Pirelli & C.

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Significant events during the year

On January 27, 2009 Brembo, Magneti Marelli and Pirelli announced the start of technological cooperation aimed at developing avant-garde solutions for the Italian and international automotive industry.

Cyber Tyre, the “smart” tyre developed by Pirelli, will be integrated with Magneti Marelli electronic control systems and Brembo advanced braking systems for ad hoc technological solutions, to meet performance and safety needs of all user types.

The skills and the excellence of the three Italian groups, recognised also at the international level, will make it possible to achieve significant synergies and develop applications in particular in the field of security systems for motor vehicles with the aim also of reducing environmental impact, in line with the evolution of international standards and with the new CO2 emission limits envisaged by the European Union from 2012 onwards.

On February 11, 2009 the Pirelli Group presented the outlines of the 2009-2011 business plan.

On March 5, 2009, the Pirelli & C. Real Estate S.p.A. Board of Directors ratified the decision taken in February, approving an operation aimed at strengthening the Company’s equity structure and supporting the new business model by proposing a capital increase against payment, in divisible form, to be offered as option to its Shareholders.

The capital increase is an element of the 2009-2011 business plan and the aim is to boost the company and, in particular, by allowing it to pursue the actions foreseen in the plan itself and to improve the ratio between debt and own capital, thus reinforcing the equity structure.

Subsequently, on April 17, 2009, an extraordinary Shareholders’ Meeting of Pirelli & C. Real Estate S.p.A. approved the capital increase.

In June the terms were defined for the capital increase, which involved the issue of 798,574,564 ordinary shares with enjoyment from January 1, 2009 and with a par value of 0.50 euro, with no premium. The option assignment ratio was set at 135 newly-issued shares for every 7 shares already held for a total amount of 399.3 million euro.

On July 3, 2009 the option rights offer period in relation to the capital increase of Pirelli & C Real Estate S.p.A., which had begun on June 15, 2009, came to an end.

A total of 41,142,801 option rights were exercised and 793,468,305 newly-issued Pirelli & C. Real Estate S.p.A. ordinary shares were subscribed, representing approximately 99.361% of total shares offered in option, for a total countervalue of approximately 396.7 million euro.

Fulfilling the undertakings given, the controlling shareholder Pirelli & C. S.p.A. exercised all the option rights available to it, subscribing 463,752,540 newly-issued Pirelli & C. Real Estate S.p.A. ordinary shares, representing approximately 58.07% of the shares offered, for a total countervalue of approximately 231.9 million euro. Pirelli & C. S.p.A. subscribed the portion attributable to it converting into capital part of the financial receivable due from Pirelli & C. Real Estate S.p.A..

At the end of the option offer period 264,768 option rights were therefore not exercised; corresponding to a total of 5,106,240 newly-issued Pirelli & C. Real Estate S.p.A. ordinary shares, for a total countervalue of approximately 2.6 million euro.

Under the terms of Art. 2441, Clause 3, of the Civil Code, the unexercised option rights were offered on the Stock Exchange in the sessions of July 13, 14, 15, 16 and 17, 2009.

Through this offer all the unopted rights were placed on the market. The capital increase procedure therefore ended with the subscription of all the remaining 5,106,240 ordinary shares offered in option, at the price of 0.50 euro per share, for a total countervalue of 2,553,120 euro.

The capital increase was therefore completed with the subscription of all the 798,574,545 newly-issued ordinary shares, for a countervalue of 399,287,272.50 euro.

The new share capital of Pirelli & C. Real Estate S.p.A. is therefore 420,585,888.50 euro, divided into 841,171,777 ordinary shares of a par value of 0.50 euro each. As of today Pirelli & C. S.p.A. is thus the holder of an equity interest of 487,798,972 shares representing 57.99% of the new share capital of Pirelli & C. Real Estate S.p.A..

On March 24, 2009, Pirelli and Alcatel-Lucent reached agreement on the sale by Pirelli to Alcatel-Lucent of its equity interest in Alcatel-Lucent Submarine Networks, the company concerned with submarine systems for telecommunications. The transaction took place as a result of Pirelli’s exercise of its ‘put’ option, agreed between the two companies in 2004, at the time of the agreement, whereby Alcatel acquired some Pirelli submarine systems businesses. The sale, for a total value of 56 million euro, entailed a capital gain of 11.2 million euro. This disposal by Pirelli is consistent with its strategy of focusing on its core business, as announced by the Group when it presented its 2009-2011 business plan.

