98/234/EC: Commission Decision of 15 July 1997 concerning financial aid granted to Lloyd Triestino Società di Navigazione SpA and Italia di Navigazione SpA (Only the Italian text is authentic) (Text with EEA relevance)
Date: 1997-07-15
Institutions: European Commission
Subjects: Italy, State aid, invitation to tender, maritime shipping, privatisation, type of business

24. 3. 98

EN

Official Journal of the European Communities

L 88/53

COMMISSION

COMMISSION DECISION

of 15 July 1997

concerning financial aid granted to Lloyd Triestino Societ(cid:133) di Navigazione SpA
and Italia di Navigazione SpA

(Only the Italian text is authentic)

(Text with EEA relevance)

(98/234/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having regard to the Agreement establishing the Euro-
pean Economic Area, and in particular point (a) of Article
62(1) thereof,

Societ(cid:133) di Navigazione SpA (hereinafter referred to as
‘Lloyd') and Italia SpA di Navigazione (hereinafter:
‘Italia'), the two international liner shipping companies
within the Finmare group (3), as part of an overall restruc-
turing plan. This Decree Law was subsequently replaced
by Law 204/95, whic remains in force. It is this recapital-
this consultation and
isation which is the subject of
proposal for a Commission decision.

Having, in accordance with the provisions of the above-
mentioned Articles, given notice to the parties concerned
to submit their comments and having regard to those
comments,

In view of the publication of DL 22/94 in the Gazzetta
Ufficiale della Repubblica Italiana on 15 January 1994
and its consequent entry into force, the recapitalisation
plan was registered by the Secretariat-General as a non-
notified aid scheme.

Whereas:

On 16 February 1994 (by letter registered under reference
SG (94) A/3082 on 24 February), the Permanent Repre-
sentation of Italy notified the Secretariat-General of the
Commission of a new Decree Law (‘DL') (1) No 22/94 (2),
which concerned urgent measures for different sectors of
the Italian economy. This DL included a proposal to
grant financial support to the maritime sector, specifically
in the form of a capital injection into Lloyd Triestino

(1) Under the Italian Constitution (Article 77), in cases of extra-
the government may adopt
ordinary need or emergency,
law. These
provisional measures which have the force of
Decree-Laws (‘DLs') come into effect automatically following
their publication in the Italian State Gazzetta Ufficiale (Offi-
cial Journal) and remain in force for up to 60 days. DLS must
be presented by the government to the Parliament for enact-
ment and lose their validity if, after 60 days of their publica-
tion in the Gazzetta Ufficiale, they have not been enacted.
In many instances, DLs have been replaced on expiry by
successive new DLs,
although some provisions may be
amended, and measures can remain in force without enact-
ment for months or even years. However, the Constitutional
Court
in Italy ruled in 1996 that DLs can no longer be
renewed after 60 days as this undermines the principle that
DLs are only justified in cases of urgency

(2) DL 22/94 of 13 January 1994, published in the Gazzetta
Ufficiale della Repubblica Italiana No 11 of 15 January
1994.

On 27 July 1994, the Commission decided to initiate the
Article 93(2) procedure (4), considering that there were, at
that stage, doubts about the compatibility of the proposed
financial support with the Treaty. In response, comments
were received from the Italian shipowner’s association
(Confederazione Italiana Armatori or ‘Confitarma' (5)), the
United Kingdom authorities and lawyers representing a
competitor of Lloyd.

The Italian authorities submitted their comments and
further information by letters of 13 October and 24
November 1994. Regular exchanges of correspondence
took place during 1995, as the Finmare restructuring plan
took shape, and the final information required for the

(3) Finmare is a State-controlled holding company which directly
controls 12 shipping companies operating in different sectors,
including international
(Italia and
Lloyd), local and Mediterranean coastal navigation and cabo-
tage. Finmare handles 45 % of Italy’s bulk cargo, 9 % of
freight and 65 % of
container
passenger traffic through Italian ports (IRI group 1992 to 1993
yearbook).

transport, 18 % of coastal

(container)

services

liner

(4) OJ C 333, 29. 11. 1994, p. 6.
(5) Confitarma represents 83 % of the private shipowners in Italy.

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Commission to take a decision was transmitted by the
Italian authorities on 15 May 1997. There were also
numerous bilateral meetings, both in Brussels and Rome,
of which the last took place on 17 April 1996.

