.188 winning hand. 40:26.190 --> 40:28.160 In addition, they have all the resources. 40:28.159 --> 40:32.249 I think that it--I seem to remember that at that time E.On 40:32.251 --> 40:36.631 has cash on the balance sheet for about €100 billion-- 40:36.630 --> 40:43.030 it's going to cost about $40 or $42 billion? 40:43.030 --> 40:49.570 Again, they don't go anywhere and they get stalled, 40:49.570 --> 40:55.070 at that point, Enel, that has been watching 40:55.067 --> 41:00.167 the situation, sees an opportunity. 41:00.170 --> 41:06.990 There is a bid by Gas Natural that doesn't seem to go anywhere 41:06.992 --> 41:13.482 because of political opposition, and because it's cheap. 41:13.480 --> 41:17.910 There is a bid by the leading European champion, 41:17.909 --> 41:23.259 a utility, that is a lot richer and can become a lot richer, 41:23.260 --> 41:29.200 but doesn't go anywhere because the Spanish government is 41:29.199 --> 41:34.609 reluctant to sell or to have one of the utility-- 41:34.610 --> 41:41.550 one of the national champions end up in German hands. 41:41.550 --> 41:48.310 Enel sees an opening and a strategy based on three 41:48.313 --> 41:49.973 variables. 41:49.969 --> 41:56.269 One they say, maybe we can pay as much as 41:56.268 --> 42:00.668 E.On, we don't have the same cash on 42:00.666 --> 42:04.846 the balance sheet but we have no debt, 42:04.849 --> 42:10.079 so we can try to fight it on that. 42:10.079 --> 42:17.009 Second, is we might be more acceptable to the Spanish 42:17.010 --> 42:23.010 government and that needs to be found out, 42:23.010 --> 42:25.580 and the third is, and this is really in my 42:25.577 --> 42:29.007 opinion the winning-- this is really the winning 42:29.005 --> 42:33.395 perception of Enel, they say why should we buy off 42:33.398 --> 42:38.098 those construction companies, for the biggest construction 42:38.097 --> 42:41.927 company that are-- that is in the capital. 42:41.929 --> 42:48.539 That can be our ally in unlocking the situation. 42:48.539 --> 42:53.119 Why should we try to buy them out? 42:53.119 --> 42:57.359 Why don't we simply go and talk to the entrepreneur-- 42:57.360 --> 43:00.940 this construction is usually one entrepreneur for each 43:00.936 --> 43:03.436 company, why don't we go and talk to the 43:03.442 --> 43:05.662 entrepreneur and see what do you want. 43:05.659 --> 43:06.769 You want cash? 43:06.769 --> 43:07.759 We'll give it to you. 43:07.760 --> 43:11.260 If you want a piece of the company, we will make a deal 43:11.257 --> 43:11.967 with you. 43:11.969 --> 43:13.879 What do you want? 43:13.880 --> 43:18.440 Oddly--naturally, now the entrepreneur says, 43:18.440 --> 43:21.370 "No, no, no the reason why I'm here is 43:21.369 --> 43:24.089 because I want to diversify my risk, 43:24.090 --> 43:28.340 I want significant opportunities to growth-- 43:28.340 --> 43:33.330 to grow and so what I really want is not cash but is a piece 43:33.327 --> 43:34.847 of Endesa." 43:34.849 --> 43:44.569 Enel says, okay let's discuss, rationally now the 43:44.568 --> 43:50.638 entrepreneur, which is Acciona, 43:50.641 --> 43:52.871 stalls. 43:52.869 --> 43:57.099 Enel tried to force his hand does something very unusual. 43:57.099 --> 44:01.789 In very, very unusual in a cross border takeover company, 44:01.789 --> 44:07.739 goes into the market, and buys 10% of Endesa in the 44:07.739 --> 44:11.139 market, which according to Spanish 44:11.139 --> 44:15.619 regulation you can do, and Enel has not launched a bid 44:15.615 --> 44:16.005 yet. 44:16.010 --> 44:18.220 It's someone coming out of the left field, 44:18.219 --> 44:23.179 so they go into the market and they buy 10%, 44:23.179 --> 44:30.599 €39 per share, higher than the bid for the bid 44:30.596 --> 44:32.076 by E.On. 44:32.079 --> 44:35.159 At that point they sit around the table with the entrepreneur 44:35.155 --> 44:39.155 and say, "See, we are very serious, 44:39.159 --> 44:43.699 so we are either going--either we are going to buy this company 44:43.695 --> 44:50.995 or E.On is going to buy it, or we make a deal and together 44:50.996 --> 44:53.886 we buy it." 44:53.889 --> 44:59.929 Long negotiations start with the entrepreneur, 44:59.929 --> 45:04.829 and at the end, a deal in this negotiation Enel 45:04.831 --> 45:07.571 again-- the entrepreneur stalls again 45:07.568 --> 45:11.388 or tried to get more, so Enel again decides to be 45:11.393 --> 45:16.403 aggressive and does an equity swap for a remaining 14% or 45:16.398 --> 45:21.488 14.99% of the capital which is the maximum permitted under 45:21.494 --> 45:23.644 Spanish regulation. 