Billionaire Benettons Must Tread Carefully in Italy

(Bloomberg Opinion) -- The Benetton name has become tarnished in Italy. The billionaire family has become synonymous with troubled infrastructure group Atlantia SpA, now facing serious financial repercussions over the tragic collapse of the Morandi road bridge in 2018. The episode starkly underscores how business is a complex social activity which depends on much more than legal contracts between its stakeholders.

The investigation into what caused a section of the bridge to give way, claiming 43 lives, has yet to conclude. But Prime Minister Giuseppe Conte has told La Repubblica newspaper there was grave negligence by Atlantia subsidiary Autostrade per l’Italia (the Benettons own 30% of Atlantia). As punishment, the government has changed the law so it could revoke the road operator’s lucrative motorway concession and pay it significantly lower compensation than the existing contract would have allowed.

For its part, Autostrade asserts that it has always met its obligations under the concession agreement, spending more on maintenance than it had originally committed to do.

Rome’s disregard for contractual obligations should not be seen as a symptom of capricious Italian politics. It’s plausible that other governments would have made similar moves faced with the same public uproar.

Indeed, the authorities might be justified in breaching the contract if that were necessary to prevent unpalatable outcomes. The terms say that Autostrade should be compensated for termination at the net present value (NPV) of the asset’s future cash flows. This is estimated by analysts to be about 20 billion euros ($22 billion) or more. The penalty for gross negligence is 10%, implying a roughly 2 billion euros fine depending on where the NPV was agreed. The sight of Autostrade walking away with 90% of fair value if gross negligence were proven to have contributed to such an awful event would be intolerable.

True, there is scope to levy additional deductions for “damage suffered by the grantor” (the transport ministry). But the opportunity for legal wrangling over that number must be high. The new law solves this by setting the starting point for compensation at book value, which could be half the NPV and so prices in a massive damages claim from the outset.

The principal difficulty with the government’s radicalism is that it comes ahead of the formal conclusion of the investigation and proposes an arbitrary compensation number that lacks transparent justification. The practical problem is that it’s hard to see how any company other than Autostrade can operate Italy’s motorways.

There’s still scope for a negotiated resolution. The government’s priority should be to take any necessary enforcement action arising from the probe, and to ensure the motorway infrastructure is safe. It also needs to incentivize good behavior by concession holders. There’s the understandable worry that the near-term demands of Atlantia’s debt interest and shareholder dividends trumped necessary spending to prevent problems that would take time to emerge.

As for Atlantia, it would be unwise to see its goal here as extracting a decent financial settlement, ridding itself of the concession and walking away. Short-term investors who have piled into the shares are probably betting that it has European law on its side and will do just that. The Benettons, whose large holding confers a sizeable stewardship responsibility, hopefully think differently.

The real challenge for Atlantia is to regain its license to operate in the broadest sense — rebuilding a lasting partnership between itself and the society in which it does business. Exiting the concession won’t achieve that. Nor will a protracted legal battle in defense of contractual entitlements. A long-term agreement providing appropriate redress for any past failings, and holding Atlantia’s feet to the fire to ensure the motorway infrastructure is safe and stays that way, must be the common goal.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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