DESCRIPTION OF THE MEASURES

is for a capital

injection of ITL 60 000
The proposal
million (ECU 31 million), payable in 1996. Lloyd will
receive ITL 40 000 million and Italia ITL 20 million. The
Italian authorities have confirmed that
this financial
support has not been paid to Lloyd or Italia, which are
the Commission’s
undercapitalised,
decision.

in advance

of

The proposal to grant State support to recapitalise Lloyd
and Italia is part of the final stage of the restructuring of
the Italian public fleet. The principal aim of the present
capital injection is to give Lloyd and Italia a viable finan-
cial
their adaptation to normal
market conditions in the run-up to privatisation, sched-
uled for early 1997.

footing and support

The Italian State has emphasized that, without the capital
injection, the companies, which are significant employers,
would be too weak financially to be privatised. The Italian
Government, therefore, wishes to complete the current
restructuring process as planned and to allow privatisa-
tion.

The planned privatisation is progressing: Finmare
commissioned Citibank to identify possible buyers and
wide publicity was given to the initial request for expres-
sions of potential interest. As a result, a number of leading
Italian and foreign shipping companies have indicated an
interest as possible buyers. The Italian Government has
prepared ad hoc draft legislation, as required by Italian
law, to allow the sale to go ahead as soon as the Commis-
sion has taken a decision on the capital injection.

BACKGROUND

Since the 1970s, the Finmare group has found itself in
grave financial difficulty, which prompted the Italian
authorities to propose the restructuring of the group. The
second phase of restructuring, developed within the Law
of 5 December 1986, established the division of the group

into a number of sectors of activity. Of these the liner
(container) division will be the first to be privatised.

Despite this, Lloyd and Italia continued to register losses:
the consolidated accounts for 1991 showed combined
losses of ITL 53 000 million (ECU 27 million). To cover
these losses, both companies have released financial
resources through the sale of assets, as part of the recent
restructuring process. In addition, over the years,
the
companies have been in receipt of aid, provided under
framework Law 234/89, which had been notified to the
Commission. The Commission has verified that the aid
granted falls under the aid regime established by frame-
work Law 234/89 (approved by the Commission (1)) and
that the aid adheres to the conditions under which the
scheme was approved. Consequently, this aid constitutes
existing aid. Over the last years, both companies have
operated at roughly break-even levels.

IRI (2),

around 1991,

the parent holding
However,
company of Finmare, began to have doubts about the
strategic importance of the companies and the abilities of
the public holding companies to manage their affairs.
From spring 1992,
therefore,
spent considerable time and effort in developing and
implementing a restructuring plan.

the Finmare group has,

In January 1994, an outline restructuring plan for the
group was presented to the government. This provided
for:

(cid:190) rapid privatisation of the bulk transport sector,
(cid:190) take-over by the State railway of

the companies

providing transport links with islands, and

(cid:190) a merger of the two companies in the international

liner sector.

However, the proposal finally reached is not to merge
Lloyd and Italia but to privatise them separately. In addi-
tion, certain activities and assets have been transferred or
sold prior to mergers between companies to improve
companies’ financial balances within the Finmare group.

While the detailed plan for the final stage of restructuring
the group was being developed, the government issued
Decree Law (No 22) of 13 January 1994. This provided
that: ‘in order to improve the financial health and allow a
profitable privatisation of the Finmare group, subject to
the approval of the Ministers of Transport and Navigation
and of the Treasury, of an appropriate restructuring plan
presented by Finmare,
the Treasury is authorised to
provide recapitalisation, for the companies operating in
maritime transport in international cargo trade'.

In September 1995, the Government presented the final
restructuring plan for the Finmare group, aiming for the
financial consolidation of
the companies before their
privatisation. After discussions with the responsible
committees of the Chamber of Deputies and the Senate,
the plan was definitively approved and transmitted to the
Commission in January 1996.

(1) OJ C 239, 25. 9. 1990, p. 10.
(2) IRI (Istituto per la Ricostruzione Industriale) is a public body
created in 1933 to coordinate and support, through financial
subholdings, economic activities considered to be of national
interest (e.g. RAI, Alitalia, Stet, Fincantieri, Finmare).

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As was mentioned above, a number of mergers, transfers
and asset sales took place within the Finmare group after
July 1996. Of these, the only ones which affected the two
companies in question were;

(cid:190) Sidermar, a coastal shipping company, wholly owned
by Finmare, ceased its operations in September 1995,
following the sale of its fleet of 14 vessels to private
operators. The remaining assets and liabilities were
then transferred to Lloyd through a merger on 1
September 1996, resulting in an increase in Lloyd’s
assets of some ITL 50 000 million (ECU 25 million),

(cid:190) similarly,

two ships owned by Viamare, another
company within the Finmare group, were sold to
Tirrenia, the principal Western Italian cabotage oper-
ator in the Finmare group; the remaining Viamare
ship was sold to a Greek company. Viamare subse-
quently ceased operations; the remaining assets and
liabilities were transferred to Italia through a merger.
The debts of Viamare were settled and Italia thereby
obtained assets worth ITL 16 000 million (ECU 8
million).

