Eni CEO Drafts in Former Boss to Pave Way for Saipem Sale

Posted by Michelle Howard April 23, 2015

Stefano Cao has been brought back by Eni to turn around the oil service subsidiary Saipem that he spent nearly 25 years working for and prepare it for a sale, according to people familiar with the plan.

Italian state-controlled oil major Eni has been mulling for years the idea of cutting its 43 percent stake in Saipem to somewhere below 30 percent, mainly to get 4.4 billion euros ($4.7 billion) of debt off its balance sheet that has been a brake on its own growth.

But falling oil prices and setbacks that culminated last year in Saipem losing the lucrative South Stream gas pipeline project forced Eni to put the plan on hold.

Saipem shares have fallen more than 60 percent in the past two years, wiping more than 10 billion euros off its market value after two profit warnings, a corruption probe in Algeria and bleak outlook leading to cost overruns and lost projects.

Relatively low valuation multiples after the share slide -- including a 2014 price to book ratio of just 0.9 times, indicating an undervalued asset base -- have rekindled investor interest in the contractor.

Earlier this year U.S. investment company Dodge & Cox increased its holding to almost 12 percent, making it the second-largest shareholder. It has not said why it bought the stake.

But potential buyers want Saipem's problems brought under control before they consider buying part of Eni's holding.

For Eni too, a deal is still some way off. While Saipem shares have risen 30 percent since the start of 2015, partly on bets that Cao can turn the ship around, that is still below the price Eni is likely to accept.

"Cao will relaunch the company through new commercial agreements and possibly M&A, then Eni could sell down to 20-30 percent to investors to create a company with no big shareholder," a source close to Cao said.

Eni's CEO, Claudio Descalzi, has moved to tighten his grip on Saipem by designating 63-year-old Cao as CEO-in-waiting. Cao will rejoin the company in the coming weeks.

Cao spent almost 25 years at Saipem, leaving in 2000 as executive chairman to take charge of Eni's core exploration and production business where he managed Descalzi. He left Eni in 2008. Since then he has headed independent E&P group Exploenergy and been a non-executive director at Petrofac.

"Cao's a man Descalzi knows he can trust and who knows the oil business inside out," said a banker who knows both men.

"The idea is to get Saipem shares back to the 14-15 euro mark so Eni can sell down below 25 percent, deconsolidate the debt and get a partner on board to inject capital. That could take this year," the banker said.

Saipem stock was trading at 11.4 euros on Thursday.

Legacy Contracts
Besides cutting debt and rebuilding a weak order portfolio, Cao's main job will be to phase out, this year, legacy contracts with low profit margins that were awarded before 2013.

He will also have to resolve the immediate problem of 1.1 billion euros of unpaid revenues. These are for work done on projects that oil major clients are reluctant to recognise.

"Cao is well known to the big energy companies it will have to negotiate with," the banker said.

It will not be easy as falling energy prices force oil majors to slash costs and squeeze suppliers.

Saipem, with an order backlog of 22 billion euros, has had no contract awards so far in 2015 except for a $1.8 billion deal for the Kashagan pipelines, and bidding activity looks quiet.

"Last time prices slumped in 2008 we ended up undercutting rivals and got stuck with low-margin contracts. We mustn't let that happen again," a top manager at Saipem said.

But foreign interest remains high. Road shows last year drew keen interest from foreign investors interested in Eni's stake, bankers familiar with the matter said.

"This is a company with top-drawer strategic assets, especially deepwater, and there was a lot of interest from foreign names in China and the Middle East, including Abu Dhabi's Adia and Qatar Petroleum," one of the bankers said.

The banker said Italian state lender Cassa Depositi e Prestiti (CDP) had also been involved in talks last year as a candidate to partner Saipem but the plans had been suspended. CDP declined to comment.

"If the price recovers, CDP is one of the options on the table, and they could buy through a reserved capital increase," the banker said.