Elliott's Views

VALUATION

Was this a “packaged deal” designed to shift value from STS to Breda?

  • The price for the assets disposed was disclosed by Finmeccanica at a valuation of EUR 36 million for Breda (excluding certain contracts and revamping activities and including certain real estate assets) and EUR 761 million for STS, equivalent to EUR 9.50 per share for listed company STS (or 1.3x EV/Sales and 12.6x EV/EBIT).
  • The joint disposal of the two assets meant that the acquisition of Breda for a positive value could be subsidised by the acquisition of STS at a discount to fair value.  In other words, the acquisition by Hitachi undervalued shares of the profitable Ansaldo STS and overpaid Finmeccanica for the loss-making Breda.  This resulted in a lower offer to minorities of STS.
  • Additionally, because the sale of loss-making Breda was packaged with the sale of a profitable STS the joint disposal likely discouraged many bidders who were not interested in acquiring Breda from participating in the bidding process, and may therefore have prevented STS minorities from achieving full value for their shareholdings in STS.

 

What was the situation of Breda before the transaction?

  • In the five fiscal years up to and including 2014 Breda required EUR 1.3 billion of capital injections by Finmeccanica to cover operating losses (view here).
  • The current CEO of Finmeccanica described Breda in a press article  as a “discredited brand with which it was impossible to win contracts around the world”. 
  • Various equity research analysts were attributing a negative EV to Breda, in the range of minus EUR 250 million to minus EUR 500 million as published in a number of Finmeccanica research reports: Deutsche Bank – 21 March 2014; Equita – 26 June 2014; Fidentiis – 4 July 2014; ESN – 18 September 2014.

 

Was the offer for STS fair?

 

CORPORATE GOVERNANCE

Elliott has identified several corporate governance concerns at STS including regarding the independence of board directors:

  • Other concerns relating to the STS board composition, board functioning and the qualifications of the CEO have been independently raised by the Board of Auditors of STS (view report), by proxy advisors Glass Lewis and ISS and by leading media outlets.

Hitachi Rail’s poor governance of STS raises questions about Hitachi Group’s longer-term global expansion plans:

  • This acquisition is Hitachi Group’s largest outside of Japan in the last decade and has been delegated to and led by a European executive (Mr. Alistair Dormer, CEO of Hitachi Rail and now, subsequent to the acquisition by Hitachi, Chairman of STS).  

The chronology of corporate governance shortcomings at Hitachi includes:

  • Nov 3rd 2015 – Mrs. Barbara Poggiali, a STS director designated by Hitachi as ‘independent’, resigned for “personal reasons” after just one day in office. Prior to her resignation, questions had been raised as to whether Mrs Poggiali in fact qualifIed as an ‘independent director’ (contrary to the representations given to shareholders upon her appointment).
  • Nov 20th – A second director designated by Hitachi (Mr. Ryoichi Hirayanagi) resigned stating as a reason that his “current place of residence and work is in Tokyo” whilst Ansaldo STS is an Italian company. In fact, Elliott understands that Mr Hirayanagi lives in Naples and works for Breda (now called Hitachi Rail Italy).
  • Nov 25th – The STS directors designated by Hitachi appointed Mr. Mario Garraffo to replace Mr. Hirayanagi who had resigned. Mr. Hirayanagi was not an ‘independent director’, however his replacement was chosen to qualify as ‘independent’ with the objective to change from 2:3 to 3:3 the balance between ‘independent directors’ designated by Hitachi (two) and those designated by the minority shareholders (three) at Ansaldo STS shareholders’ meeting on November 2nd.  The decision by Hitachi’s controlled board to ‘counterbalance’ the weight of independent directors was seen by minority shareholders and the Italian press as intended to exercise undue influence on the independent directors (as reported in Sole 24 Ore on 25th November 2015).
  • Nov 30th – Alistair Dormer, CEO of Hitachi Rail and Chairman of STS asserted in an interview that STS would be delisted if Hitachi reaches a 66% ownership. The article did not explain (and Mr Dormer did not subsequently clarify) that such an outcome would require the consent of the “related party committee”, formed by 3 independent directors. (as reported in Sole 24 Ore on 30th November 2015).
  • Dec 3rd – According to the press (as reported in Sole 24 Ore on 3rd December 2015), the statutory board of Ansaldo STS chaired by Giacinto Sarubbi asked CONSOB to ascertain whether the appointment of Mr. Alistair Dormer (Chairman) breached art. 2390 of the Italian civil code, which prevents the appointment to the board of a director from a competing company unless approved by the shareholder’s meeting (and this was not the case for Mr. Dormer who is also CEO of Hitachi Rail). 
  • Dec 9th – The offer document is published and does not contain reference to the fact that the acquisition of Breda was a condition precedent for the sale of STS
  • Dec 31st – The majority of independent directors (all except Mr. Garraffo and Mrs. Piccinino designated by Hitachi) concluded that the price of the tender could not deemed to be fair.
  • Jan 5th 2016 – Hitachi publishes an advert in the Italian press inviting shareholders to tender their shares, referring to the offer document (but the advertisement did not refer to the fact that the majority of independent directors did not consider the offer price to be fair)
  • Mar 1st – Hitachi announced a voluntary offer price increase from EUR 9.50 to EUR 9.68 per share for its STS tender offer, announcing it reserved the right to vote against the proposal of the BoD to distribution of the EUR 0.18 per share dividend at the upcoming AGM. This was seen by minority shareholders and the Italian press as an attempt by Hitachi to threaten STS shareholders to force them to tender their shares (as reported in Sole 24 Ore on 3rd March 2016). 
  • Mar 15th – Ansaldo STS board of directors expected to assess the qualification of Mrs. Piccinino as an ‘independent’ director following a letter sent by other independent directors who questioned the role of Mrs. Piccinino on the basis of alleged linkages between Mrs. Piccinino and the law firm advising Hitachi. ‎
  • Mar 18thGenoa’s newspaper Il Secolo XIX reported that among the various wiretappings put in place by the public prosecutor investigating the "collusion" between Finmeccanica and Hitachi, there is one in which Alistair Dormer (Hitachi Rail CEO and Ansaldo STS Chairman) asks STS’ CEO Stefano Siragusa to interfere with the results of an impairment test run by Deloitte on STS, which, based on a discounted cash flow analysis of Ansaldo STS’ business plan indicated a valuation of EUR 14 per share.
  • Mar 29th – The annual report of the Board of Statutory Auditors of STS (“Collegio Sindacale”) is published (view here). Internal auditors highlight several events which occurred under Hitachi’s direction and mention a letter sent to CONSOB to highlight “the increasing difficulty in ensuring the correct functioning of the defences existing to protect the Corporate Governance structure”. 
  • Mar 30th – At the same board meeting where the CEO resigned (he was effectively ousted) the Board representatives of Hitachi resigned.  This caused (as per Italian law) the entire Board to automatically step down and the need to nominate a new one.  Elliott believes that this was a deliberate attempt by Hitachi to consolidate its control over the Ansaldo STS board.  The CEO's resignation was written about in an article published by Sole 24 Ore.
  • April 16thIl Sole 24 Ore reports that Andy Barr, potential future CEO of STS, has been touring the company and its facilities in recent weeks, accompanied by the current CEO.  Note that Andy Barr is COO of Hitachi Rail (i.e. a competitor) and was previously rejected by the selection committee of the board of STS as not suitable for the job.
  • May 5th – ISS and Glass Lewis publish reports ahead of STS AGM suggesting minorities should vote for Elliott’s slate. Additionally, ISS reports that Mario Garraffo (“independent” on the previous Board and subsequently re-elected from Hitachi’s slate) and Alessandra Piccinino (“independent” on the previous Board) are not independent directors given their ties to Hitachi or Hitachi’s advisors.
  • May 13th – AGM held in Genoa (view Minutes here).  As expected, the new Board is made of nine people: of which six were proposed by Hitachi, three by Elliott.
  • May 16th – First board meeting elects Risk and Control Committee as well as Remuneration and Nomination Committee.  Hitachi nominates the same three independent directors (Painter, Garraffo, De Benedictis) from Hitachi’s slate to both Board Committees (representing a departure from the company’s previous practice which had been – in accordance with the norms of good corporate governance – to appoint only independent directors to these committees).
  • May 24th – Andrew Barr, Hitachi’s nominee for the post of STS’ CEO, previously unanimously rejected by the former Nomination Committee, is elected CEO of Ansaldo STS with the votes of the six directors proposed by Hitachi.  Moreover, Mr. Barr indicates 25 years of management experience in his CV implying he started his managerial career at the age of 16.
  • Aug 5th – STS’s statutory auditors questioned the independence requirements of Mr. De Benedictis, a board member elected as "independent" with Hitachi’s votes.  Statutory auditors presented to the board of STS the opinion of prof. Marchetti, a well-respected notary and corporate governance expert, suggesting that by virtue of his prior executive position in Finmeccanica, Mr. De Benedictis "probably cannot the considered independent"; (view article published in Sole 24 Ore). 
  • Oct 28th – Hitachi constitutes the Bid Committee with STS. The Bid Committee is composed by 3 members, none of whom are independent and all of whom were proposed by Hitachi (Dormer, Barr, Mingay). Elliott considers that the Bid Committee may be another attempt at reducing the influence of the company’s independent directors enabling Hitachi to run Ansaldo STS in the interests of Hitachi alone rather than in the interests of all shareholders.  On the same day STS’s CFO, Mr. Carassai announces his resignation from the company, effective from Feb 28th 2017 (see press release).
  • Nov 14th – KPMG, STS’s external auditors also resign stating "...it could be in a situation which could compromises its independence" (see press release).  KPMG's resignation comes almost one year after Hitachi acquired 40% of STS and approximately two weeks after the resignation of the company CFO.
  • Jan 4th – Hitachi adds an action for liability to the agenda for the AGM to be held on Jan 19th in Genoa. The action is against independent director Giuseppe Bivona appointed from the slate presented by the Elliott Funds with the overwhelming support of the vast majority of STS’ minority shareholders. At the request of minority shareholder Amber Capital, Ansaldo STS published a series of letters written by Mr. Bivona (available here) to Consob, the Board of STS, the Board of Statutory Auditors of STS and Borsa Italiana bringing to light an impressive and disconcerting series of alleged corporate governance issues at Ansaldo STS (a bullet point summary can be found here)
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This website and the information contained within it (together referred to as "this website") is an information resource for shareholders in Ansaldo STS SpA ("Shareholders"). Through this website shareholders can access copies of the correspondence between Elliott Advisors (UK) Limited ("Elliott"), Elliott International LP, Liverpool Limited Partnership, Elliott Associates LP (“Elliott Funds”) and the management of each of Hitachi Ltd. (“Hitachi”) and Ansaldo STS SpA (“Ansaldo STS”), the press releases issued by Elliott in relation to the acquisition by Hitachi of its shareholdings in Ansaldo STS, the letters written by Elliott and/or the Elliott Funds to CONSOB and other information relevant to the acquisition and each of Hitachi’s and Ansaldo STS’s subsequent conduct (the "acquisition").

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