Arrests put Finmeccanica strategy at risk

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Giuseppe Orsi has been battling to cut Finmeccanica’s debts and return the Italian defence group to profitability, while defending its international reputation amid investigations into alleged corruption dating back several years.

Analysts say the chief executive’s own arrest on Tuesday and that of the head of its moneymaking helicopter unit deal a serious blow to the company’s future stability.

At issue is not only how the already troubled and now “decapitated” company will be run without its chief executive – who denies allegations of corruption involving a helicopter sale to India – but also the reaction of important customers, particularly the US.

The big problem for the company now is that Mr Orsi’s arrest limits its room for manoeuvre and creates uncertainty, says Francis Tusa of Defence Analysis. He noted the reaction in the US would be especially crucial – given the market’s importance for Finmeccanica – because of its far-reaching anti-bribery laws, its regulators’ willingness to prosecute and its fierce national defence contractor competitors.

Finmeccanica’s shares have fallen by nearly 50 per cent over the past three years, closing down more than 7 per cent on Tuesday.

“You have the uncertainty because of the relatively troubled transition to Orsi [and the worry] that more could come out. You have internal uncertainty, and wider business uncertainty. And people will ask ‘How will this company manage with a degree of decapitation?’” says Mr Tusa.

With the Italian Treasury holding a controlling stake of over 30 per cent in Finmeccanica, the company can at least be assured of continued support from its main shareholder.

Of immediate concern are Finmeccanica’s attempts to sell off two of its subsidiaries, Ansaldo Energia, the power plants and turbines producer in which Finmeccanica holds a 55 per cent stake, and its lossmaking rail transport unit Ansaldo Breda.

The company had hoped to complete at least one of the deals by the end of last year. Germany’s Siemens and South Korea’s Samsung are reported to have expressed interest in Ansaldo Energia, while an Italian consortium backed by a state-controlled strategic fund was also considering making an offer.

The board will not be in a position to decide on the sales, commented Luca Conti, analyst at Banca Akros in Milan. “This worries us as Mr Orsi’s strategy was focused on avoiding any capital increase and disposing of peripheral assets,” Mr Conti wrote in a note to investors.

A Mediobanca note reacting to the arrests said the news was “clearly negative” as a new chief executive would impose new writedowns and take time to review the strategy, probably derailing the planned disposals. Finmeccanica’s credibility in winning new tenders abroad had been damaged, it said.

Following the arrest, Fitch, the rating agency, warned Finmeccanica’s rating could fall, noting the arrests “increase the risk of material disruption in the company’s strategy and day-to-day management as well as a delay to its restructuring and asset disposal plan, which remain vital for the company to maintain its present rating. Reputational damages and its impact on future business are another concern.”

Fitch placed Finmeccanica’s long-term rating of triple B minus on negative watch.

When Mr Orsi became chairman in December 2011, after the previous leadership became enmeshed in corruption allegations, he was presented as the company’s “new broom” who would clean up. But his firing of over 30 managers, which had begun earlier in the year when he was appointed chief executive, was followed by a backlash of allegations against him made by a small group of former senior officials in statements to investigating magistrates. There are fears within Finmeccanica that the bad blood could lead to further revelations.

Some of those allegations centred on the very emerging markets that Finmeccanica was targeting, in particular Brazil, Panama and India.

India is an important but tricky market for defence companies, which are struggling under the financial cutbacks of traditional big spenders, such as the US and Europe.

Transparency International gave India a D plus rating in its government defence anti-corruption index, worse than Brazil and Bulgaria, but better than Pakistan, China and Russia.

In reporting its third-quarter results for 2012, Finmeccanica said it was facing a challenging recession and “growing uncertainty” – particularly over US defence spending – but that it remained confident that its restructuring programme was on track to meet 2012 targets and a return to profitability. But having failed to complete the asset sales that had aimed to raise €1bn, those targets are unlikely to have been met.

Finmeccanica’s debts rose by €197m in the third quarter to €4.8bn. However it was growth in its helicopter and aeronautics divisions that helped Finmeccanica to record earnings before interest, tax and amortisation of €741m in the first three quarters, up 36 per cent on a like-for-like basis.

Reporting those results, Mr Orsi called 2012 a “delicate transition”. Analysts fear this year could be even worse.

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