Roadblocks Ahead for Merger of Spain’s Abertis and Italy’s Autostrade?
It was a weekend that generated shock waves. On the night of April 21, the news broke from Italy: Spain’s Abertis and Italy’s Autostrade were merging. The two largest highway companies in Europe had decided to join forces to create a giant of dimensions that were unimaginable, at least until then. The results of this marriage would be a company with revenues of €6 billion, a staff of 20,000 employees, stock market capitalization above €25 billion, assets of €45 billion, and more than 6,700 kilometers of super highways in 16 countries.
By the time gossip about the deal spread through the business world, Autostrade’s board of directors had met on Saturday to approve the deal. The next day, the Spaniards did the same. However, one surprise remained: Despite all expectations, Abertis was the one who was assuming power. Although the two parties insisted on selling the deal as a merger of equals, the Spaniards came away with the majority of the new company’s capital, its brand, its headquarters, and its executive leadership in the person of Salvador Alemany, its chief executive.
After word got out, it wasn’t long before problems popped up in Italy, a country fully immersed in the process of changing its government. In the elections, allies of Romano Prodi, who had snatched away power from Silvio Berlusconi, went on to declare that they were against the deal. Super highways are considered a strategic asset for any government, and Autostrade owns 70% of the country’s privately owned mileage. Vito Gamberale, the chief executive of Autostrade, was the first person to sound the alarm.
Merger or Takeover?
Shortly after the deal was announced, Il Sole 24 Ore, the Italian newspaper, assured readers that Gamberale opposed the merger. The newspaper went even further, assuring readers that the entire deal was made behind the back of the executive. The Benetton family, which owns the multicolored fashion company and is the largest shareholder of Autostrade through the Schema28 investment corporation, had planned everything behind Gamberale’s back. A day earlier, on April 22, the Benetton family had informed the board of directors.
In that initial meeting, Gamberale gave his approval to the merger. But a week later, when he was to definitively approve the plans of Benetton, he distanced himself from the deal. It was a tale that involved a resignation announcement. Ever since they had learned about the deal, the Spaniards had been clear about who was going to be their representatives in the newly created giant: Isidre Fainé, who was president of both La Caixa, the financial institution, as well as Abertis, would occupy the same position in the new giant. Florentino Pérez, president of the construction firm ACS and former director of Real Madrid CF, would be its vice-president. Meanwhile, Salvador Alemany would retake his position as chief executive. However, for Italy, the only clear position was the presidency, which would be shared by Fainé and Gian Maria Gross-Prieto.
Nevertheless, experts did not agree about whether the deal involved a true merger between equals or, on the contrary, a handover of power to the Spanish company. Mauro Guillén, a Wharton management professor, is more inclined to believe the second position. “It seems to be a hidden takeover, given what we know about the new executives and the location of the headquarters in Barcelona.” However, Joaquin Garralda disagrees. He prefers to give a vote of confidence to the official version – at least for the moment. “Whether this is hidden or not, we’ll find out a posteriori. However, if we look at the usual figures, it seems like a merger. La Caixa and ACS are the top shareholders in the Spanish company, and they will continue to be partners after the merger with Autostrade behind Italy’s Benetton, which will be the largest shareholder. It is a very subtle thing, and I believe there will be many agreements. It seems that the board is composed of equals, so I believe that it is indeed going to be a merger. However, time will tell.”
No one doubts that the deal has strategic meaning. According to Garralda, “These are two big companies and they decide to merge to create a giant that is even larger, without any precedent. Most of their business is in superhighways, a very stable activity where the only thing you have to worry about is the regulatory agency. From a strategic point of view, therefore, this is going to be not only the largest company but probably also the most profitable. I believe that the only expense that might cut into its profits is financing costs, in the sense that when the funds want to buy its shares, it will cost them money. In financial terms, they will have access to more investment funds.” As a result, he adds, “The merger is going to provide them with very solid financial power. From the viewpoint of financial management, they will gain competitive advantages and they will be able to perform better than other companies. In summary, I do not believe that economy of scale is going to be the key to the resulting company, but rather its greater financial strength, its greater visibility and its greater ability to get international funding.”