45:23.639 --> 45:27.749 It tells the entrepreneur, "See we are here to stay, 45:27.750 --> 45:32.420 we now own 25% of the company, we own more than you do, 45:32.420 --> 45:33.810 and you will not get rid of us. 45:33.809 --> 45:38.879 At the same time they show E.On that they own 25% and so that 45:38.878 --> 45:43.608 they are possibly in a position to block the takeover. 45:43.610 --> 45:47.730 So this is a battle being fought with two fronts. 45:47.730 --> 45:52.200 One, the only opportunity to win, Enel rightly decides is to 45:52.201 --> 45:54.931 make a deal with the entrepreneur; 45:54.929 --> 46:02.949 and two at the same time they have to fight the offer by E.On 46:02.945 --> 46:08.955 which, as you can see, increases this offer to 46:08.956 --> 46:12.026 €40 per share. 46:12.030 --> 46:17.340 At the same time, Enel has been negotiating with 46:17.344 --> 46:24.354 entrepreneur and they strike a deal in which 25% is going to be 46:24.353 --> 46:30.163 owned directly by Enel, but 51% of the shares are going 46:30.157 --> 46:35.097 to be owned by a joint venture company made by Enel and the 46:35.096 --> 46:40.666 entrepreneur who is Acciona, where the entrepreneur has 51%, 46:40.668 --> 46:45.998 and the entrepreneur who is scared about being trapped into 46:45.996 --> 46:50.036 a situation that is not liquid also has-- 46:50.039 --> 46:52.689 also negotiate with Enel, a right of put, 46:52.690 --> 46:59.320 to put to Enel his own shares for--his own shares in Endesa, 46:59.320 --> 47:03.540 for the same price that it has been negotiated, 47:03.539 --> 47:07.709 the €41 per share. 47:07.710 --> 47:10.490 As you have seen--sorry I moved it-- 47:10.489 --> 47:18.139 as you have seen the final battle is won by Enel, 47:18.139 --> 47:21.399 it made a deal with E.On on the side in which E.On is going to 47:21.396 --> 47:23.636 be sold about $10 billion dollar asset, 47:23.639 --> 47:27.809 €10 billion asset and so E.On also gets a foothold in the 47:27.807 --> 47:31.837 Spanish market but Endesa stays more or less what it is, 47:31.840 --> 47:35.790 and the situation is Enel, Acciona, 47:35.789 --> 47:45.029 with Acciona has a right of put to Enel for the shares that they 47:45.030 --> 47:45.910 own. 47:45.909 --> 47:48.269 Am I going too fast? 47:48.268 --> 47:50.858 Prof: You're doing fine, but you've only got about three 47:50.858 --> 47:51.818 or four minutes left. 47:51.820 --> 47:55.380 Paolo Zanonni: I know but the rest is 47:55.380 --> 47:57.080 just the end of it. 47:57.079 --> 48:03.279 The situation is that the Endesa/E.On folds, 48:03.277 --> 48:09.907 and Endesa is now owned by Enel and Acciona. 48:09.909 --> 48:15.209 Now in the meantime, what happens in the world-- 48:15.210 --> 48:20.840 and what happens is that there is a credit crunch, 48:20.840 --> 48:29.030 which, in the case of Spain, overlaps with a very severe 48:29.032 --> 48:35.442 downturn in construction and real estate. 48:35.440 --> 48:40.490 You have--we need to differentiate here between 48:40.492 --> 48:42.912 different countries. 48:42.909 --> 48:47.089 You have to think that the reliance on debt and the 48:47.090 --> 48:50.770 reliance on construction and real estate, 48:50.768 --> 48:56.128 in the case of Spain, was so high that while in 48:56.128 --> 49:03.118 Europe you have an unemployment rate that is below 10% and in 49:03.119 --> 49:07.779 the states you have one that is 10%. 49:07.780 --> 49:14.590 In Spain you have an unemployment rate which is 24%, 49:14.594 --> 49:17.004 if well counted. 49:17.000 --> 49:22.660 The whole model of development of the Spanish economy is in 49:22.664 --> 49:27.944 doubt, or is in crisis, because of the severe crisis in 49:27.936 --> 49:31.156 construction and real estate. 49:31.159 --> 49:35.509 It's easier to add that most of the companies that have been 49:35.509 --> 49:38.799 operating there, including Acciona, 49:38.800 --> 49:44.990 the partner of E.On had been buying shares with loans by the 49:44.994 --> 49:46.784 Spanish banks. 49:46.780 --> 49:51.390 Not only you have the collapse in the prices of the real estate 49:51.389 --> 49:54.129 asset, you have also the trouble in 49:54.130 --> 49:56.940 refinancing the loan that have been-- 49:56.940 --> 50:02.990 the money that has been borrowed by the construction 50:02.987 --> 50:04.407 companies. 