There are a lot of family businesses out there. In Germany, for example, 1.5 million companies, out of a total of 2.1 million, remain family-owned.
Traditionally, family businesses have not been very keen on the stock market. In Italy, for example, the preponderance of family-owned companies has kept the stock market small: its capitalization is 18% of GDP, compared with an OECD average of 50%.
But things are changing. Even in Italy, there were 10 new listings in 1995, primarily of family businesses. Why? Yoram Gutgeld, a specialist in family businesses at management consultant McKinsey, believes generational change is always the most important motivation.
"In a number of cases," he says, "the company was built in the 1950s by a great entrepreneur. But in the generation below, some are interested in the business, some are not. Floating stock resolves this problem."
Governments have also done their bit to encourage flotations. The former Berlusconi government in Italy passed the Tremonti law giving companies that listed in 1995 an attractive tax break - a reduction in corporation tax amounting to 16% annually for three consecutive years.
And, of course, some family companies are just desperate for capital.
Still, it would be an exaggeration to claim that family-owned companies are rushing to get themselves listed. The desire to stay in control and a reluctance to disclose financial information are strong disincentives. "The last thing they want is to open their books to public scrutiny," says a Spanish government official.
Take Spain's biggest family business, El Corte Inglés, a department store chain, which is famously reluctant to release its figures. The group's financial year closed on February 28 but, in accordance with the firm's tradition, it was not until the last Sunday in August that the outside world learnt that the privately owned company's turnover had for the first time exceeded Pta1 trillion ($8.3 billion).
The attitude towards listing in the UK has always been different from that in its continental neighbours. Marc Goergen of the School of Management Studies at Oxford University has found that German companies are on average 51 years old when they list; in the UK they are 14.
Goergen also found after examining 55 German and UK businesses that the distribution of voting rights was substantially different in the two countries for family businesses floated between 1981 and 1988. In Germany, the percentage of businesses whose families still had voting rights in excess of 50% six years after an initial public offer (IPO) was 56.36%. In the UK, the figure was 11.11%. Granada's current effort to take over the UK "family" hotel group Forte, bears this out. The Forte family owns only 8% of that company.
Tax can discourage flotation. "Mention accounts to a German," says one German investment banker, "and the first thing he thinks of is tax." Wealth tax is the biggest disincentive to listing. Austria abolished it in 1993, with very beneficial consequences for the stock exchange. Mayr-Melnholf, the world market leader in recycled cardboard, owned by the aristocratic family of the same name, responded by floating 40% of the company in 1994. Chief executive Michael Gröller says there were many reasons for listing, but "the scenario of listing while there was wealth tax was never discussed".
But no two cases are the same. To gauge the strength of the trend towards listing, Euromoney reporters visited leading family companies in Italy, France, Germany and Spain to ask them what plans they had for going public. We also publish an exclusive table listing Europe's biggest family companies.
PLANNING TO LIST
ERG: the power of expansion
"I joined the company in 1987," says 34-year-old Edoardo Garrone, vice-chairman of ERG. "My father called me one morning and said: 'You should come and join me because I have some problems with my chief executive and I need help.' He wanted to have a son close to him - more of a counsellor than a manager."
Today, the son is looking to float the company.
ERG, which stands for Raffinerie Edoardo Garrone, is owned by the Garrone family of Genoa and operates oil refineries and petrol stations throughout Italy. Indeed, the first thing one sees leaving Genoa's airport terminal is the blue and white design of an ERG petrol station. The Garrones like you to know Genoa is their town. They even used to sponsor the local football team, Sampdoria.
ERG grew from a small petrol company established by Edoardo's grandfather (also called Edoardo Garrone) in 1938 and an oil refinery he built during the war. (He was jailed in 1943 by the Nazi occupiers who thought he was supplying petrol to the Italian resistance.) After the war, Edoardo built up a network of petrol stations.
In 1963, his 28-year-old son, Riccardo, who had just graduated from university with a degree in chemistry, was thrown into the business when Edoardo died suddenly while salmon-fishing in Norway. Apart from having acted as an English translator for his father in negotiations with BP (British Petroleum), Riccardo had nearly no experience.
The company today has consolidated assets of L2,000 billion ($1.3 billion) and a staff of 1,650, accounts for 6% of Mediterranean refining capacity and operates 2,217 petrol stations in Italy.
