October 2009

By Vernon Silver and Sara Gay Forden Oct. 28 (Bloomberg) — When John Elkann was just 29 years old, in 2005, he faced the possibility of becoming the Agnelli family leader who lost control of Fiat SpA a century after his great-great-grandfather founded the automaker. The Turin-based maker of Ferraris and 500s had lost money in each of the previous four years. Instead of using cash to repay a loan of 3 billion euros, equivalent to $3.6 billion at the time, Fiat issued new shares to the lenders in September 2005. The banks may have supplanted the family as Fiat’s biggest shareholder if Agnelli holding companies hadn’t used an equity swap transaction with Merrill Lynch & Co. to retain the family’s grip on the automaker, according to the holding companies. Merrill, which had bought 10 percent of Fiat’s shares, sold most of its stake to the family at the exact moment the automaker issued new stock to pay back its lenders. The maneuver worked, keeping the Agnelli stake at 30 percent, according to the contracts for the deal. The family preserved control of Fiat. While the swap deal itself was lawful, in May 2008 Turin prosecutors filed charges against two Agnelli holding companies and two longtime family advisers for market manipulation. The prosecutors allege that the companies, Giovanni Agnelli & C. Sapaz and IFIL Investments SpA, and the advisers, Gianluigi Gabetti and Franzo Grande Stevens , misled investors by failing to disclose the swap deal in two press statements released a month prior to the transaction. Prosecutors say investors drove up Fiat’s stock price because they believed that the family companies might purchase shares in the market to keep hold of the automaker. Turin Trial Elkann, a native New Yorker who was raised in the U.K., Brazil, France and Italy, is scheduled to testify at the trial in November. It has been held in a courthouse hearing room buried under the streets of Turin and known to Italians by an English name: the Bunker. Lawyers in black gowns stroll past stone lions by contemporary artist Michelangelo Pistoletto to reach the subterranean chamber. The two companies, and both Grande Stevens and Gabetti, have denied the charges in documents filed in court. Elkann, who isn’t charged in the case, declined to discuss it through a spokesperson. “These are serious charges that call into question the transparency of one of Italy’s most important industrial families and whether they communicated correctly to the market,” says Luca D’Auria , a Milan-based lawyer who specializes in financial crimes. “Market manipulation carries severe penalties.” Chrysler Deal The trial is one of a series of challenges hitting the Agnelli family at its base in Turin, in northern Italy at the foot of the Alps. In June, Fiat agreed to dedicate about $10 billion worth of vehicle designs, engine technology and management time to Chrysler Group LLC in exchange for a 20 percent stake in the then-bankrupt U.S. company. Fiat says it made the deal to try to survive as an independent automaker by getting bigger and expanding sales in the U.S. Starting in mid-2007, investors punished the stock of Agnelli holding company IFIL Investments. The family combined IFIL and another company in March 2009 to form Exor SpA , where Elkann serves as chairman. Shares of IFIL plummeted 82 percent from July 2007 to Feb. 27. Exor has since partly recovered that loss, more than doubling to 14 euros on Oct. 27. IFIL and Exor have tracked Fiat stock. “Exor has been beaten up,” says James Morton , a London- based money manager at Mackenzie Financial Corp., which has a 16 percent stake in Exor. “The stock is trading at a deep discount. We think it’s a value.” Sporting Lifestyle The Agnellis are one of Italy’s richest families, holding a 59 percent stake with a market value of about $2.6 billion in Exor, whose investments include Fiat and Juventus Football Club SpA. Elkann says he was left with control of the family’s business assets when his grandfather, Giovanni Agnelli II, died in 2003. Known as Gianni, the grandfather spent his early adulthood darting around the Mediterranean on his yacht and helicopter. He was often accompanied by celebrity friends, from Jacqueline Kennedy to film star Anita Ekberg. Elkann has carried on the patriarch’s sporting lifestyle, spending 2.5 million euros of his own money to buy a racing yacht named Ericsson 3. He’s using the sailboat to enter an Italian team in the Volvo Ocean Race 2011-2012. Elkann decided to buy the racer in 2009 after a nine-day venture across the Atlantic Ocean with his skipper, Giovanni Soldini, on the Stealth, a black yacht that Gianni Agnelli had built. Artist and Journalist Elkann, now 33, possesses little of his grandfather’s zeal for public life. Called serious by