Rise of Elkann could finally lead to demise of car maker
November 1, 2009
By Vernon Silver and Sara Gay Forden
The Turin-based maker of Ferraris had lost money in each of the previous four years. Instead of using cash to repay a loan of e3 billion (R34.2bn), equivalent to $3.6bn (R28bn) at the time, Fiat issued new shares to the lenders in September 2005.
The banks may have supplanted the family as Fiat's biggest shareholder if Agnelli holding companies had not used an equity swap transaction with Merrill Lynch to retain the family's grip on the firm, according to the holding companies.
Merrill, which had bought 10 percent of Fiat's shares, sold most of its stake to the family at the exact moment the car maker issued new stock to pay back its lenders. The maneuver worked, keeping the Agnelli stake at 30 percent, according to the contracts for the deal. The family preserved control of Fiat.
While the swap deal itself was lawful, in May last year Turin prosecutors filed charges against two Agnelli holding companies and two long-time family advisors for market manipulation. The prosecutors alleged that the companies, Giovanni Agnelli Sapaz and IFIL Investments, and the advisors, Gianluigi Gabetti and Franzo Grande Stevens, misled investors by failing to disclose the swap deal in two press statements released a month before the transaction. Prosecutors said investors drove up Fiat's stock price because they believed the family companies might purchase shares in the market to keep hold of the car maker.
Elkann, a native New Yorker who was raised in the UK, Brazil, France and Italy, is scheduled to testify at the trial this month. It has been held in a courthouse hearing room buried under the streets of Turin and known to Italians by an English name: the Bunker.
Denied charges
The two companies, and both Grande Stevens and Gabetti, have denied the charges in documents filed in court. Elkann, who is not charged in the case, declined to discuss it through a spokesperson.
"These are serious charges that call into question the transparency of one of Italy's most important industrial families and whether they communicated correctly to the market," says Luca D'Auria, a Milan-based lawyer who specialises in financial crimes. "Market manipulation carries severe penalties."
The trial is one of a series of challenges hitting the Agnelli family at its base in Turin.
In June, Fiat agreed to dedicate about $10bn worth of vehicle designs, engine technology and management time to Chrysler Group in exchange for a 20 percent stake in the then-bankrupt US firm.
Fiat says it made the deal to try to survive as an independent company by getting bigger and expanding sales in the US.
Starting in mid-2007, investors punished the stock of Agnelli holding company IFIL Investments.
The family combined IFIL and another company in March this year to form Exor, where Elkann serves as chairman.
Shares of IFIL plummeted 82 percent from July 2007 to February 27. Exor has since partly recovered that loss, more than doubling to e14 on Tuesday. IFIL and Exor have tracked Fiat stock.
"Exor has been beaten up," says James Morton, a London-based money manager at Mackenzie Financial Corporation, which has a 16 percent stake in Exor. "The stock is trading at a deep discount. We think it's a value."
The Agnellis are one of Italy's richest families, holding a 59 percent stake with a market value of about $2.6bn in Exor, whose investments include Fiat and Juventus Football Club.
Elkann says he was left with control of the family's business assets when his grandfather, Giovanni Agnelli II, died in 2003.
Elkann, now 33, possesses little of his grandfather's zeal for public life. Called serious by associates, he works out of Exor's Turin headquarters, a 19th-century, gray-stone, neoclassical palazzo that stretches for an entire city block. It was the Agnelli family home until the 1960s.
Fluent in English, French, Italian and Portuguese, Elkann appears in public mostly at ceremonial events, such as the one in June with Fiat chief executive Sergio Marchionne and Italian Prime Minister Silvio Berlusconi to showcase Fiat's new 500 convertible in Rome.
In one of Elkann's early displays of leadership, in 2006, he overhauled the management of the Juventus soccer team.
Juventus has been Italy's most dominant club, with 27 national championships. Prosecutors disclosed in May 2006 that they were investigating managers for match-fixing by allegedly arranging to have friendly referees assigned to important games.
Soccer fan
A soccer fan who regularly attends Juventus matches in Turin and on the road, Elkann moved quickly to address the scandal, appointing a new nine-member board of directors and chief executive in June 2006. "Today, we turn a page after what we've learned in recent weeks, in a sad chapter in Juventus history," he said at the time.
Giuseppe Berta, a business professor at Milan's Bocconi University, says cleaning up the Juventus mess was a small first step for the young heir. "It has no comparison to the industrial and financial challenges John is facing now," Berta says. "His match is still to be played out."