On March 26, 2009 Pirelli Tyre launched Cinturato P7, the first environment-friendly high-performance tyre for the high end of the market. P7 completes the Cinturato green product family, launched last year with models P4 and P6 for mid-range cars. From an environmental point of view, Cinturato P7, besides cutting CO2 emissions by as much as 4 grams per kilometre, with consequently reduced fuel consumption, also lowers sound emissions by 30%.

From the point of view of safety, it ensures excellent performance on both dry and wet roads. The tyre contributes on average to 20% of the total consumption and carbon dioxide emissions of a vehicle.

At the same time as the launch of the new product, Pirelli Tyre has introduced a new incentive program for tyre replacement in Italy, with a totally self-financed initiative which, like that for vehicle scrapping, offers a contribution towards the purchase of fuel to those who replace their tyres with Pirelli environment-friendly products.

This measure, a complete novelty for the industry, is aimed at sustaining demand at a time of economic crisis and at encouraging the adoption of products with low environmental impact for each segment of the car market and fostering road safety, by subsidising the replacement of tyres whose wear exceeds legal limits.

The worn tyre replacement incentive is part of the Pirelli program to develop increasingly innovative and environment-friendly products and solutions, in line with the aims announced in the 2009-2011 business plan presented by the Group last February.

On April 7, 2009, the 150 million euro bond issued by Pirelli & C. S.p.A. in 1999 at a fixed rate of 5.125% was redeemed on maturity.

On April 8, 2009 Carlo A. Puri Negri left the post of Executive Vice-President of Pirelli & C. Real Estate S.p.A.. At the same time, Giulio Malfatto joined the Group Pirelli Real Estate with the role of Managing Director of Pirelli & C. Real Estate S.p.A., with responsibility for the business, while Claudio De Conto, Managing Director Finance, has maintained responsibilities for supervision and direction in financial areas.

On May 26, 2009, the Board of Directors of Pirelli Real Estate S.p.A. confirmed the economic targets to 2011, reviewing also certain strategic decisions concerning mainly the intention to concentrate the Group’s attention on what are considered core businesses capable of generating revenues of a recurrent nature. With this the Pirelli Real Estate Group aims to reposition itself on the market, taking advantage of the specific skills which enabled its success in the years immediately following its listing, such as the fund management business and the provision of specialist real estate services (mainly agency and property management) which are accompanied by the credit servicing business, owing precisely to its ability to generate recurrent revenues. Finally, the Board approved further action for rationalization and the recovery of efficiency at the Group level.

On June 9, 2009 the Arcandor Group presented a petition to the Court of Essen, initiating the procedure for declaration of bankruptcy under the terms of German law. Up to now, the Receivers appointed by the Court have fulfilled the obligations provided for by the existing master lease agreements and have prepared a rescue plan for the group which has to obtain the approval of the creditors’ meeting to be held some time in the next few months. The Receivers have also informally stated that they have reached an outline agreement with all the categories of debtors of the group.

On February 25, 2010 the Proprietor Companies signed a New Master Lease Agreement which provides among other things for (i) release by Kardstadt of 13 properties, with consequently no further payment of rents (ii) reduction of the total rent paid on 5 specific properties (iii) reduction - limited to a period of 5 years - of the total rent (not allocated asset by asset) on the remaining properties (iv) extension of the term of the master lease agreement from the current year of expiry, 2021, up to the end of 2026.

On February 25, 2010 the Proprietor Companies also negotiated and signed with the lending banks of the HighStreet project the appropriate changes to the financing needed to adapt to the content of the New Master Lease Agreement summarised above, which among other things extended the current expiry of the credit facilities from July 2011 to July 2014.

With reference to the valuation of the real estate portfolio, Cushman & Wakefield were asked to update the valuation of the real estate portfolio at December 31, 2009 on the basis among other things of (i) the effective restructuring of the Kardstadt Group (ii) the effective extension of the master lease agreement by at least 5 years.

It should be noted that at December 31, 2009 Pirelli RE’s remaining investment in the initiative, which was also affected by devaluations made in the period, amounted to 35.6 million euro compared with 61.2 million euro at December 31, 2008.