These arrangements have affected the overall financial
picture for Lloyd and Italia,
the asset bases of both
companies having been increased. As these transactions
constituted an international arrangement within the
Finmare group, the Italian authorities did not consider
them to amount
to state aid within the meaning of
Articles 92 and 93 of the EC Treaty.

However, the benefits accruing to Lloyd and Italia as a
result of the restructuring clearly represent a financial
advantage which could constitute State aid. The Commis-
sion has accordingly taken these amounts into account in
assessing the financial assistance granted to these com-
panies.

OPENING OF THE PROCEDURE (27 JULY 1994)

By decision of 27 July 1994, the Commission decided to
open the procedure under Article 92(3) of the Treaty,
since the proposed capital
injection could not at that
stage be justified as being of common European interest.

One Member State and two interested parties presented
their observations on the capital injection proposed for
Lloyd and Italia in pursuance of
the Article 93(2)
procedure.

(i) The United Kingdom Government

Community shipowners to such an extent as to be
contrary to the interests of economic operators and
consumers. It particularly noted that there were numerous
Community shipping companies in the liner market and
that the granting of financial support to the two Italian
companies could prejudice the commercial development
of more efficient companies (1).

Further, the UK Government stated that financial support
for restructuring could not be approved by the Commis-
sion, as there were no details of the restructuring process,
nor was there any evidence of progress towards re-estab-
lishing financial stability; the scope of the privatisation
was not clear and there might be doubts about the effects
of the privatisation, which could result in further costs of
liquidation at a future date. The free-market investor prin-
ciple did not apply as the alternative effects of different
strategies had not been quantified.

On the other hand, the UK Government looked favour-
ably on the Italian authorities’ intention to privatise the
two companies and recognised that the proposed capital
injection could be approved if privatisation guaranteed a
return to eocnomic viability in accordance with a fully
documented, scheduled and realistic action plan. This
might benefit the Community by promoting competition
and bringing subsidies to the two companies to an end,
while avoiding the potential repercussions of liquidation.
The UK Government proposed that the financial support
measure and the action plan should be subject to verifica-
tion and should be monitored by the Commission
throughout the period of return to financial stability. The
UK also considered that Member States and interested
parties should have access to this material and should
have the opportunity to make comments.

(ii) A competitor of Lloyd

A competitor of Lloyd stated that Lloyd had abused its
dominant position on routes from Italy to the Mediterra-
nean countries and to South Africa, increasing its tonnage
and charging below cost as well as by signing binding
contracts with shippers. The Commission has not found
any evidence to substantiate this assertion.

(iii) Confitarma

the proposed financial
Confitarma repeatedly brought
support measures
to the Commission’s attention by
providing copies of new decree laws and indicating the
sections relating to such support. Generally, they have
expressed concern that financial assistance to support the
public liner fleet, and the recapitalisation in particular,
competition, damaging the
could be distortive of

The UK Government welcomed the decision to open the
procedure, considering generally that State aid should not
be granted when it may distort competition between

(1) Routes served are: Lloyd (cid:190) Africa, Asia and Oceania; Italia (cid:190)
North and South America. There is full freedom to provide
services for any operator on these routes and competition is
fierce.

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24. 3. 98

development of normal commercial strategies. This view-
point has been endorsed by the competition and trade
authority of Italy, in a decision issued on 26 January 1993
to the Italian authorities.

on the value of its assets and on the company’s expected
profitability.

(iv) The response of the Italian authorities

The Italian authorities provided specific details (commer-
cially confidential) on the development of Lloyd and
Italia during the period of restructuring; these showed
considerable improvements in productivity, with increases
in the number of containers carried despite reductions in
the number of personnel and ships operated. The com-
panies have adopted a new commercial strategy based on
cooperation with other operators,
slot charters, etc.
the companies’ debts have been redued,
Furthermore,
income has increased and the companies are both now
operating in a healthier financial environment. However,
depsite these improvements, in particular in the field of
productivity and reduced operating costs, an additional
capital
the
currently under capitalised companies to become finan-
cially sound and capable of privatisation.

still necessary in order

injection is

for

The Commission also requested further details on the
financial position of Lloyd and Italia which the Italian
authorities provided at meetings
in Brussels on 12
November 1996 and 17 April 1997 and in subsequent
correspondence.

the Italian authorities

In the opinion of
the sums
proposed or granted to the two companies were no more
than those which a reasonable owner would invest in his
companies which he intended to divest himself of. In any
event, they maintained, the proceeds of any privatisation
sale would exceed any amounts invested in the companies
by their owner to prepare them for the privatisation. The
Commission requested proof of this assertion, which the
Italian authorities undertook to provide.