50:04.409 --> 50:08.509 So for instance, Enel partner starts running 50:08.510 --> 50:13.210 into financial trouble, it starts running into 50:13.208 --> 50:18.848 financial troubles that are so big that probably the only 50:18.853 --> 50:23.193 security that he can give to the banks, 50:23.190 --> 50:27.640 or renewing the loan that they have extended to him, 50:27.639 --> 50:33.339 is the put of the 25% of Endesa that he owns, 50:33.340 --> 50:38.740 or 25 point something to Enel. 50:38.739 --> 50:43.059 That put, by the way, is at a price, 50:43.059 --> 50:48.489 that is the price of the bid, which is 41. 50:48.489 --> 50:53.169 At the same time the price of the Endesa shares of the market 50:53.170 --> 50:56.680 have gone down to 20 or 25, between 20 and 25, 50:56.681 --> 50:59.101 but that doesn't mean much. 50:59.099 --> 51:04.719 Enel sees the opportunity to get control of all of the Endesa 51:04.722 --> 51:07.222 shares, approaches the entrepreneur and 51:07.217 --> 51:10.877 says, okay you have the right of put 51:10.876 --> 51:14.006 for 2011, why don't we negotiate a 51:14.014 --> 51:18.594 situation in which we would pay you less than €31 per 51:18.586 --> 51:22.576 share, you will get some assets, 51:22.583 --> 51:27.823 and we will get your 25% of the shares, 51:27.820 --> 51:31.800 so there is an extensive negotiation, 51:31.800 --> 51:38.830 and Enel ends up buying the 25% of Acciona, 51:38.829 --> 51:44.089 dissolving the joint venture and getting control of 92% of 51:44.088 --> 51:44.918 Endesa. 51:44.920 --> 51:48.520 However, you can see what this does to Enel. 51:48.518 --> 51:54.508 The bid was largely based on debt, the purchase; 51:54.510 --> 52:00.310 the accelerated purchase of the shares has increased the debt, 52:00.309 --> 52:06.929 so now Enel finds itself with $22 or $23 billion dollar market 52:06.929 --> 52:09.969 cap, equity market cap of $65 52:09.967 --> 52:11.957 billion dollar debt. 52:11.960 --> 52:18.170 The change in--the change that the management wanted has 52:18.173 --> 52:20.733 occurred, but what happened is that 52:20.733 --> 52:22.713 because of the way that the management, 52:22.710 --> 52:25.060 and because of the circumstances, 52:25.061 --> 52:29.621 there is a huge load of debt on the company and it is true that 52:29.621 --> 52:34.251 they wanted to have a more risky company with a higher potential 52:34.253 --> 52:37.223 of goals, but investors are not very 52:37.217 --> 52:41.547 happy about having invested in a company in which the equity-- 52:41.550 --> 52:46.270 the debt to equity ratio is 3:1, or 3.2:1. 52:46.268 --> 52:52.188 Enel thinks that a capital increase in order to--a dividend 52:52.188 --> 52:55.758 reduction and a capital increase. 52:55.760 --> 52:56.870 What is the problem? 52:56.869 --> 52:59.609 The problem is nothing, probably there is enough room, 52:59.610 --> 53:01.590 we advise them, there is enough room-- 53:01.590 --> 53:05.530 there is enough appetite in the market to do a capital decrease, 53:05.530 --> 53:10.350 but the problem is that the Italian government directly 53:10.349 --> 53:14.929 through the treasury is-- holds 32% of Enel, 53:14.934 --> 53:19.004 and as you know, these are not European and 53:18.998 --> 53:23.498 American governments these days are saddled with a large amount 53:23.503 --> 53:26.413 of debt that they will have to repay. 53:26.409 --> 53:30.629 So at the level of the Italian government there is very little 53:30.626 --> 53:33.666 appetite for subscribing the rights issue. 53:33.670 --> 53:37.120 On the other hand, there is very little appetite 53:37.123 --> 53:41.903 for being diluted and make Enel into a totally public company, 53:41.900 --> 53:44.180 because when you own more than 30%, 53:44.179 --> 53:45.849 according to Italian law more or less, 53:45.849 --> 53:49.839 you nominate 100% of the board or 90% of the board. 53:49.840 --> 53:55.890 There is the final effort by the management is a negotiation, 53:55.889 --> 53:58.679 this time not with the Spanish government, 53:58.679 --> 54:01.529 but with the Italian government, in order to try to 54:01.534 --> 54:05.024 convince the government to let the capital increase go forward 54:05.018 --> 54:07.358 and either be diluted or subscribed, 54:07.360 --> 54:10.540 and this is not concerned to the class, 54:10.539 --> 54:15.039 but the government eventually gave up and found a way in which 54:15.041 --> 54:18.811 they could subscribe to the capital increase without 54:18.806 --> 54:22.716 increasing the government deficit of the country. 54:22.719 --> 54:26.139 Prof: Thanks Paolo, we look forward to having you 54:26.135 --> 54:27.435 back in the Spring. 54:27.440 --> 54:33.000