Edoardo Garrone, the eldest of the third generation, says the company's growth was financed by cashflow - individual shareholders have not received dividends for over 15 years. "My father and his sister, the only shareholders, did not care about dividends," says Edoardo. "Neither had a king-size lifestyle."
For 60-year-old Riccardo Garrone, the changes are difficult to come to terms with. "It's a change of culture for him," says his son. "Every day he has to make some violence on himself to change his style. He has to be non-operating which is difficult for him." He pauses and says: "The most difficult job in this company in the past 30 years was public relations. He put a lot more value on truth than diplomacy."
Succession
Pierantonio Nebuloni was Edoardo's choice for managing director in 1993. Nebuloni had joined the finance department in 1987 from Montedison, the agrochemical and energy group. He is widely admired by investment bankers for having successfully extended the ratio of the company's long-term debt to total interest-bearing debt from 8% to 25% in the space of one year, 1995.
Father and son differ significantly in their management styles. Riccardo Garrone always wants to be instructed and to understand before he makes a decision. Nebuloni comments: "For a manager, it bothers you but it protects you. He shares the responsibility."
Edoardo, who is vice-president, says his approach is different: "If we pay someone to do his job, he has to do it." The two Garrones' interests however are similar - both father and son love sports. Last year, they took up golf. Edoardo's handicap is already 16.
He is frank about the succession: "This is the most difficult thing to manage. I don't want to destroy our company or make 14 small bits of it." (He is referring to the 14 family shareholders: Edoardo's brothers, sisters and cousins.)
His plan is to double the value of assets in five years. A cornerstone of this strategy is the decision to enter the power-generation business. Together with Mission Energy of the US, ERG plans to build and operate a L1,800 billion, 512MW thermal power station. The company emphasizes that this is not a diversification, but a solution to the over-production of heavy fuel gases (viewed as a by-product of the refining process) at its Sicilian refinery. Given the fall in world demand and prices for these products, it makes sense to use them to power the plant.
With Mission Energy, it will finance L400 billion of the project. The rest will be provided by a consortium of banks which include SBC Warburg, Barclays and Citibank.
ERG is talking to 15 investment banks about the possibilities of going public. Edoardo Garrone points to the door of the boardroom to indicate how queues of bankers have been lining up outside. He says he has not spoken to any of them - except informally over coffee: "I don't want to talk to banks about suggestions. Mr Nebuloni and his team are doing this. Then they can come to me and my father afterwards."
Nebuloni has already invented a slogan to raise investor awareness of the company: "I told Franco Bernabe [head of ENI, the recently privatized Italian oil company] ours would be - ERG: private energy since forever."
Edoardo is positive: "I don't see any problems because my mind is ready. I see only advantages in an IPO." He is confident that short-termism will not be a problem: "You have to demonstrate that the value of the shares may be low today but you are growing the company. You have to be ready to talk to Fidelity-style [institutional] shareholders. That is why we are having some management changes."
The structure of the company is being simplified for the purposes of an IPO. "We are merging all operating companies into a single company in January 1996," says Nebuloni. A more difficult task is deciding what to do with the companies set up when ERG closed its Genoa oil refinery in 1988. These range from data management to chemical research, and were created largely to provide work for 400 unemployed families.
"We are going to take all these out," says Nebuloni, "and become just an oil company. Some will be sold outside and some will be bought by the family as private concerns."
Nebuloni says the company is looking to be 30% public and 70% family-owned, with possibly a private placement of shares. "ERG represents 100% of the family worth. They cannot contribute more to finance the growth phase." Going public, Nebuloni says, will also give the company an acquisition currency - its own shares.
A shareholder agreement has already been drawn up. Edoardo says: "The difficult thing was to tell the other 13 shareholders that we had to make one. They all replied: 'Why? We don't need one, we have always in the past delegated responsibility.' I had to explain that it gives us security. If we have an IPO, it means we have control. We need to keep the votes together for the children."
But of the 30% which he plans to float, he has concluded that between 2% and 5% will be put into the hands of the family as liquid stock. "This," says Edoardo, pointing to an impressionist view of Genoa on the wall, "is so they can buy pictures and houses."
But two problems will confront bankers and investors wanting to analyze the balance sheet - the temporary use of a refinery for the past two years, which has inflated earnings, and the peculiar tax planning the company has adopted. Last year, first-half profits were L22 billion, with a tax bill of L3 billion. This year, profits were L3 billion, with a tax bill of L22 billion. Edoardo explains: "We have paid this year the tax for last." Steven Irvine
