In the past year China has played a larger part in Italian investment than ever before. China National Chemical Corporation (ChemChina) acquired tyre maker Pirelli in a $7.1bn (£5.4bn) deal, while football clubs AC Milan and Inter Milan were sold to Chinese investors.
This investment looks set to continue as Chinese buyers see Italy as a gateway to market share in the EU and around the world. After a period of economic hardship in Italy the country is seeing an influx of foreign direct investment and this has already had a positive effect on Italy’s GDP.
As big-name corporates circle the opportunities increase for Italian lawyers. The deals are out there and it is up to them to position themselves as the investors’ local law firms of choice.
Why are Italy-headquartered companies attractive to Chinese buyers?
Vittorio Noseda, partner, NCTM: Italy has been China’s biggest target in Europe, according to Bloomberg. We saw this with ChemChina’s purchase of Pirelli – the $7.1bn deal that was the largest Chinese investment into Italy to date and means China’s investments totalled nearly $14bn in 2015. We’ve also seen Chinese investments in two of the best-known football teams in Italy and the world – AC Milan and Inter Milan. For 2016 foreign investment was reportedly at a record high by the end of June. Italy offers a large and safe market as well as privileged access to the 300 million-strong EU market. Due to Italy’s economic struggles in recent years there has been a repricing of listed and unlisted entities that favours foreign investors, particularly in light of the increased stability of the euro.
Due to Italy’s economic struggles there has been a repricing of listed and unlisted entities that favours foreign investors” Vittorio Noseda
Italy is China’s new hot strategic investment market. Chinese investors can find established luxury brands and manufacturing, infrastructure and technology sectors offering key opportunities, while China needs outward investment for new market share in the EU and globally. Huawei, the Chinese telecoms equipment maker that has been operating in Italy for many years, recently doubled its R&D staff in Italy in light of the quality of Italian engineers. Foreign investment in large Italian companies is welcome, and the People’s Bank of China holds stakes in some of Italy’s biggest companies such as Assicurazioni Generali, Enel, Eni, Fiat Chrysler Automobiles and Telecom Italia.
Stefano Micheli and Renzo Cavalieri, Asia country partners, Bonelli Erede Pappalardo: Chinese corporations are large but generally too local to grow steadily on global markets. They urgently need to diversify their production and markets, as well as to improve their technological standards, quality and reputation.
By buying Italian companies they get – for a reasonable price and in reasonably safe political, social and economic conditions – some of the most prestigious brands of the world. Italy is also a gateway to the EU and potentially a convenient hub for approaching other EMEA countries.
Stefano Beghi, Hong Kong managing partner, Gianni Origoni Grippo Cappelli & Partners: ‘Made in Italy’, ‘Designed in Italy’ and ‘Italian know-how’ are all carriers of value in China and allow an increased selling price of goods and services, while differentiating the offer from local competitors.
Investing in a company headquartered in Italy may bring to Chinese companies a tremendous competitive advantage in the local market, as the assumption is that all the soft skills, experience, knowledge, belong to the highly appreciated Italian tradition.
Bureaucracy, tax pressure and poor support from banks are the traditional weaknesses of the Italian market” Stefano Beghi
Marco Nicolini, partner, Chiomenti Studio Legale: In our professional experience some Italy-headquartered companies are attractive to Chinese buyers because of the combination of the needs of the Italian companies (often small to medium-sized with high-quality products and technology but in need of growing internationally) and the needs of Chinese buyers (bringing liquidity and know-how related to large, growing markets with strong appetite for such products).
Also, Italy today may be the right place to invest as the economy is benefiting from some structural reforms the Italian government is putting in place. After the prolonged economic crisis that has hit the European economies there might be an opportunity to acquire quality assets at an attractive price.
Do you see any trends in terms of Italian companies being acquired?
Gabriele Capecchi, partner, Legance: Although Chinese investments are quite diversified we can see there is a concentration of investment in energy and infrastructure companies. Just considering the past three years, Chinese investors have acquired stakes (even minority ones) in Ansaldo, Enel, Eni, Energia and Telecom Italia, not to mention one of the biggest transactions of the recent years – the acquisition of the controlling participation in Pirelli by ChemChina. This trend is not only true in Italy but also reflects their worldwide investment strategy.
Beghi: Mid-sized, family-run businesses with a strong international presence are being acquired. These are particularly in the aviation, automotive components and cruise ships sectors, as well as medical equipment, pharmaceuticals, education, sports, hotels and consumer goods industries.
Micheli and Cavalieri: Not really. Chinese companies (both private and state-owned) have invested in almost every industrial sector from energy to automotive, from yachts to football teams, from food to real estate. In some cases targets were financially distressed, in others perfectly healthy. Also, from a dimensional point of view it is not easy to identify a trend. However, in general Chinese investors prefer to get full control of the targets: investments in minority shares are quite exceptional.
Nicolini: We see two main trends. First, there is an investment trend towards targeting assets that are brought back to China to exploit the growing market there. This is a less recent but still active investment trend that typically targets assets either in the consumer space (such as food, furniture, fashion and luxury) and in the industrial technology and products space (such as environment-related technology, automotive and medical equipment).
