A return to the spotlight

Matteo Arpe, former star of the Italian banking sector, has gone back to his roots in search of future profits. Andy Thomson reports

It was always likely that Matteo Arpe would be found at the heart of any post-crisis shake-up of the Italian banking sector. After all, the youthful Arpe honed a reputation as arguably Italy's most famous investment banker when wracking up an impressive list of M&A mandates during spells at Mediobanca, Lehman Brothers and Capitalia. He also gained a reputation for ruffling a few feathers, it was widely reported that he left his most recent banking post at Capitalia after disagreements with the bank's chairman. Now at the helm of Sator Private Equity, the investment group he founded last year, Arpe finds himself back in the media glare following his firm's €110 million pending rescue of ailing Milan-based Banca Profilo, a listed banking group (the deal is awaiting regulatory approval).

A source close to Sator (the firm itself declined to go on the record for this article) claimed that the Banca Profilo transaction represents “the first private equity deal [amid the financial crisis] that prevents a bank from going bust”. The same source said there had been other similar deals involving the acquisition of already-failed banks, such as the €129 million purchase of Carnegie Investment Bank from the Swedish Debt Office in February by Nordic private equity firms Altor Private Equity and Bure Equity – but no equivalents.

Banca Profilo, added the source, had been advised by the Bank of Italy to “find a solution” after turning significant profits into a loss of €74 million in 2008. The Bank of Italy's endorsement of the deal was one notable sign of faith in Sator's ability to turn around the company's fortunes. Another was the attitude of some of the bank's major shareholders, which had initially taken money out of the bank only to re-invest in the Sator deal and take a minority position (Sator will hold at least 51 percent). “That's the leverage a good investor has,” says the source. “I can't remember the last time a core shareholder group in Italy agreed to take a minority stake – they have always either retained a majority or sold out.”

The same faith in the ability of Arpe and colleagues was demonstrated by the firm's recent fundraising success, which saw it take a year to raise €700 million despite the headwinds of economic decline and investors' liquidity constraints. A significant, though unspecified, amount of capital came from entrepreneurial families. Banca Profilo is the second deal from this fund, which last September invested €30 million to acquire 40 percent of Bagglioni Hotels, a luxury hotels group.

RAPID ASCENT
So how has Arpe managed to generate such faith from regulators and wealthy individuals alike? The first signs that he had a magic touch came when he rose swiftly through the ranks at Mediobanca, known locally as “the bank of the system” due to its position at the heart of a network of influential relationships in the Italian banking world. Having become head of the bank's capital markets activities at the remarkably tender age of 33, Arpe was involved in some of the highest-profile M&A deals involving Italian companies. These included the privatisation of Telecom Italia and subsequent $35 billion hostile takeover of the company by Olivetti in 1999.

It was in the same year that Arpe left Mediobanca, joining Lehman Brothers for a two-year spell before going on to cement his reputation at Rome-based Capitalia, which he joined in 2001 as head of its wholesale bank before going on to become chief executive in 2003. The move was evidence of Arpe's ability to spring a surprise. “It was known as the most troubled institution in Italy,” recalls a Milan-based private equity professional. “It was based in Rome, it was highly political, and it had a seemingly bottomless pit of nonperforming loans. It was to everyone's surprise that he turned up there.”

Perhaps the most objective indicator of Arpe's success in turning around Capitalia was the fact that, when he joined the bank, its share price was languishing at €0.70. When he left, as Capitalia was in the process of being acquired by Unicredit in a $29 billion deal in May 2007, it had risen to around €8.00. His approach was described by someone who witnessed it first hand as “very radical”. This was in the context of what had traditionally been a highly conservative and staid approach to banking in Italy. Among the ‘radical’ measures were opening retail branches on Saturdays and at lunchtimes.

Arpe also launched a principal investment operation at Capitalia, putting the bank's money behind companies that often needed major restructuring (see table below). Among the deals in which Capitalia took a stake was Colony Capital's €300 million buyout of some luxury hotels from Starwood in June 2003. Upon exit in May 2006, the deal delivered Capitalia a gross IRR of 32 percent. This operation might be seen effectively as the forerunner to Sator, given that many of the 28-strong Sator team worked with Arpe at Capitalia.

LOFTY PRINCIPALSBelow is a selection of principal investments undertaken by Capitalia during Arpe's time at the bank

Equity Capitalia's Value Capitalia's
Date of Date of Total Total invested Total
Initial Initial EV Equity by Capitalia Realized Unrealized Value Multiple Gross
Investment Realization (€m) (€m) (€m) (€m) (€m) (€m) of Cost IRR
Transactions
Colony Capital
Acquisition of
luxury hotels in Jun-03 May-06 295 100 20 44 40 84 4.21x 32%
Sardinia from
Starwood
Pirelli Tyre
Acquisition of Sep-06 Feb-08 740 333 67 86 86 1.29x 20%
minority stake
Astaldi
Capital
injection and Oct-00 Jun-02 340 50 26 36 36 1.38x 23%
debt
restructuring
FIAT
Investment in
mandatory Dec-02 Sep-06 n/a 3,000 425 663 663 1.56x 13%
convertible
bonds
ENIA
Acquisition of Feb-04 Dec-05 n/a 80 40 53 53 1.33x 17%
minority stake
Average 1.95x 21%