On June 29, 2009, in the context of non-performing loans, Pirelli Real Estate reduced its financial commitment to the investment platform European NPL S.à r.l. (67% DGAD International S.à r.l. - a company wholly controlled by Calyon S.A. - 33% Pirelli Real Estate) thanks to the refinancing of 250 million euro disbursed by DGAD International

S.à r.l. which enabled Pirelli Real Estate to repay its shareholder loan. As part of the same operation DGAD International S.à r.l. became a shareholder of Pirelli RE Credit Servicing S.p.A. with a 20% stake. As a result of the above Pirelli Real Estate recorded a positive change in its net financial position, including the shareholder loan, of approximately 89 million euro.

One of the aims of the operation is to acquire mandates for the management of portfolios of non-performing loans on behalf of third parties, in keeping with the growing focus of the Pirelli Real Estate Group in the service sector.

On July 2, 2009, during a press conference held at the Brazilian Santo Andrè factory, the Pirelli Group announced that it intended to continue to reinforce its presence and to invest more in Brazil, where this year it is celebrating 80 years of industrial and commercial business.

In keeping with the 2009-2011 business plan, in the three-year period the Group is will to invest about 200 million dollars in addition to the 100 million dollars already invested in the previous year. The strategy of reinforcement in the area will consolidate the Pirelli Group’s leadership in the South American markets.

The new investments will enable a 20% increase in car and motorcycle tyre production. The 300 million US dollars of total investments in the 2008-2011 period are destined one third for research and development and the remainder for increasing the production capacity.

On July 31, 2009, as part of the actions taken to redefine the structure of the financing relations of Pirelli & C. Real Estate S.p.A., a club deal financing agreement was signed with eight leading Italian credit institutions for a total of 320 million euro expiring in July 2012. The operation enabled Pirelli Real Estate S.p.A. to extend the average remaining term of the credit facilities, also increasing by 40 million euro the resources already granted by the above institutions.

In July 2009, 123,923,185 Telecom Italia S.p.A. ordinary shares were sold for total revenues of approximately Euro 129.4 million. Following this operation the Pirelli Group no longer holds any Telecom Italia S.p.A. shares.

On September 15, 2009 Pirelli signed a "Memorandum of Understanding" with the Hixih Group (formerly the Yinhe Group), a partner of the group since 2005 in the production of tyres, for the creation of a filter production plant at Yanzhou, in the province of Shandong (China).

The agreement is to be seen in the context of the protocols signed with the Italian Ministry of the Environment and Protection of the Territory and the Sea, with the Chinese Ministry for Environmental Protection and with the Municipality of Beijing, for the diffusion of advanced technologies for the abatement of pollutant emissions of diesel vehicles in China. The agreement enables Pirelli to reinforce and consolidate its presence established in the country in 2005. The new factory, where construction is expected to begin by the end of first quarter 2010, will be located in the same area as the manufacturing facility built by the partners for the production of truck and car tyres and will create a real and proper diversified industrial pole, capable of taking maximum advantage of the synergies deriving from the production and sale of the two products.

The plant for particulate filters, for both "retrofitting" and original equipment, will develop gradually. The investment, which was envisaged in the 2009-2011 business plan, will take account of the evolution of the market and may be up to 50 million euro in the three-year period, with a production capacity of approximately 100,000 filters per year and approximately 1,200 employees.

On September 16, 2009 the Board of Directors of Pirelli & C. S.p.A. approved the Group’s new organizational framework. In keeping with the strategy and the objectives of the 2009-2011 business plan of focusing on the core business, the company decided to simplify its organizational structure and bring together all the activities in direct support of the core business in the new "Tyre and Parts" Division, responsibility for which was entrusted to Francesco Gori, who also maintains the position of Chief Executive Officer of Pirelli Tyre S.p.A..

The reorganization will enable a significant reduction in the size of the structures at the corporate level, with savings, expected from 2010 onwards, of at least 10 million euro on an annual basis, and bring together the operating activities necessary for development of the core business: tyres (Pirelli Tyre) and filters (Pirelli Eco Technology), within the new Division will thus ensure unitary governance of the business processes.

In line with the focus on the industrial activities, the reorganization therefore entails the replacement of the Operational General Management, entrusted to Claudio De Conto, who now concentrates his work, in his capacity as Chief Financial Officer, on Pirelli & C. Real Estate S.p.A. together with the Chief Executive Officer of Pirelli & C. Real Estate S.p.A., Giulio Malfatto, continuing to manage the turnaround process positively launched and conducted up to now.

