June 9, 2013 12:53 pm

Spain’s ownership web set to untangle

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Spanish business, it is said, can be a small place. Whether they are sharing bottles of rioja at upmarket Madrid restaurants, or the same classrooms, or even the same blood, large parts of the country’s business elite have ties that stretch back generations.

This cosy, interconnected world is epitomised by the nexus of cross-shareholdings between banks and many of Spain’s largest companies, largely constructed during the past two decades.

Interconnected and interdependent

Interconnected and interdependent
Spain's cross shareholdings

Out of the 35 companies in the Ibex stock index, 15 are connected to another member though a significant shareholding. If Bankia, the nationalised savings bank recently dropped from the index, were included, that figure would rise to 19.

With the financial crisis having ripped through the balance sheets of the caja system, corporate Spain is undergoing an upheaval. As capital-strapped lenders are forced to sell non-core holdings, this long-standing and complicated web of cross-shareholdings is at risk of disappearing.

“We are going to see a different model emerging, of pure commercial banking,” says Robert Tornabell, a professor of finance at ESADE business school. “Maybe some banks will keep their stakes, but the old financial structure is changing very rapidly.”

During a privatisation spree in the late 1980s and 1990s banks and cajas took stakes in companies such as Telefónica, the former telecoms monopoly, Repsol, the oil and gas company, and the utility Gas Natural, among others.

These investments served two purposes. First, they allowed banks and cajas to secure a stable flow of dividend payments outside their core business of lending money.

Second, with the encouragement of politicians, the investments ensured that newly privatised companies had stable domestic shareholders that would maintain their “Spanishness”, and reduce the risk of their being snapped up by foreign predators.

However, for international investors these connections can be difficult to understand and serve as a deterrent.

Gavin Morris is a partner at Governance for Owners, an activist fund manager that focuses on improving corporate governance at companies with shareholdings in Spain. “To an outside investor like us, cross shareholdings seem like an anachronism,” he says.

“These stakes can be offputting from an investors’ point of view, as the relationship can involve more than just the shareholding. There can be commercial agreements as well. The net result, from our perspective, is to severely limit the attractiveness of many listed Spanish companies.”

Caixabank, the banking arm of the Catalan caja La Caixa, and Spain’s third-largest lender by assets, is the largest shareholder of Gas Natural, the Ibex 35 utility, with a 35 per cent stake worth €5.7bn at current prices.

The bank is also the largest investor in Repsol, with a 13 per cent stake in the oil company, which itself holds a 30 per cent stake, the second largest, in Gas Natural. Caixabank and Repsol have a shareholding agreement for their stakes in Gas Natural.

Antonio Brufau, chairman of Repsol, worked at La Caixa, before moving to Gas Natural. He took charge of Repsol in 2004. Meanwhile Isidro Fainé, chairman of La Caixa, which holds 5 per cent of Telefónica, is both vice-chairman of the telecoms group, and vice-president of Repsol.

On a trip to Argentina this year to meet the government of Cristina Fernández, which in 2011 expropriated Repsol’s YPF division, observers were unclear which of his various companies Mr Fainé was representing.

Aside from Repsol’s involvement in the country, Telefónica is also the largest telecoms group in Argentina. Meanwhile Inbursa, the investment arm of Mexican billionaire Carlos Slim, on whose board of directors Mr Fainé also sits, owns a stake in YPF. And Mr Slim owns a small stake in Caixabank. Caixabank declined to comment.

Ties often stretch beyond shareholdings. A glitzy party at the Madrid stock exchange in 2011, to celebrate the ill-fated listing of Bankia, had the air of a society wedding, and was attended by the great and the good of politics and business.

On the board of the bailed-out lender sat Ángel Acebes, a former interior minister in the same Popular party government in which Rodrigo Rato, Bankia’s executive chairman at the time, was economy minister.

Another former board member, Claudio Aguirre, who at Goldman Sachs and then Merrill Lynch in Spain worked on several privatisations, is the cousin of Esperanza Aguirre, the powerful Popular party president of the Madrid region at the time. The Madrid region itself was then the largest shareholder in Bankia, through its domination of the cajas foundation.

Companies that are among the largest advertisers hold investments in media companies. Santander, Caixabank and Telefónica hold convertible bonds in Grupo Prisa, the media group that owns El País, the leading daily newspaper.

Caixabank, however, is one of Spain’s healthier lenders, and has said it is not yet considering selling its largest shareholdings, although people close to the bank say it has looked at splitting them away from its core operations.

Yet Spain’s nationalised banks, most notably Bankia, have been forced by Brussels to place their large webs of shareholdings on the block. Bankia, formed through a merger of seven savings banks, holds 12 per cent of IAG, the company that resulted from the merger of Iberia and British Airways, and 5.3 per cent of the power utility Iberdrola, with large stakes in Mapfre, an insurer, and Indra, the defence technology group.

Previously, with savings banks’ boards dominated by politicians, the system of cross-shareholdings allowed the political class at a regional and national level to exert influence across boardrooms. This state of affairs, investors and corporate governance experts hope, is increasingly a thing of the past.

Equally significant are the incoming changes to banking capital rules, with lenders forced to hold more capital against shareholdings under Basel III rules. As a result, even those banks that want to keep their stakes might be forced to trim them. Last month Caixabank disposed of its stake in Tubacex, a maker of stainless-steel pipes.

This expected sell-off of stakes should start to break down the cosy relationships between managers and their larger domestic shareholders, and see the arrival of foreign investors that demand more stringent standards of governance.

“Local shareholders have historically been very passive and probably have social and family ties with the management,” says Mireia Giné, a governance expert at IESE business school. “If your company is mostly owned by foreign capital, then management teams tend to act differently in annual meetings, and governance over time improves.”

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