Elkann says he devotes most of his time to Exor, where he is leading the hunt for investments. He is looking primarily at financial services and commercial property firms.
"We'd like to add exposure to the largest emerging markets such as India and China," Elkann says. "What's important is to make decisions in the best interest of the stakeholders."
He oversaw the April 2007 purchase of a 72 percent stake in New York property services company Cushman & Wakefield for $625m near the peak of the property bubble. In February last year, IFIL said it agreed to invest e61m in Hong Kong-based hedge fund manager Vision Investment Management via a convertible bond that could become a 40 percent stake by 2013.
One a Friday morning in June Elkann walks into a conference room at his headquarters to talk with reporters about his gamble on Chrysler. With a serious look on his face, he fishes small chocolate bars from his suit jacket pocket and hands them to reporters.
"Chrysler is a tremendous opportunity and a huge challenge, and we are completely engaged," says Elkann. "Our conviction as a family and as Fiat shareholders is to ensure our legacy by strengthening the car business over time."
Elkann receives counsel from his late grandfather's advisors, Gabetti and Grande Stevens. Gabetti, 85, has worked for the family since the early 1970s and was chairman of the two holding companies when they were charged with manipulating the market last year. He is a life trustee of New York's Museum of Modern Art. Naples-born lawyer Grande Stevens, 81, has served as the secretary of Fiat's board from 1982 and was Gianni Agnelli's legal advisor.
In the market manipulation trial, Gabetti and Grande Stevens each face a maximum prison sentence of six years and fines of up to e3m.
Their ages would exempt them from actually serving time under Italian law. The two companies, IFIL and Sapaz, may each be fined as much as e1.5m.
The advisors and companies say that the August press releases were not misleading because company managers had not decided for sure to buy Fiat shares from Merrill, according to defence filings.
"One does not expect something like this to happen at the end of one's career, but when it's over, I am confident that things will be set right," says Gabetti.
The indictments stem from an administrative ruling in 2007 by Consob, Italy's market regulator, that the advisors and companies had issued misleading press releases. On appeal, judges reduced the fines for the companies, advisors and a third executive to e6.3m from e16m. Last month, the civil division of Italy's supreme court issued a final ruling upholding the administrative penalties for breaking market rules.
Consob also fined Merrill e250 000 in December 2007 for failing to disclose it had taken a stake in Fiat that exceeded 5 percent. A Merrill spokeswoman in Milan said the case had been resolved and declined to comment further.
Inheritance dispute
As the Agnelli companies face trial, the family is also dealing with an inheritance dispute. Two years ago, Elkann's mother - Margherita Agnelli de Pahlen - filed a lawsuit in Turin against Gabetti and Grande Stevens - accusing them of failing to tell her about assets from her father - Gianni Agnelli - allegedly stashed outside of Italy. Gabetti and Grande Stevens have contested the suit's merits in court filings.
In June 2007 - leaders of the family - which has more than 200 living members - broke with Elkann's mother in a letter to her that was reproduced by Italian newspapers.
The letter - which was signed by Gianni Agnelli's four sisters - voiced support for Gabetti, Grande Stevens and Agnelli de Pahlen's mother - Marella.
In 2004, Agnelli de Pahlen and her mother had reached a settlement over the inheritance.
"Your attack against your mother and people who for years worked with us, who enjoyed the full confidence of your father and who enjoy our trust, leaves us in complete disagreement," the letter said.
Elkann, who didn't sign the letter, told Italian news agency Ansa in 2007 that his mother's suit surprised and pained him. Agnelli de Pahlen, who lives near Geneva, declined a request for an interview.
The suit spurred Italy's tax authority, Agenzia delle Entrate, to open an investigation into the family's holdings, the agency said in August. Elkann denounced press accounts of the inquiry.
"I am indignant," Elkann told Ansa last month, "about the violence of the words used and the false accusations that have been made about my grandfather."
An Exor spokesperson says the probe does not include the holding company or Fiat.
Elkann inherited a crisis at Fiat.
"He's a dynamic and innovative leader," says Ron Bloom, the head of the US government's auto task force, which led the restructuring of Chrysler in bankruptcy. "He's just what Chrysler needs."
But six years into leading a dynasty, Elkann's hurdles are high, and after the Agnellis ran Fiat for five generations, he may become the heir who surrenders his clan's grip on its car maker. - Bloomberg
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