VALUATION OF THE COMPANIES

An internationally reputed independent consultant was
engaged to carry out a detailed valuation of the com-
panies.

The consultant used two methods to determine the value
of
the companies. The main method used was the
discounted cash flows (DCF) method, which is based on
the assumption that the value of the company depends on
the operating cash flows expected to be generated in the
future.

A second, control, method was also utilised, namely the
excess earnings (EE) method, which is based on the
assumption that the value of the company depends both

The DCF method used by the consultant is widely recog-
nised as the most appropriate method for the objective
valuation of companies. In order to be able to rely on
such a method a certain level of information about the
company’s past and future performance is required. In the
present case, the information utilised was the following:

(cid:190) preliminary 1996 financial

reports for Lloyd and

Italia,

(cid:190) the audited financial reports for Lloyd and Italia for

1992, 1993, 1994 and 1995,

(cid:190) extracts from the 1997 financial reports for Lloyd and

Italia,

(cid:190) the financial plans for Lloyd and Italia for the years

1997 to 1999.

initially by consolidating some of

Since 1992 Lloyd has sought to improve its financial
performance,
its
services which resulted in a sharp overall reduction in
capacity and a lowering of net losses and latterly through
the device of extensive cooperation with partners. The
company has moved towards chartering-out its vessels to
partners and has then chartered-in a fixed number of
slots. These changes have led to an overall increase in the
company’s operations and revenues (up from ITL 291 600
million in 1992 to ITL 666 300 million in 1996) and a
decrease in operating costs. Since 1992 Lloyd has reduced
its net annual loss from ITL 29 300 million in 1992 to
ITL 1 400 million in 1996.

its commitment

Italia’s performance has also improved in recent years as a
result principally of
to a number of
specific routes,
its revenues have increased from ITL
186 900 million in 1992 to ITL 329 900 million in 1996.
The company still, however, remains vulnerable to the
increased competition and capacity available in the world
market and is
Italia has
reduced its net loss from ITL 18 700 million 1992 to a
break-even point in 1996.

seriously undercapitalised.

As is normal practice, a ‘control method' was used; the
usual control method would be the ‘comparables method',
in which the main financial figures of similar companies
traded on the financial markets or the subject of recent
merger/acquisition transactions would be used to reach a
value for the company. However, given the absence of a
sufficient number of comparable listed companies and
merger/acquisition activity this method was not used. The
EE (excess earnings) method was utilised instead.

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By utilising the methods listed above, a range of values for
the companies was reached. This range of values takes
into account a number of variables, and by so doing and
by utilising a number of techniques, the consultant there-
fore submits that a realistic range of values for the com-
panies has been reached. The figures in question cannot
be revealed for reasons of commercial confidentiality, as
this would have an impact on the sale price of the compa-
nies.

All the values given, including those at the lower end of
the range, were substantially above the total amount of
the financial assistance given to the companies, for each
company. Hence, even according to the lowest valuation
made of the value of the companies, the expected sales
price will exceed the proposed capital injection of ITL
60 000 million (ECU 31 million), plus the value of the
assets transferred as a consequence of the restructuring of
the Finmare group (liquidation of Sidermar and Viamare)
amounting to ITL 66 000 million (ECU 33 million).

LEGAL APPRAISAL

According to Article 92(1) of the EC Treaty, any aid
granted by a Member State or through State resources in
any form whatsoever which distorts or threatens to distort
competition by favouring certain undertakings or the
production of certain goods shall, in so far as it affects
trade between member States, be incompatible with the
common market.

As is stated in Article 222 of the EC Treaty, Community
law is neutral with respect to the private or public owner-
ship of undertakings. Accordingly,
support
which facilitates the privatisation of State-owned under-
takings may not as such benefit from a derogation from
the basic principle of incompatibility of State aid with the
common market laid down in Article 92(1).

financial

However, when a privatisation is effected by the sale of
shares on the stock excahnge it is generally assumed to be
on market conditions and not to involve aid.

If the company is privatised not by stock-exchange flota-
tion but by trade sale (sale of the company as a whole, or
in parts, to other companies) a number of conditions, as
set out by the Commission in its XXIIIrd Annual
competition report (1993) (1) must be followed:

(cid:190) a competitive tender must be held which is open to
all comers, transparent and not conditional on the
performance of other acts such as the acquisition of
assets other than those bid for or the continued opera-
tion of certain businesses,

(1) XXIIIrd competition report, points 402-403.

