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24 August, 2006
  Italy's protectionism addiction
A blocked merger deal between an Italian toll-road operator and a Spanish
infrastructure firm signals the return of protectionism in Italy.

Commentary by Eric J Lyman in Rome for ISN Security Watch (24/08/06)

ROME --Just when observers thought Italy had kicked the controversial protectionism
habit, it appears to have reared its ugly head again in connection with a merger
between an Italian toll-road operator and a Barcelona-based infrastructure firm.

For decades, Italy has been more likely than most countries to take extraordinary steps
to protect its domestic business interests. But as the Italian economy became more
ingrained in the EU over the last decade, the practice became more controversial. The
issue came to a head last year when then-central bank governor Antonio Fazio took
illegal steps to block Dutch banker ABN Amro's attempt to acquire Italian rival Banca

The conventional wisdom was that the deal - which resulted in so much pressure from
Brussels and other European capitals that it was pushed through anyway and the
disgraced Fazio was forced to resign - broke Italy of the protectionism habit. That
belief was reinforced when the Italo-centric government of Silvio Berlusconi was
narrowly defeated by a pro-European coalition led by former European Commission
president Romano Prodi.

But the proposed €14.3 billion deal (US$18.4 billion) between Italian highway operator
Autostrada (a subsidiary of clothing giant Benetton) and Spain's Abertis is proving

The planned merger looked like a sure thing - at first. Shareholders at both companies
approved the deal by large margins. Spanish regulators gave it a quick thumbs up, and
the Italian securities regulator and antitrust authority thought the deal worry free
enough to skip a full investigation.

Then Infrastructure Minister Antonio di Pietro and Finance Minister Tommaso Padoa-
Schioppa unexpectedly weighed in on the subject, co-authoring a letter to the
country's usually silent highways regulator. The letter opined that the deal should be
blocked based on a decade-old provision that included a paragraph that could be
interpreted to indicate that construction companies should not own stakes in Italian
highway operators. That spelled trouble: Abertis' second largest shareholder is
Spanish construction company ACS, which owns a stake large enough to mean it
would hold 12.5 percent of the combined company.

And so the deal was blocked - though nobody who paid much attention thought it was
because of the probability of a construction company like ACS holding a seat on the
new company's board of directors. After all, ACS already owns a non-controversial
chunk of Autostrada through an investment in a holding company controlled by
Benetton, the highway operator's parent company. And Autostrada's biggest rival in
Italy, Gavio, is itself one of the country's largest construction companies.

A more likely culprit? It is probable that di Pietro, Padoa-Schioppa and other critics of
the deal balked at the notion of an Italian company operating more than 3,400 kilometers
of highway having a Spanish CEO and based in Barcelona.

The synergies created by the proposed merger are not obvious. But that has never
been a prerequisite to regulatory approval, and most believe the deal will eventually be
approved. Sensing a brewing controversy, many at the highest reaches of the Italian
government have tried to stay out of the fray, and several prominent early critics have
since back-pedaled.

Meanwhile, major shareholders from both companies have appealed to the EU, which
has indicated it could step in, as it did with the precedent-setting merger between ABN
Amro and Banca Antonveneta.

Autostrada and Abertis have at least a couple of options to assure the deal goes
through. The most proactive would be for Abertis to ask or force ACS to sell most or
all its stake in the company. But a more likely tact is for the pair to fight for the deal in
the court of public opinion: putting visible pressure on Prodi to reveal his pro-European
roots by pulling rank on his ministers and lobbying for the EU to get involved.

Where does this leave Italy? However it all plays out, it seems Italy is likely to come out
of this process with egg on its face. A long-standing even if unofficial policy of limiting
foreign access to the Italian economy has often been popular at home, but has long
been criticized everywhere else. With this deal, Prodi and his allies may have proved
that they are not above the country's notorious protectionist addiction.

The timing of the development could hardly be worse: Too many wrong signals could
result in foreigners shunning the struggling Italian economy at the very point that it is
battling to turn the corner, when an inflow of foreign capital could be part of the

"The government in Italy is sending the wrong signal at the wrong time," suggested a
statement from the Instituto Bruno Leoni, a Turin-based pro-market think tank.

And it's hard to disagree.


Eric J Lyman is ISN Security Watch's senior correspondent in Rome.

The views and opinions expressed herein are those of the author only, not the
International Relations and Security Network (ISN).