Activist Investing Italian Style: The Battle for Generali

Medieval Italy was beset by warring factions such as the Guelphs and Ghibellines or, in Shakespeare’s tale, the Montagues and Capulets. Today’s corporate scene sometimes seems similar, but investors shouldn’t be put off.

Assicurazioni Generali,

G 2.12%

one of the largest European insurance companies is under siege. The board wants shareholders to renew the mandate of incumbent Chief Executive Officer Philippe Donnet at a meeting on April 29 and has the support of major shareholder Mediobanca,

a bank in Milan. But the second largest shareholder, cement magnate Francesco Gaetano Caltagirone,

Last week he proposed another board, including veteran Generali manager Luciano Cirinà as CEO, who was promptly fired for volunteering to replace his boss.

Dissenters argue that Generali has gradually lost ground to competitors like Allianz, Axa and Zurich and needs a more ambitious growth strategy. This week they received the support of Leonardo Del Vecchio, Generali’s third-largest shareholder. One of Italy’s richest men, Mr. Del Vecchio founded Luxottica, the owner of eyewear brands including Ray-Ban and Oakley, which merged with French eyeglass lens manufacturer Essilor in 2018 to become a global eye care giant.

According to the insurer, Mediobanca owns 13% of Generali, while Mr Caltagirone and Mr Del Vecchio together hold 16%. However, it is disputed that Mediobanca has rented a further 4.4% of votes. So much will depend on smaller shareholders, including the big US fund managers. Mr. Del Vecchio has also built up a 19 per cent stake in Mediobanca, but that doesn’t seem to interfere with the battle for Generali.

Aside from the dubious practice of outside votes, the case shows in some ways how corporate governance is supposed to work. It’s similar to an activist situation in the US, only with billionaire entrepreneurs and no Wall Street fee-earners.

Generali is open to activism because it has an unusually diversified investor base by Italian standards. According to Italy’s stock exchange regulator, top shareholders own an average of 48% of listed Italian companies – far more than in the US or other European countries. The structure of Mr. Caltagirone’s challenge of proposing alternative directors has its roots in governance reforms to counter the weight of these large shareholders.

Investors are optimistic as Generali shares rose above €20 for the first time since 2008 this week. Analysts at Berenberg Bank expect Mr Donnet to be re-elected but will be under pressure to exceed his existing targets.

A less rosy view would be that disagreements between key shareholders eventually cripple Generali. Telecom Italy,

A telecom company that has become a shadow of itself through years of over-indebtedness, underinvestment and power struggles reveals the risks.

A preliminary offer from KKR,

first announced in November, Telecom Italia could offer a way out of the impasse. The company said this week it is still in talks with the US private equity giant and has also received interest from rival fund CVC for a minority stake in its corporate business. But investors’ hopes could easily be thwarted by government fears that Italy’s broadband network would fall into foreign hands, or by legacy board portfolios: major shareholder Vivendi has opposed a sale, while institutional investors are broadly in favour.

The line between healthy debate and destructive bickering is difficult to draw, but for now Generali seems to be on the right side. To stay there, struggling shareholders will need to reach a meaningful agreement after this month’s vote. Activists do well to raise the bar for performance, but a corporate renaissance also requires stable leadership.

write to Stephen Wilmot at stephen.wilmot@wsj.com

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