Mitt Romney skipped Italy on his swing through Europe. That was probably prudent.
That's because Bain Capital, under Romney as chief executive officer, made about $1 billion in a leveraged buyout 12 years ago that remains controversial in Italy to this day. Bain was part of a group that bought a telephone-directory company from the Italian government and then sold it about two years later, at the peak of the technology bubble, for about 25 times what it paid.
Bain funneled profits through subsidiaries in Luxembourg, a common corporate strategy for avoiding income taxes in other European countries, according to documents reviewed by Bloomberg News. The buyer, Italy's biggest telephone company, now has a total market value less than what it paid Bain and other investors for the directory business.
In Italy, the deals have spurred at least three books, separate legal and regulatory probes and newspaper columns alleging investors made a fortune at the expense of Italian taxpayers. Boston-based Bain wasn't a subject of the inquiries, which didn't result in any charges.
The sale of the government's directory business is "a dark chapter in the country's privatization history, one that has hurt Italians deeply," said Bernardo Bortolotti, an economics professor at Turin University who advised the Italian Treasury on asset sales from 2002 through 2005. "It was a mistake from the start, damaged by a lack of transparency and the use of offshore funds." Personally Involved While few ordinary Italians realize the link between Romney and the investor group, the deal symbolizes Italy's economic woes and government futility as the nation struggles to convince investors that it can repay Europe's second-largest debt without a bailout. The economy is in its fourth recession since 2001 and unemployment is at a 13-year high.
Romney himself probably earned more than $50 million, and possibly as much as $60 million from the Italian directory sale of Seat Pagine Gialle SpA, according to a person familiar with the matter. The deal turned into one of the biggest windfalls of his tenure.
"With this investment, Mitt Romney and Bain Capital, with its consortium partners, partnered with a new management team to transform this company, and grow it into a tremendous success," said Michele Davis, a spokeswoman for Romney's presidential campaign. "Mitt Romney is running for President to put that experience to work." 'Burned' Investors As Bain's CEO from 1984 to 2001, Romney was personally involved in the deal at various points, including the initial decision to invest. He attended at least one meeting about it in Boston, according to a participant. When Bain sold the directory business in 2000, Romney, while still holding the title of CEO, was in charge of preparations for the 2002 Winter Olympics in Salt Lake City. Romney has contended that he gave up management control of Bain in February 1999 to run the games.
"Mitt Romney and Bain played the role of successful financial speculators at the peril of the Italian government and the small stock-market investors who were burned by the sharp decline in Seat shares," said Giovanni Pons, a journalist for la Repubblica and co-author of "L'Affare Telecom" (2002), which recounts details of the Bain deal.
The use of offshore subsidiaries to avoid taxes has been standard practice for private equity firms such as Bain, as well as other big U.S. companies such as Google Inc., Facebook Inc. and Cisco Systems Inc.
'Full Compliance' "The holding company structure was in full compliance with all tax and reporting requirements in Italy, Europe, the U.S. and the resident countries of other investors," Bain Capital said in an e-mail. "Investing through this common cross-border structure ensured that investors were not unfairly subjected to double taxation in multiple countries. The structure did not reduce or defer income taxes for any U.S. investor." Romney's extensive investments in tax havens are drawing intensifying media scrutiny at the same time that revenue- starved governments around the world are cracking down on such practices.
In recent weeks, Romney has faced increasing pressure to release additional years of tax returns because of questions over his 13.9 percent personal tax rate, his Swiss bank account, an IRA valued at as much as $102 million and his investments in Bermuda and the Cayman Islands.
An official for Italian Finance Minister Vittorio Grilli, who oversaw privatizations at the Treasury when Italy sold the telephone-directory business, declined to comment.
Cautionary Tale The telephone directory episode may serve as a cautionary tale now that the Italian government has approved an additional round of state asset sales, said Italian Senator Elio Lannutti, a member of the Italian Values party, which is headed by a former magistrate who led anti-corruption probes in the 1990s. Italy aims to raise 10 billion euros through those sales and reduce the second-biggest government debt load in Europe.
Bain's purchase and quick resale of the yellow pages business is "an example of Italian capitalism, whereby those with little capital are able to cheat the system and enrich themselves," Lannutti said. "It's a mistake Italians hope won't be repeated again now." Twelve years later, Romney's ties to the deal could hurt his image in Italy, said Carlo Alberto Carnevale-Maffè, a professor of strategy at Bocconi University's School of Management in Milan.
