Italy: Alitalia / CAI - A Very Special Deal

Last Updated: 3 March 2009
Article by Francesco Portolano and Pietro Masi


The future of Alitalia, Italy's biggest airline, has been the focus of attention in recent months. The rescue of the troubled company may have a wider impact on Italian insolvencies and restructurings

In 2006, after a decade in which the company permanently recorded losses and was supported by the state, the Ministry of the Economy turned on a dime and changed its policy. Acting in its capacity as Alitalia's main shareholder, it decided to sell its equity stake (around 50% of the corporate capital) by public auction. Some of the world's largest private equity funds and a number of Alitalia's competitors - including Aeroflot, Air France and Italian airline Air One - took part in the auction, but none of the offers met the seller's requirements. Therefore, the process ended without a sale.

The Ministry of the Economy and the Ministry of Public Transport then began private negotiations to sell the former's stake to Air France. The sale was nearly concluded when the deal suddenly collapsed, mainly for two reasons. First, the trade unions refused to accept Air France's proposal on labour issues, as they considered that the potential purchaser's redundancy plans were excessive. Second, during the 2008 general election campaign, the centre-right coalition - which already appeared to be the likely winner - stated that an acquisition by a foreign competitor was not in line with Italy's economic strategy.

However, an alternative solution was found. This article considers the structure of the deal and its protagonists: the present government, the commissioner (as the administrator is termed in extraordinary administration proceedings) and Compagnia Aerea Italiana SpA (CAI), a new Italian company which was incorporated in order to acquire Alitalia's assets.

Stages of the New Deal

The main stages of the deal involving CAI were as follows:

  • On April 2008 the former government approved by legislative decree a state loan in favour of Alitalia. This loan was made to save the company and to ensure the continuity of an essential public service until a permanent deal was closed. However, although the loan was probably crucial to the company's survival, in November 2008 the European Commission deemed the loan to be in breach of Article 88 of the EC Treaty and therefore unlawful.
  • CAI was incorporated to purchase Alitalia's assets. Some of Italy's leading entrepreneurs, the second-largest Italian banking group and Alitalia's former main domestic competitor acquired stakes in its corporate capital.

  • On September 2008 Alitalia was declared insolvent and subject to a special bankruptcy procedure termed 'extraordinary administration' (amministrazione straordinaria), as amended by Legislative Decree 134/2008 in August 2008. A commissioner was appointed to oversee Alitalia's liquidation.
  • The commissioner created a 'bad' company, which took over most of Alitalia's liabilities, leaving Alitalia's assets in a 'good' company.
  • CAI purchased the good company in a private transaction with the commissioner and began business on January 13 2009. The bad company remains under the commissioner's control and its liabilities will be paid off partly through the proceeds of the sale of the good company.

Reforming the Extraordinary Administration Procedure

The deal was made possible by a reform of the rules on extraordinary administration - that is, a bankruptcy procedure for rescuing large insolvent companies.

The previous regulations governing the procedure were unsuitable either for Alitalia's particular circumstances or for quick deal closings in general.

Therefore, the government introduced urgent amendments to the legislation governing the process - known as the Marzano Law - to allow the sale of Alitalia's assets to be concluded promptly.

The main new provisions are as follows:

  • The government has the power to give the commissioner orders when the procedure is initiated and to set guidelines for the procedure. This provision has been strongly criticized, since it potentially puts significant political pressure on the supposedly independent commissioner.
  • The aim of the procedure is no longer to restructure the insolvent corporation, but simply to sell its assets. Thus, the commissioner may now immediately negotiate and conclude the sale of a good company to the potential purchasers. The law previously required the commissioner first to attempt to restructure the company by filing a restructuring plan. This process would have added a lengthy and potentially deal-breaking stage to the CAI negotiations.
  • The commissioner is entitled to initiate and conduct private negotiations with potential purchasers - a provision introduced to allow the commissioner to negotiate directly with CAI, rather than holding a public auction. A public procedure would have added to the time needed to sell the good company.
  • In respect of companies that carry out their business in public services markets, deals which might be deemed concentrations under antitrust law are no longer subject to the prior authorization of the Antitrust Authority. The authority may impose measures only if they are necessary to prevent unjustified and onerous contractual conditions from affecting consumers. This provision, which effectively negates the authority's powers, was introduced to allow for the involvement of Alitalia's principal domestic competitor, Air One, which is one of CAI's main shareholders.

Comments and Critiques

The reform of the Marzano Law unquestionably helped to expedite the sale of Alitalia's assets and to prevent the sale from collapsing. The failure of the rescue would have led to Alitalia's bankruptcy, which the government wished to avoid at all costs.

However, although the amendments to the law might have been justifiable in this special case, they may have unintended consequences in other scenarios. The government should consider further amending the relevant legislation to avoid such undesirable effects. Of particular concern are the provisions that:

  • eliminate the main function of the extraordinary administration procedure, which is to restructure a corporation that has been declared insolvent;
  • eliminate the role of the antitrust authority in upholding fair competition and preventing anti-competitive concentrations; and
  • reduce the commissioner's independence and dangerously strengthen political influence over bankruptcy proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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