associates, he works out of Exor’s Turin headquarters , a 19th-century, gray-stone, neoclassical palazzo that stretches for an entire city block. It was the Agnelli family home until the 1960s. Fluent in English, French, Italian and Portuguese, Elkann appears in public mostly at ceremonial events, such as the one in June with Fiat Chief Executive Officer Sergio Marchionne and Italian Prime Minister Silvio Berlusconi to showcase Fiat’s new 500 convertible in Rome. Elkann was raised mostly by his mother, Margherita Agnelli de Pahlen, 54, a painter whose poetic-realist landscapes and figurative works have been exhibited at galleries in France and Italy. Elkann’s father, French-Italian journalist Alain Elkann, and mother divorced in 1981. Agnelli de Pahlen’s second husband, former Fiat executive Serge de Pahlen, is a Russian count. Soccer Fan In one of Elkann’s early displays of leadership, in 2006, he overhauled the management of the Juventus soccer team. Juventus has been Italy’s most dominant club, with 27 national championships. Prosecutors disclosed in May 2006 that they were investigating managers for match fixing by allegedly arranging to have friendly referees assigned to important games. A soccer fan who regularly attends Juventus matches in Turin and on the road, Elkann moved quickly to address the scandal, appointing a new nine-member board of directors and CEO in June 2006. “Today, we turn a page after what we’ve learned in recent weeks, in a sad chapter in Juventus history,” he told reporters at the time. Giuseppe Berta, a business professor at Milan’s Bocconi University, says cleaning up the Juventus mess was a small first step for the young heir. “It has no comparison to the industrial and financial challenges John is facing now,” Berta says. “His match is still to be played out.” Elkann’s Investments Elkann says he devotes most of his time to Exor, where he’s leading the hunt for investments. He’s looking primarily at financial services and commercial real estate firms. “We’d like to add exposure to the largest emerging markets such as India and China,” Elkann says. “What’s important is to make decisions in the best interest of the stakeholders.” He oversaw the April 2007 purchase of a 72 percent stake in New York real estate services company Cushman & Wakefield Inc. for $625 million near the peak of the real estate bubble. In February 2008, IFIL said it agreed to invest 61 million euros in Hong Kong-based hedge fund manager Vision Investment Management Ltd. via a convertible bond that can become a 40 percent stake by 2013. One Friday morning in June, 6-foot-2-inch (1.88-meter), curly-haired Elkann walks into a conference room at his headquarters to talk with reporters about his gamble on Chrysler. With a serious look on his face, he fishes small chocolate bars from his suit jacket pocket and hands them to reporters. ‘Ensure Our Legacy’ “Chrysler is a tremendous opportunity and a huge challenge, and we are completely engaged,” says Elkann, who speaks carefully, his hands resting on the table. “Our conviction as a family and as Fiat shareholders is to ensure our legacy by strengthening the car business over time.” Elkann receives counsel from his late grandfather’s advisers, Gabetti and Grande Stevens. Gabetti, 85, has worked for the family since the early 1970s and was chairman of the two holding companies when they were charged with manipulating the market in 2008. He’s a life trustee of New York’s Museum of Modern Art. Naples-born lawyer Grande Stevens, 81, has served as the secretary of Fiat’s board from 1982 and was Gianni Agnelli’s legal adviser. In the market manipulation trial, Gabetti and Grande Stevens each face a maximum prison sentence of six years and fines of up to 3 million euros, says D’Auria, the attorney. Their ages would exempt them from actually serving time under Italian law. The two companies, IFIL and G.A. Sapaz, may each be fined as much as 1.5 million euros, D’Auria says. Paying Penalties The advisers and companies say that the August press releases weren’t misleading because company managers hadn’t decided for sure to buy Fiat shares from Merrill, according to defense filings. “One does not expect something like this to happen at the end of one’s career, but when it’s over, I am confident that things will be set right,” says white-haired Gabetti during a break at a hearing outside the courtroom in October. He’s stooped over and fighting a flu, a scarf wrapped around his neck. The indictments stem from an administrative ruling in 2007 by Consob, Italy’s market regulator, that the advisers and companies had issued misleading press releases. On appeal, judges reduced the fines for the companies, advisers and a third executive to 6.3 million euros from 16 million euros. In