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Will CEO Change Slow Other Changes at Finmeccanica?

Apr. 21, 2014 - 04:37PM   |  
By TOM KINGTON   |   Comments
Mayor Unveils New Security Videocameras At Milano
Mauro Moretti, the new CEO of Finmeccanica, previously ran Italy's state railway company. (Vittorio Zunino Celotto/Getty Images)
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ROME — The arrival of a new CEO at Italian defense group Finmeccanica has left analysts fretting over whether plans to dump the group’s loss-making transport activity will be delayed.

Mauro Moretti was tapped on April 14 by the government to take over the state-controlled group from CEO Alessandro Pansa, who has been urging ministers for months to let him sell Ansaldo Breda, a maker of rolling stock that has been hemorrhaging cash for years.

What worries the markets, which have long backed the sale, is that Moretti is moving to Finmeccanica from running Italy’s state railway company, Ferrovie dello Stato, where he had worked since 1977.

News of Moretti’s appointment prompted a 7.2 percent slide in two days in Finmeccanica’s share price. It had been edging up as a result of Pansa’s bid to sell Ansaldo Breda, as well as his efforts to cut costs and increase transparency in the wake of a series of corruption scandals that buffeted the group and led to the arrest of predecessor Giuseppe Orsi.

Selling Ansaldo Breda and railway signaling company Ansaldo STS have been backed by the government, which said in a statement last month that exiting the transport sector is “essential” to allow Finmeccanica to focus on aerospace, defense and security.

But Italy’s Mediobanca warned April 15 that Moretti’s arrival could lead to “potential strategic delays or radical rethinking of the projected disposal of the civil assets.”

Italian investment bank Equita said in a note, “We still believe the focus on core businesses will remain a priority, but decisions will inevitably take longer.”

Fears grew after Fabrizio Landi, who is due to join the Finmeccanica board of directors, told an Italian newspaper, “I will ask Moretti to re-evaluate the question of the sale of Ansaldo Breda, in the light of a detailed study that he is the best qualified to carry out.”

Moretti gained a reputation for canny restructuring at Ferrovie dello Stato, bringing Italy’s creaking rail network back into profit with the launch of fast new lines.

He is seen as a firm favorite of Prime Minister Matteo Renzi, who reportedly had him in mind as a possible ministerial candidate when he entered government in February. Moretti got his new job as part of a broad sweep of new appointments ordered by Renzi at the top of state utilities.

But critics have questioned Moretti’s qualifications to run a global defense group, noting he had just one competitor to deal with at the railways and has no defense experience. Moreover, he becomes Finmeccanica’s fourth CEO since 2011, when Pierfrancesco Guarguaglini stepped down.

But one analyst was not rattled by the change. “The reaction of some to this appointment — that he is a railway man and therefore will not sell off the railway units — is, I believe, a logical non sequitur,” said Charles Armitage, an analyst at UBS, London, who tracks Finmeccanica.

“He is a turnaround specialist who will take a good look at the company, but the Italian government has already given the go-ahead on better governance, cost reductions and portfolio rationalization, and I believe that will be broadly untouched. This is more of a midcourse correction,” he said. “He may be new to the business, but look at Louis Gallois, who restructured the French railways without a strike and then applied his methods when he took over EADS.”

But a second, Italy-based analyst said Moretti’s appointment was a mystery because Finmeccanica’s restructuring is underway.

“Helicopters and aeronautics now have programs under way which generate revenue with low risk while electronics units have downsized, so there is no need to launch a revolution,” said the analyst, who declined to be named. “And if the government has blessed the sell-offs, Moretti’s arrival likely reflects Renzi’s wish to change everything, and the fact that Moretti is well liked by Renzi and the Italian President Giorgio Napolitano. But Moretti is an outsider, and it is a risk.”

Armitage said that despite joining Finmeccanica amid restructuring, there are a few strategic decisions facing Moretti.

“Decisions about whether to sell off parts of Defence Systems — Oto Melara and WASS and Finmeccanica’s stake in MBDA — may now be delayed,” he said.

Another decision involves picking a partner, from Airbus or Safran, in the management of Avio’s space activity, in which Finmeccanica holds a stake.

Armitage said one decision unlikely to be made in a hurry is finding a merger partner for Finmeccanica in Europe, something touted in 2012 when BAE Systems was planning a merger with EADS, now rebranded Airbus.

“Thales could be the candidate, but Finmeccanica’s high debt means its market [capitalization] is €3.7 billion [US $5.1 billion] to Thales’ €9 billion, despite similar sales. That would only give Italy about 25 percent control of a merged entity, which would likely be unacceptable to Rome,” he said.

One change due to happen immediately involves wages. As part of Renzi’s clamp-down on state salaries, Finmeccanica President Gianni de Gennaro will have his annual salary cut to €238,000 while Moretti is set to see his salary take a 25 percent cut. Pansa was earning €816,000 plus bonuses. ■


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