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Watch Out, Billionaire Del Vecchio Is Meddling

Chris Hughes

(Bloomberg Opinion) -- Italy’s second-richest tycoon made his fortune in spectacles, and now he has ideas about how to run a bank. There is no doubting Leonardo Del Vecchio’s entrepreneurial flair. But his decision to take a 7% stake in Mediobanca SpA and opine publicly about its strategy merits caution. He is but one shareholder, and he should not dictate the lender’s strategy.

Del Vecchio is not a naturally passive shareholder or owner. Chief executive officers at his glasses maker Luxottica Group SpA would rotate at an alarming pace. The merger of Luxottica with French lenses group Essilor diluted his dominant holding into a non-controlling stake and created a balanced board with representation from both sides. The arrangement soon fell into acrimony. That is an inauspicious backdrop for a large and potentially growing investment in Mediobanca.

His motivations are unclear. The benign explanation is that this is portfolio diversification: Most of Del Vecchio’s wealth is tied up in the eyewear industry. He has some financial exposure to Italian insurer Assicurazioni Generali SpA and lender UniCredit SpA, but this is relatively small. The more worrying possibility is that it really is about meddling with another Generali shareholder — Mediobanca owns 13% of the insurer — or that it relates to some other personal agenda.

Del Vecchio has reportedly said Mediobanca needs to be more ambitious in mergers and acquisitions, expand in investment banking, and rely less on the income it receives from Generali. It is not obvious all of these ideas would benefit other shareholders. Wealth management is where acquisitions might make sense for Mediobanca, but deals are risky given that the main assets — the people — can walk out of the door. Mediobanca CEO Alberto Nagel has been rightly cautious.

Lifting exposure to investment banking activities, reviving a former strategy, would re-introduce more volatile revenue streams and risk lowering the multiple of earnings on which the shares trade.

The function of the Generali stake is a trickier question. Corporate finance theory would dictate that Mediobanca should sell it and return cash to shareholders. If the bank needed cash in the future, it would then ask shareholders to stump up when it could show what the funds would be used for.

That works for big, diversified corporations like Unilever NV. But a smaller, less well-capitalized, Italy-focused bank would probably find the capital markets unwilling to provide funds just when it needed them most — for example, in hard times when bid targets were most affordable. So long as there is a possibility that Mediobanca might want to do M&A, the stake is best seen as a financial resource to be retained.

It’s possible that Del Vecchio’s vision and Nagel’s could align if Mediobanca finds a decent takeover target, which the Generali stake could pay for. But while Mediobanca’s existing strategy looks sound, and the group is well run, Nagel cannot be complacent. The Generali stake makes a big contribution to net income but doesn’t require any management effort. And Mediobanca’s central and treasury functions make an uncomfortably high dent in the profits that the other businesses bring in. 

An upcoming strategy refresh offers the chance for Nagel to set some hard targets for revenue growth and further cost efficiency that would dispel any suggestion of low ambition.

To contact the author of this story: Chris Hughes at chughes89@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@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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