Succession scramble grips Italian family businesses after COVID fears

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A man walks past the Veneta Cucine store amid the coronavirus disease (COVID-19) pandemic in Rome, Italy December 13, 2021. REUTERS/Yara Nardi

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  • Family businesses have avoided loosening their grip
  • Family Control May Hinder Growth – Central Bank
  • Pandemic prompts companies to explore M&A options
  • According to bankers, inquiries about the valuation of deals are increasing
  • Mediobanca, CS and Deutsche strengthen medium-sized teams

MILAN, February 3 (Reuters) – For years, Dionisio Archiutti had watched his father toy with the idea of ​​bringing a new investor into the family business, but he knew time would not necessarily help the 80-year-old with the decision.

“Italian entrepreneurs often hold onto their companies more tightly as they get older, fearing that without them at the top there might be no future,” he said.

A year after the pandemic began, Giacomo Carlo Archiutti sold 30% of the kitchen manufacturer he founded in 1967 in industrial north-east Italy to a private equity firm.

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Before the pandemic, Archiuttis would have been a rarity, an Italian family business that would have welcomed an outside investor as the first step in managing succession planning.

Now, however, bankers say they are being overwhelmed by requests to explore possible deals from small and medium-sized businesses (SMEs) that are facing challenges from supply chain disruptions to funding for investments needed to bring them digital and… to keep up to date with ecological business standards.

“The pandemic has shown companies that they can be hit by a tsunami and made them aware that they have to deal with generational renewal,” said NB Aurora chief executive Francesco Sogaro.

For the Archiuttis, NB Aurora now holds two of Veneta Cucine’s five board seats and is working with the family to guide their growth strategy in “subtle but effective” ways.

“You certainly can’t expect to tell businessmen of my father’s generation what to do. But thanks to the fund’s expertise, we’ve taken some bolder steps,” said Archiutti.

Family businesses are the backbone of Italy’s economy, and nearly a third of them are in the hands of an executive in their 70s, data from Bocconi University’s AUB Research Center shows. And succession remains a deep-seated issue.

Percentage of the first 1,000 family businesses in each country to be led by a CEO aged 70+

“We are small and we are old,” said Francesco Casoli, chairman of AIDAF, the association of family businesses, which make up almost 70% of Italy’s 148,530 SMEs, according to data company Cerved.

Loyal owners have been accused by the Bank of Italy of holding back growth by blocking investment needed to boost productivity and scaring off skilled managers.

The COVID-19 crisis, which has claimed more than 147,000 lives in Italy, the second-highest death toll in Europe after Britain, combined with the worst economic downturn since World War II, appears to have convinced some to let go.

“Deals that we had been discussing for years without owners ever finding the courage to take the plunge suddenly gained momentum,” added NB Aurora’s Sogaro.

The Illy and Vergnano families, for example, welcomed a minority investor into their respective coffee businesses last year as they pursue international expansion plans.

COVID CATALYST

“Fear is always the biggest motivator,” said AUB Director Guido Corbetta.

“The halt in production during the first COVID wave caused companies to panic. They weathered the worst only to struggle with skyrocketing energy prices and scarce raw materials and components.”

For Stefano Giudici, Nomura’s head of investment banking in Italy, companies that have emerged victorious from the pandemic have the added incentive of taking advantage of high market valuations at a time when pent-up demand and stimulus spending from the European Union are boosting their growth prospects.

“These two elements create a momentum that many business owners want to capitalize on,” he said.

Veneta Cucine’s sales in 2021 rose 40% to around €280 million, with demand for home furniture at its strongest since the 1990s, says Archiutti.

Bankers say double-digit multiples for company valuations have become the norm.

Deals targeting Italian companies rose 122% last year to a record €85.5 billion, consultancy EY said, forecasting a similar trend this year, although Omicron and inflation pose a threat. Almost a quarter of these were private equity deals.

According to calculations by EY, 86% of the 705 M&A transactions in Italy last year involved private companies.

JOIN THE CLUB

In order to attract more medium-sized companies, the private equity companies Deutsche Beteiligungs AG (DBANn.DE), Gilde Buy Out Partners and Bregal Unternhemerkapital settled in Milan last year.

And the strong increase in demand for private capital in a market that is still not very well penetrated by funds has also led to an increase in so-called club deals, which are backed by groups of small investors.

QCapital, a club deal firm targeting SMEs with sales of up to €40 million, said it has met with about 120 companies interested in raising debt capital since May.

“Investment platforms like ours are springing up like mushrooms,” said Francesco Niutta, one of the founders.

The deal rush represents an opportunity for banks, which are increasingly combining advisory and corporate finance services for SMEs with their wealth management activities, enabling them to channel funds from very wealthy individuals into companies.

Foreign banks also want to cash in.

In September, Deutsche Bank launched a new bank for entrepreneurs with a 30-strong team in Italy, and Credit Suisse hired more bankers in Investment Banking Advisory under European head Vincenzo De Falco.

To defend a phase it has traditionally dominated, Italian investment bank Mediobanca has doubled over the past two years its team of bankers specializing in mid-market M&A, which it combines with private banking services.

Mediobanca processed 25 such deals in 2021, doubling the number of 2020. ($1 = 0.8867 euros)

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Reporting by Valentina Za, Elisa Anzolin and Elvira Pollina; Editing by Alexander Smith

Our standards: The Thomson Reuters Trust Principles.

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