Can New Management Turn Eni and Finmeccanica Around?

Recently appointed Prime Minister Matteo Renzi in Italy just nominated a new CEO for Eni and Finmeccanica. What's the outlook for these companies?

May 28, 2014 at 2:06PM

New government measures by recently appointed Italian Prime Minister Matteo Renzi are bringing renewed excitement to the country. Renzi, a relatively new face within Italian politics, decided to execute a stimulus plan that will benefit lower-income workers. Now, every Italian worker with an annual salary ranging from about $11,000 to $35,000 (8,000 euros to 26,000 euros) will receive a $109 monthly bonus. The cost? About $1.1 billion, considering that there are about 10 million people within this salary range. In order to finance this plan, Renzi will execute intense spending cuts totaling $8.2 billion.

The new Italian prime minister is also showing willingness to bring change to the companies in which the government has a stake. He changed the CEOs of oil giant Eni (NYSE:E) and industrial conglomerate Finmeccanica (NASDAQOTH:FINMY) -- two companies in which the Italian government owns a 30% stake -- among others. What strategy is behind these changes?

Eni's new leaders
At Eni, Renzi managed to install Emma Marcegaglia, the high-profile former head of Italian industrial lobby Confindustria, as chairwoman. More importantly, however, Renzi chose an insider for CEO: Claudio Descalzi, Eni's former head of exploration and production.

And now may be the perfect time for an E&P-focused leader. Eni's operations in Northern Africa meant to supply Italian demand are not as vibrant as before. The civil war in Libya and dwindling volumes from Algeria have reduced deliveries. Algeria in particular is reducing gas exports due to its growing population and artificially low domestic energy prices. Eni's long-term gas supply deals with Algeria expire in 2019 and might not be renewed.

Given his background, Descalzi may help Eni focus on increasing the discovery of lucrative resources. Descalzi is responsible for the group's biggest-ever discovery, Mamba South off the coast of Mozambique. Africa, where the company is already the biggest foreign oil and gas operator, is the best area to continue exploring. In Mozambique especially, Eni holds a controlling stake in the gas-rich Area 4 field in Rovuma Basin, which holds more than 150 trillion cubic feet of gas.

Finmeccanica's new chief
Leadership changes are also being made at industrial group Finmeccanica, a multinational giant operating in the aerospace, defense, and security sectors. Renzi made Mauro Moretti CEO and general manager. Moretti is well known in the country for turning around the previously loss-making state railway Ferrovie dello Stato -- and this sort of turnaround expertise is exactly what Renzi is looking for.

Finmeccanica's image in particular requires an overhaul. The company is under corruption investigations, as a former CEO is facing charges for offering bribes that would guarantee the sale of 12 helicopters to India. In addition, the company could face a new corruption trial over the sale of helicopters and satellites to Panama. These issues will not disappear anytime soon.

The company's financials are what Moretti has come to improve, however. Finmeccanica's 2013 annual report showed that it is not in terrible shape, but this is mostly thanks to the sale of Ansaldo Energia, which helped reduce the group's net financial position by $857 million. However, revenue for 2013 was down 2.9% from 2012.

Digging into Finmeccanica's structure, the company operates whole businesses in two sectors: transportation and aerospace and defense. The former, which generates 10% of revenue for the company, is where Moretti might make his first move. The transportation sector, led by AnsaldoBreda, had a negative impact on the group's profitability and cash generation. In 2013, it showed a 7.3% drop in new orders.

This unit, specialized in railways, is considered inefficient by the group itself. The previous administration was actually pushing to trim parts of this area. Moretti may continue this effort, as he is expected to work on improving the company's balance sheets, though he has not commented on the matter.

Final thoughts
When analyzing the recent history of these two companies, two things stand out: corruption and the selling of business units. This could be coincidence, but it must be taken into consideration when thinking about investing in either companies.

Under Renzi's newly appointed management, Eni and Finmeccanica will likely experience sales of noncore assets. This will consequently lead to improvements in their accounting books. This stronger focus on what works for the companies is highly positive. Further, Renzi-appointed leaders may have more and stronger ties with the Italian government, potentially leading to new contracts with the state.

The installment of Claudio Descalzi at the head of Eni should assure continuity and an extra focus on exploration, which could turn highly profitable.

Meanwhile, Finmeccanica may soon show a better balance sheet with Moretti's intervention, but it is questionable whether the new management can boost the company's top line. The Italian economy is contracting, and despite Finmeccanica's relationship with the government, it will be hard to expect juicy new contracts. Italy holds a public debt of more than 132.6% of GDP, and Renzi has committed to keep Italy's deficit below the European Union limit of 3% of GDP in 2014. That would require more cuts or extra financing -- not new investments in defense.

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Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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