September, the civil division of Italy’s supreme court issued a final ruling upholding the administrative penalties for breaking market rules. Mother’s Lawsuit Consob also fined Merrill 250,000 euros in December 2007 for failing to disclose it had taken a stake in Fiat that exceeded 5 percent. A Merrill spokeswoman in Milan said the case had been resolved and declined to comment further. As the Agnelli companies face trial, the family is also dealing with an inheritance dispute. Two years ago, Elkann’s mother, Margherita Agnelli de Pahlen, filed a lawsuit in Turin against Gabetti and Grande Stevens, accusing them of failing to tell her about assets from her father, Gianni Agnelli, allegedly stashed outside of Italy. Gabetti and Grande Stevens have contested the suit’s merits in court filings. In June 2007, leaders of the family, which has more than 200 living members, broke with Elkann’s mother in a letter to her that was reproduced by Italian newspapers. The letter, which was signed by Gianni Agnelli’s four sisters, voiced support for Gabetti, Grande Stevens and Agnelli de Pahlen’s mother, Marella. In 2004, Agnelli de Pahlen and her mother had reached a settlement over the inheritance. ‘Indignant’ “Your attack against your mother and people who for years worked with us, who enjoyed the full confidence of your father and who enjoy our trust, leaves us in complete disagreement,” the letter said. Elkann, who didn’t sign the letter, told Italian news wire Ansa in 2007 that his mother’s suit surprised and pained him. Agnelli de Pahlen, who lives near Geneva, declined a request for an interview. The suit spurred Italy’s tax authority, Agenzia delle Entrate, to open an investigation into the family’s holdings, the agency said in August. Elkann denounced press accounts of the inquiry. “I am indignant,” Elkann told Ansa on Sept. 1, “about the violence of the words used and the false accusations that have been made about my grandfather.” An Exor spokesperson says the probe doesn’t include the holding company or Fiat. Elkann’s Training Elkann showed interest in the family business before he received a degree in industrial engineering and management at Turin Polytechnic. “He was already thinking about the work he was going to do,” Grande Stevens says. After graduating in 2000, he joined the corporate audit staff of General Electric Co., where Jack Welch — a Fiat board member — was CEO. Four years later, Elkann married Lavinia Borromeo, whose family owns the Borromean Islands in Italy’s Lake Maggiore. They have two sons, Leone, 3, and Oceano, 1. Gianni Agnelli, who died at age 81, picked Elkann, his eldest grandchild, to take the reins from him. Gianni’s only son, Edoardo, a devotee of Eastern religions, died in 2000 of an apparent suicide, his body found below a bridge near Turin. Elkann’s younger brother Lapo Elkann, 32, almost died of a drug overdose in 2005. “Gianni said there had to be a leader of the family, and he was right to pick John,” Grande Stevens says. “He is very serious and well prepared.” ‘Might Fail’ Elkann inherited a crisis at Fiat. In 2003, it was losing 2 million euros a day and had exhausted all of its lines of credit, Gabetti said in a 2006 deposition. “Fiat was under so much tension that it wasn’t out of the question to think it might fail,” he said. By 2005, the automaker’s 3 billion euro loan was coming due, creating the possibility that the family would lose its grip on Fiat. Instead of paying the banks in cash, Fiat planned to give them stock, converting the loan into a 27 percent Fiat stake. IFIL, a family company, would be left with 22 percent, according to Consob. At a July 2005 meeting in Grande Stevens’s office in Turin, a plan was set in motion that would keep the family in charge of Fiat, according to depositions by the two Merrill bankers, Maurizio Tamagnini and Enrico Chiapparoli , who were at the meeting. Grande Stevens told the Merrill bankers he wanted to rewrite an existing equity swap contract between the bank and a Luxembourg-based Agnelli holding company, according to the bankers’ depositions. Merrill Swap In the existing equity swap, the Agnellis had bet that Fiat’s stock, which had hit a 20-year closing low of 4.53 euros in April 2005, would rise. Merrill would pay the family a sum based on the difference between a starting price of 5.50 euros and whatever higher price the shares might hit in December 2005. So that Merrill could make good on the bet, the New York-based firm had bought about 90 million Fiat shares, or 10 percent of the automaker, starting in April 2005, according to Consob. The new contract changed the way Merrill would pay the Agnellis. The family would buy 82.25 million shares of Fiat stock, exactly enough to bring its holding to 30 percent, at 5.60 euros