Second, there is a more recent trend towards acquiring assets with a view to geographically diversifying investments out of China. In this respect we have seen growing interest in the financial, insurance and real estate sectors. From a size perspective, investments range from a few million euro up to multibillion deals.
How are the Italian firms positioning themselves amid this growing Chinese investment, and taking advantage of the opportunities?
Capecchi: Chinese companies arriving in Italy in search of investment opportunities are looking for ‘one-stop-shop’ advice. They need to receive a global introduction to our market, our legal system and assistance to soften the impact with our complicated bureaucracy. Italian firms are connecting with Chinese firms to receive their clients wishing to expand their investments in our country and such clients appreciate the continuing assistance with all aspects of law and the sensibility to understand that even our most common negotiating rules should never be taken for granted.
There is a concentration of Chinese investment in energy and infrastructure companies” Gabriele Capecchi
Beghi: Most Chinese investments are welcomed as they bring a huge opportunity to expand the market in China and other countries. The Chinese investor seems more mature now and respectful of the target’s traditions and management. Other Italian companies react by trying to find their own way in China through acquisitions or direct investments in general.
Noseda: Few large Italian law firms are developing strategic partnerships in China, such as an office or presence there. Through direct collaboration with Chinese lawyers the forging of new relationships, and the strengthening of established relationships, is occurring so that when Chinese investors are looking to invest in Italy such firms can provide assistance when Italian investors may be looking to invest in China. This enables firms to guide good investment opportunities for their clients between China and Italy. The Italian government also supports cross-border investment between Italy and China.
Micheli and Cavalieri: In some cases Chinese investors are perceived as ‘white knights’ who save Italian companies that are close to bankruptcy. In other cases the dimensions and financial capacity of Chinese investors are considered essential to provide to Italian companies – in the majority of cases relatively small – with new opportunities for development and new markets. In any event, China now plays a major role in all Italian large and mid-sized enterprises’ strategies. In fact, those who are not interested in becoming targets of Chinese investments are trying to increase their presence in China.
Apart from China, which countries are looking at Italy from an investment point of view?
Capecchi: Taking into account that different countries are interested in different sectors, the US remains one of the most active investors in our country. If we only consider M&A transactions, US investments in 2015 were equal to almost €10bn (£8.5bn), which is not only an outstanding result but also notably higher than the amount invested in previous years. This is a positive trend.
Beghi: Among Asian investors Koreans, Singaporeans and Malaysians are looking carefully at Italy but I would not say there is a trend in this sense. It still concerns opportunistic investment.
Micheli and Cavalieri: Chinese investors’ interest in Italy is a quite recent phenomenon, but of course Italian companies remain attractive targets for other countries’ investors. The past 12 months, in particular, have seen a steady growth of M&A activity in Italy with investments both from the ‘usual suspects’ countries like the US, France or Germany, and from China’s direct competitors like Japan or the Arab Emirates.
In some cases Chinese investors are perceived as ‘white knights’ who save Italian companies that are close to bankruptcy”
Stefano Micheli and Renzo Cavalieri
Noseda: We have seen recent investments involving the US, UK, Germany and Spain among others. Also, new investment opportunities are offered by state-owned group such as Poste or Enac being listed and with the governmental project to favour growth and the concentration of Italian banks.
What are the challenges facing Chinese companies that want to invest in Italy?
Capecchi: Chinese investors need to be guided through a legal, economic and bureaucratic environment they are not familiar with and have difficulty understanding. Our country’s bureaucracy can reduce the attractiveness of its assets, resources and know-how. The Italian government has been working hard to reduce these difficulties and labour reform is a good example of a successful step towards attracting foreign investors. Tax reform, administrative flexibility and incentives for Chinese who wish to move to Italy will ensure our country stays on the Chinese investment radar.
Beghi: Bureaucracy, tax pressure, the steadiness of the employment market and poor support from banks to foreign investors are the traditional weaknesses of the Italian market, and all this affects Chinese investments in Italy.
Noseda: At present there is a highly favourable climate for Chinese investment in Italy. The recent reform of labour law has provided the higher level of flexibility in the workforce that has been long-awaited by foreign investors.
On the other hand, challenges include the length of court procedures and some administrative procedures. These are, however, slowly improving.
Micheli and Cavalieri: The main challenge is probably related to human resources – Italy is not an easy country. Chinese investors often lack international corporate and personal experience, and their knowledge of Italian culture, language, economy and law is quite limited. Issues used to arise in both the M&A process (with a high rate of failure) and the post-merger integration process, but there are signs of improvement thanks to the rise of a class of more ‘globalised’ Chinese managers and advisers.
Nicolini: Challenges are mainly related to the language barrier and the cultural distance between the countries. Sometimes, also, the attitude of single parties may create additional challenges, specifically when the investment is made by Chinese industrial investors as opposed to financial investors, or when the target is a family-owned business. From a legal standpoint Italian law generally does not treat Chinese investors differently from other non-European investors. On the other hand, Chinese investors have to comply with local Chinese regulations governing outbound investments beyond China’s borders.
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