(cid:190) the company must be sold to the highest bidder, and

(cid:190) bidders must be given enough time and information
to carry out a proper valuation of the assets as the
basis for their bid.

If the above conditions are followed it can be assumed,
without further examination, that no aid is involved.

Before flotation, debt may be written off or reduced,
without this giving rise to the presumption of aid, as long
as the proceeds of the flotation (or trade sale) exceed the
reduction in debt.

in question exceeds

In the present case even the lowest valuation of the range
of values reached for the expected sale value of the two
the
companies
proposed capital injection of ITL 60 000 milion, plus the
value of the assets transferred as a consequence of the
restructuring of
the Finmare group (liquidation of
Sidermar and Viamare) amounting to ITL 66 000 million
(ECU 33 million) by a substantial amount.

the amount of

Moreover, the financial assistance which is the subject of
the present consultation should, as an investment and
according to general financial theory, entail a premium
for risk and the time between investment and return
should also be considered. In this context, it should be
noted that the range of sales values is in the order of 20 to
25 % and that the lowest value has been chosen as the
basis of the assessment. The risk-premium is thereby
taken into account. As to the question of timing, the time
lapse between the payment of
funds and the sale is
expected to be short (the sale is planned around the end
of 1997), so that the lowest of the expected sales valu-
ations will exceed any possible interest yield which might
accrue if the sums invested in the companies were placed
on deposit with a bank for the same duration.

Therefore, for the reasons set out above, the financial
support may be considered not to constitute State aid.

CONCLUSIONS

In conclusion, the capital injection of ITL 60 000 million
(ECU 31 million) as envisaged in the notification,
together with the financial assistance derived from the
group restructuring of Finmare, has put the two com-
panies in a position where they can now realistically be
privatised. The independent consultants have also indi-
cated that both companies are now in a position where
they can be expected to operate profitably. The Italian
authorities have agreed that no further aid will be given to
either of those companies in connection with this privat-
isation.

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The Italian authorities have undertaken to proceed
speedily with the privatisation of Lloyd and Italia and in a
transparent manner by way of a competitive tender and
have confirmed, by an undertaking received on 4 July
1997, the following time-plan:
(cid:190) an independent

been
consultant has
appointed to advise the government on the prepar-
ation of the privatisation,

recently

(cid:190) finalization of

these preparations by the end of

October 1997 at the latest,

(cid:190) publication of

the tender notice by the end of

(cid:190) time limit

November 1997 at the latest,
for
December 1997 at the latest.

submitting bids by the end of

The Italian Governement further confirmed its intention
to complete the sale of the two companies within three
months following the time limit for submission of bids.
In approving the scheme, the Commission has taken into
account these undertakings and will monitor the imple-
mentation of the time-plan.
The Italian authorities have undertaken to provide a
report, showing the results of the application of the finan-
cial support and the process of privatisation within three
months of the signing of the sales contract.
It is, therefore, proposed to the Commission that no
objections be raised to the financial support granted by
the Italian authorities to the two companies,

HAS ADOPTED THIS REGULATION:

Article 1
The financial assistance given to Lloyd Triestino and
Italia di Navigazione in the form of the capital injection
of ITL 60 000 million (ECU 31 million) and the transfer
of assets from the liquidated shipping lines in the

Finmare group, Sidermar and Viamare, amounting to ITL
66 000 million (ECU 33 million), (ITL 126 000 million,
or ECU 64 million, in total) does not constitute State aid
under Article 92(1) of the EC Treaty.

Article 2

In reaching this Decision, the Commission takes note of
the following undertakings provided by the Italian
authorities:

(cid:190) apart from the sums as set out in Article 1, no further
assistance shall be given to Lloyd or Italia for the
privatisation of those two companies; the authorities
shall proceed with the planned privatisation of Lloyd
and Italia in a transparent manner by way of compet-
itive tender, in accordance with the conditions in the
XXIIIrd competition report as set out above,

(cid:190) the Italian Government further confirmed its inten-
tion to complete the sale of two companies within
three months following the time-limit for submission
of bids. The tender notice shall be published for the
sale of the aforementioned companies at the latest by
the end of December 1997. The Italian authorities
shall provide the Commission with a report showing
the results of the privatisation,
including the sales
price, within three months of the signing of the sales
contract.

This Decision is addressed to the Republic of Italy.

Article 3

Done at Brussels, 15 July 1997.

For the Commission

Neil KINNOCK

Member of the Commission