De Benedetti scrambles to escape debt hole

One thing that the Italian information technology firm Olivetti is used to is digging itself out of deep holes. After all, if it hadn't been for the foresight of its chairman Carlo De Benedetti, who took the company into the computing business in 1978, it might still be making old-fashioned steam typewriters. Or, more likely, making nothing at all.

But this time the hole is bigger, and the stakes far higher, than ever before. Having hit the peak of its success in the mid-1980s, Olivetti is no longer a pacemaker in a fast-changing industry. Unable to keep up with the likes of US giants Compaq and IBM, its personal computer division is losing money hand over fist. Worse, a radical restructuring programme begun in 1993 has failed to have the intended impact. Deep cuts in manpower and the sale of non-core interests have failed to make much of an impression on Olivetti's growing deficit, which stands at around L2,000bn (pounds 800m). Losses for the first half of 1995, announced last weekend, stand at L1,100bn.

Thus it is that Olivetti has stooped to the lowest of indignities: going cap in hand to the financial markets for the second time in two years to raise an unprecedented L2,257bn in new share capital by the end of the year through a massive rights issue accompanied by major structural changes. The idea is to plug the debt hole in one fell swoop, while at the same time somehow yanking the personal computer division back into the black and betting on the prosperity of new ventures in multimedia and cellular telephones.

It is a painful, high-risk strategy and, by common consent, the last chance Olivetti has to prove it can still function as a high-profile international company. Financial analysts are divided about the prospects. "If they make it, it will be more luck than judgement," said one Italian equities analyst, reflecting a widespread layer of cynicism.

Computer company analyst Peter Knox of UBS in London offered a more sanguine assessment. "It is clear the company has made mistakes in the past. Having said that, the accelerated restructuring programme they are now embarking on should get them out of the woods. Although it's late, it's not too late."

Olivetti has always argued that its problems are partly because of the cyclical problems suffered by all Europe's leading computer firms, and because of its status as establishment outsider within the Italian business world. But neither assertion is entirely true.

Although ICL, Siemens-Nixdorf of Germany and Bull of France have had their problems with the recession and competition from the US big guns, none has lost as much money as Olivetti. Siemens expects to make a small profit this year.

And while Olivetti has certainly had trouble securing contracts with the Italian state (the company provides about 30 per cent of computer equipment to state offices, compared with the 70 per cent level enjoyed by Bull in France), it can thank the Italian business establishment for giving it a major leg-up with the current recapitalisation plan.

The rights issue has been orchestrated by Enrico Cuccia, 87-year-old eminence grise of the Milanese bank Mediobanca, who has been at the centre of high-stakes deals and bail-outs in Italian business for decades. Behind Mediobanca are seven other participating banks, who between them have pledged one-quarter of the recapitalisation funds up front.

Moreover, an Olivetti-led international consortium called Omnitel has secured the contract to launch Italy's second cellular telephone network at the end of this year.

To sweeten the recapitalisation pill, the Mediobanca consortium allowed Olivetti to increase its stake in Omnitel from 36 per cent to 41 per cent.