If Italy winds up being a serious hindrance to the merger, it could spell the end of the grandiose dreams of Abertis and Autrostrade and could determine its ability to compete on the other side of the Atlantic. Another question follows: Can these companies compete, one by one, in the U.S., or are they forced to merge? “I don’t think they are,” says Garralda. “Each company maintained its position until this merger. I believe, instead, that there is a generalized fear that you need to eat or you will be eaten. I suppose that all companies would rather make acquisitions than be acquired. In this case, Abertis has stolen a march on its competition.”
Objective: The U.S.and Asia
The financial muscle that Abertis and Autostrade derive from joining forces will be their main calling card when attacking markets in the U.S. and Asia. Everything indicates that there will major projects in those two regions in coming years. Abertis already had its first experience in the U.S. at the start of this year -- its Toll Road in Indiana. However, it wound up withdrawing from the struggle, won by its rival Cintra which is also from Spain. Last year, Cintra was also awarded the Skyway of Chicago highway, and it is a strategic partner with the State of Texas in the Trans Texas Corridor, an ambitious project that will involve global investments of between $29 billion and $36.7 billion. The project will set a standard for all future roads that modernize communications in Texas.
Cintra’s success has awakened the interest of other companies. However, one doubt is floating in the air: Will European companies know how to compete in the Anglo-Saxon market? The doubt seems reasonable when you compare the protectionism of Europe with the free market in the U.S. In fact, analysts have long noted the Anglo-Saxon mentality of Cintra, a subsidiary of Ferrovial, as one of its key strengths when competing in the U.S. Guillén has no doubts that Abertis will be able to crack the U.S. market. “Obviously, Abertis already knows how to operate in many markets. It will do well in Europe and in the U.S. Spanish contracting companies are among the best in the world,” he adds.
Garralda emphasizes the rationality of the Anglo-Saxon market versus the European market, where guarantees of employment, the nationality of the company, and controlled prices can wind up playing a greater role than economic supply. Nevertheless, he is sure that Abertis and Autostrade “have the skills required for working as well on Anglo-Saxon terrain as their competitors do.”
In contrast, the Chinese market offers other sorts of question marks. Excessive protectionism by the government and barriers against the operations of Spanish construction firms combine to explain a comment that Salvador Alemany made recently. He said expansion in Asia is only a “medium term” goal of his company, not a short-term goal. Legal security is another important factor in the highway construction business, where companies seal agreements with governments that last for decades.
The Chinese government will have to provide the legal guarantees and the necessary markets so foreigners decide to begin to drive on their roads. In Garralda’s opinion, “China is probably the country that will offer the most exploitation opportunities in the world. The problem is the role of the public sector. If a free market system such as the American system depends on public administration, imagine the Chinese Communist system, which is so interventionist. They could easily make the decision to take a different approach, or I imagine that the Chinese could get cold feet and be very careful when it comes time for the country to act.”
At the moment, the only guaranteed investments for Abertis and Autostrade are 14 billion euros’ worth of projects in Italy, France and Spain over the next 10 years. However, it seems increasingly possible that this giant will decide to battle for projects outside Europe. One of the main criticisms that Autostrade received in recent years was “statism” when it was time to compete in foreign markets. Nevertheless, Spanish construction firms have pressed on the accelerator on highways in half of the world, and they have jumped into the lead. Only two years ago, Abertis’ market capitalization was worth about 30% of Autostrade’s, but ever since last year, the value of Abertis’ shares has equaled that of Autostrade’s.
The union of these two companies will create the largest European network of highways controlled by a single company. Practically speaking, from the south of Spain to the south of Italy, passing through France, Abertis-Autostrade resembles a large-scale highway map. That’s especially true after Abertis’ purchase a few months ago of France’s APRR in an auction that the French government precipitated by privatizing four companies in that sector. The competition provided a serious setback for Autostrade, which suffered a brief crisis because of the absence of new projects on the horizon. The Benetton family, top shareholders in Autostrade, have been the driving force behind the merger with Abertis, along with La Caixa and ACS. For its part, giant Abertis was itself created by a merger of Acesa and Aurea at the start of 2003. The alliance between these three partners has been one of the main sources of support for this deal, which has been warmly welcomed by the stock market.