a share. In July and August, investors drove up Fiat’s stock price 24 percent on speculation the family would buy tens of millions of shares on the market to preserve control, according to Consob. On Aug. 23, the market regulator, noting the spike in Fiat stock, asked the two Agnelli holding companies, G.A. Sapaz and IFIL, for comment. The regulator wanted to know whether the companies had researched or implemented plans to deal with the possibility they would be supplanted by the lending banks as Fiat’s top shareholder. Press Releases In response, Gabetti and Grande Stevens helped write two statements released to the media on Aug. 24, according to the charges filed in court. IFIL’s statement said that the company intended to retain control of Fiat but hadn’t enacted or studied any initiative to do so. G.A. Sapaz issued a release referring to IFIL’s statement and confirming its contents. Three weeks later, on the evening of Sept. 15, the two companies disclosed that they had approved the equity swap deal with Merrill to keep hold of Fiat. Following the news that the Agnellis wouldn’t have to buy shares on the market, Fiat’s stock plummeted for five straight trading days, losing 8 percent from Sept. 16. Four days later, the companies and Merrill executed the share handoff as planned. ‘Personal Matters’ In the court battle in Turin, the advisers deny that they misled investors, saying the swap deal with Merrill wasn’t approved by directors of the holding companies until Sept. 15, after they issued their press releases, according to a memorandum filed in court by Cesare Zaccone , a lawyer who’s defending Gabetti and Grande Stevens. Cesare Giordanengo, a lawyer for the holding companies, declined to comment. “The market doesn’t need to be informed of a plan that is subject to conditions,” Zaccone wrote. “The plan for keeping the group’s role as controlling shareholder of Fiat was still undefined and uncertain.” Elkann says the trial and lawsuit are “personal matters” that don’t interfere with running Exor . After consulting with Gabetti, Elkann hired Fiat chief Marchionne from SGS SA, a Swiss goods inspection company, in 2004. Marchionne, 57, revived the automaker’s profits from 2005 through 2008 by firing managers, building vehicles with shared parts and introducing new cars such as the Bravo. “He’s a dynamic and innovative leader,” says Ron Bloom , head of the U.S. government’s auto task force, which led the restructuring of Chrysler in bankruptcy. “He’s just what Chrysler needs.” Fiat in America Marchionne now wants to transform Chrysler, which lost $16 billion in 2008 with a lineup dominated by gas guzzlers like Dodge Ram trucks. In the next 18 months, he plans to roll out Chryslers with more fuel-efficient Fiat engines. As soon as late 2010, the CEO hopes to sell the Fiat 500 in the U.S. The subcompact gets about 40 miles (64 kilometers) to the gallon (3.8 liters) in city driving. The car, which is six inches shorter than BMW’s Mini Cooper compact, may be built in Mexico. Aaron Bragman , an analyst at IHS Global Insight in Troy, Michigan, forecasts North America sales of 40,000 to 50,000 for the Fiat 500 in the first year. The automaker pulled the Fiat brand out of the U.S. market in 1983 and withdrew Alfa Romeo in 1995. The company was dogged by quality problems and the lack of a dealership network — distribution it now has with Chrysler. Two prior Chrysler owners, Daimler -Benz AG and Cerberus Capital Management LP, threw away billions on the U.S. carmaker. Daimler paid $36 billion for Chrysler in 1998 before selling 80 percent of it to the buyout fund for $7.4 billion in 2007. Giving Up Control Even if Fiat resurrects Chrysler, Elkann may be forced to sell or merge the Italian automaker with yet another company, says Gregor Claussen , an equities sales specialist at Frankfurt- based Commerzbank AG, which rates Fiat a “ sell .” Fiat, which lost 578 million euros in the first half of the year amid a global recession, returned to profitability in the third quarter, with net income of 21 million euros, due partly to cost cuts. “Some sharing of power by the family seems necessary for survival,” Claussen says. Six years into leading a dynasty, Elkann’s hurdles are high. While the family’s companies fight charges in court, he’s relying on Marchionne to turn Fiat into a stronger and more profitable competitor. If that requires the Agnellis to give up control of the carmaker through a sale or merger, Elkann says the family is willing to do so. After the Agnellis ran Fiat for five generations, Elkann may become the heir who finally surrenders his clan’s grip on its automaker. To contact the reporters on this story: Vernon Silver in Rome at vtsilver@bloomberg.net ; Sara Forden in Milan at sforden@bloomberg.net