"There is always this underlying sentiment in Italian public opinion that when you are in politics you don't serve the public good, you serve your personal interest," Carnevale-Maffè said. "Many will see Romney's role in this as confirmation and it will be interpreted in a very cynical way." Pagine Gialle The origins of Bain's deal can be traced to 1996, when the Italian Treasury -- whose chiefs then included director general Mario Draghi, now head of the European Central Bank -- began privatizing several publicly owned businesses to reduce government debt, making it easier to enter the euro zone.
One of the first companies to go was Seat Pagine Gialle, or yellow pages, controlled by a state-owned company called Stet SpA.
Bain got wind of the public auction through the Italian unit of Bain & Co., the consulting company whose partners created Bain Capital. The Milan-based subsidiary was run by Gianfilippo Cuneo, a founder of McKinsey & Co.'s Italian operations.
Cuneo also was part owner of an investment firm, which needed additional capital to invest in the directory sale. Cuneo brought the deal directly to Romney.
"He immediately understood that it was a credible operation and it was worth devoting some time to it, so he guaranteed the support of Bain Capital," Cuneo said.
'Sharp Questions' Lorenzo Pellicioli, who became an investor in Seat and its CEO, recalled Romney stopping in on a meeting in Bain's Boston offices about the pending acquisition.
"He came into the room, asked a couple of very sharp questions immediately, we shook hands and he left," Pellicioli said.
The other investors in the Bain group included De Agostini SpA, an Italian holding company with publishing and media interests; Banca Commerciale Italiana SpA, then itself only recently privatized and one of the country's largest banks; Telecom Italia SpA, Italy's biggest phone company, then government-controlled; and Cuneo's investment group Investitori Associati SpA.
Bain invested 36 million euros, or about $40 million, according to a document compiled by Investitori Associati, giving it a 16 percent share of the bidding group, and making it the second-biggest investor, after Telecom Italia.
2000 Resale Bain and its partners wound up acquiring 61.7 percent of Seat for 853 million euros in November 1997, beating another bidder.
The Italian government, which previously owned a controlling stake in Telecom Italia, sold most of its shares in the phone company in 1997. In February 2000, at the height of the Internet bubble, Telecom Italia announced it was spending 14.6 billion euros to buy the remaining portion of Seat -- which had since expanded its Web offerings.
While Bain won't disclose its precise return on the investment, Cuneo's office said Investitori Associati's return was almost 28 times the initial investment.
Bain, like other private equity firms, enhances returns by using borrowed money to finance acquisitions.
Bain moved profits through a series of subsidiaries in Luxembourg, a country that makes it easy to get cash out without paying taxes, according to corporate filings. Corporate records in Luxembourg show Bain carried out technical steps for a tax- free repatriation of profits to the U.S.
'Non-Existent' Taxes Investitori Associati said taxes paid by the Luxembourg holding company in which it and the group members invested were "almost non-existent," according to an e-mail from Cuneo's office.
Seat's stock price had almost tripled in the three months leading up to Telecom Italia's offer in February 2000. The technology-heavy Nasdaq Composite Index increased 160 percent in the two years leading up to the deal.
"It was sold at the peak of the Internet bubble" recalled Pellicioli, Seat's then-CEO. "It was not pure smoke, there was a lot of real meat, but the multiple within the Internet bubble and the timing helped." Italian regulators raised concerns that the price was manipulated and investors traded on inside information and probed alleged conflicts of interest. Two top Telecom Italia officials also owned shares in Seat indirectly.
'Ripped Off' Italy's stock market watchdog, Consob, and Turin prosecutor Bruno Tinti investigated, according to a person familiar with the matter and news accounts at the time. No charges were brought.
Seat was sold in 2003 for 3.7 billion euros to another group of private equity firms and today has a market value of 57 million euros. Today, all of Telecom Italia has a market capitalization of 12.5 billion euros. Since February 2000, shares in Telecom Italia have declined about 90 percent.
"The government got ripped off," said Alessandro Fogliati, who led a Stet shareholder group that voted against the sale of Seat. "It was the beginning of the destruction of Italian industry."