On September 30, 2009 an equity interest of 5% in the subsidiary Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., leader in Italia in real estate fund management, was sold to Intesa Sanpaolo at a price of 10 million euro, with an agreement which provided for the purchase by Intesa Sanpaolo of a total equity interest in Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A. of 10%. After obtaining the necessary authorization from the Bank of Italy, the operation was completed on December 30, 2009 with the sale to Intesa Sanpaolo of a further 5% stake.

Pirelli & C. Real Estate Società di Gestione del Risparmio S.p.A., on one hand, will be able to grow internally with the development of the real estate funds and the launch of new products reserved for investors; on the other hand, instead, it will be able to seize the opportunities for external growth deriving from consolidation of the managed savings sector, aggregating other AMCs operating on the Italian market.

On November 11, 2009 Pirelli & C. S.p.A., Pirelli & C. Real Estate S.p.A. and Fimit-Fondi Immobiliari Italiani Sgr S.p.A. announced that they had reached an agreement on the need to carry out a joint feasibility study for an operation aimed at the industrial integration of the businesses of Pirelli Real Estate and Fimit to create a new entity in the sector of asset management and real estate services.

Subsequently on January 29, 2010 Pirelli & C. S.p.A., Pirelli & C. Real Estate S.p.A. and Fimit announced the suspension of the joint feasibility study for industrial integration between Pirelli Real Estate and Fimit. As matters stand, owing to its dimensions and complexity, the process of integration is not considered compatible over time with the real estate development plans of Pirelli Real Estate already underway and with Fimit’s reorganization process.

In keeping with the announcements made to the market, the Pirelli Group is continuing in any case with the process of focusing its business on industrial activities, pushing forward with the plan to separate the real estate businesses which should be completed by the end of the year, once the specific project, the terms and conditions of which have already been defined, has been examined and approved by the competent bodies of the companies involved.

On November 12, 2009 the European Investment Bank (EIB) and Pirelli Tyre S.p.A. signed a financing agreement for 100 million euro granted by the EIB to support Pirelli Group projects in the area of research and development for the period 2009-2012. The loan is earmarked for the support of research and development work in the field of innovation of products and manufacturing processes with the aim also of reducing the environmental impact of tyres, improving performance and safety standards thanks to the identification of innovative materials and components.

The project involves the work carried on in the various Pirelli research and development centres in Italy and abroad and was designed to make use of the credit facility of 200 million euro granted by the EIB last July.

The new loan consolidates the relationship between Pirelli and the EIB, which contributed already in the past to the group’s constant commitment to innovation and to the development of its competitiveness worldwide.

On November 13, 2009 Pirelli & C.Ambiente S.p.A. and Global Cleantech Capital (GCC) reached an agreement which provides for the acquisition by Pirelli & C. Ambiente S.p.A. of the 50% that had been held by GCC in the joint venture Solar Utility S.p.A.. The operation, worth approximately 8 million euro, meant that at the end of November Pirelli & C. Ambiente S.p.A. held 100% of the company. The purchase will enable Pirelli & C. Ambiente S.p.A. to take advantage of new development opportunities for Solar Utility, including through industrial partnerships such as the one recently launched with the Norwegian national energy supplier, Statkraft, as the first step in building an important player in the field of renewable energy in Italy. Solar Utility S.p.A. was set up in 2007 as an equal joint venture between Pirelli & C. Ambiente S.p.A. and GCC, a private equity fund specialized in investments in clean energies, to make joint investments in the fotovoltaic sector.

On December 3, 2009 Pirelli and Russian Technologies signed an agreement for implementation of the ‘Memorandum on Terms’ which provides for an extension of the collaboration begun in the context of the joint venture currently being finalized for the production of tyres and steelcord in Russia.

On December 17, 2009 the European Investment Bank (EIB) and Pirelli Tyre S.p.A. signed a 50 million euro loan agreement. The loan is to be used to increase the production of tyres for cars and light commercial vehicles at the Pirelli factory in Slatina, Romania, and will be a part of the investments of 250 million euro announced by the group for its Romanian business for the three years 2009-2011.

The new loan consolidates the relationship between Pirelli and the EIB, which participated already in the past in the group’s constant commitment to innovation and to the development of its competitiveness worldwide both in the field of research and development and in support of industrial growth.