China National Chemical Corp (ChemChina) is close to becoming the biggest single shareholder in Pirelli (PECI.MI) in a deal that would trigger a 7 billion euro ($7.5 billion) buyout of the Italian tire company.
Three sources familiar with the deal, which would be the latest in a string of Chinese investments in large Italian companies, said ChemChina was discussing a deal with Pirelli's top shareholders to buy a holding company called Camfin, which owns 26 percent of Pirelli and is 50 percent owned by Russia's Rosneft (ROSN.MM).
Without identifying the possible buyer, Camfin said it was in talks with an international industrial group to sell its Pirelli stake at 15 euros per share, valuing the tire group at 7.1 billion euros.
It said the stake would be transferred to a vehicle controlled by the new partner, after which a takeover offer for the rest the world's fifth-largest tire maker would ensue.
If the offer succeeds, Pirelli will be delisted. The deal comes as Pirelli's rivals Michelin (MICP.PA) and Continental (CONG.DE) look around for growth opportunities in Asia.
State-controlled ChemChina and Rosneft declined to comment.
Previous Chinese investments in Italy include State Grid Corp of China [STGRD.UL] buying into electricity grid company Terna (TRN.MI) and gas network operator Snam (SRG.MI).
Besides Rosneft, Camfin's owners are a holding company comprising Pirelli chief Marco Tronchetti Provera as well as Italian banks Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI)
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Rosneft bought the Camfin stake a year ago, before the Russian economic crisis set in.
But it is now under international sanctions because of the situation in Ukraine. It has also been hit by the plunge in oil prices, is heavily indebted and in need of billions of dollars to fund field expansion and refinery modernization.
The deal with ChemChina would allow Rosneft to cash in on part of its Camfin stake, worth about 1 billion euros at current market prices. The Russian group will not exit Pirelli altogether for the time being but may sell out later, two sources said.
Tronchetti Provera, a former head of Telecom Italia (TLIT.MI), has revamped Pirelli several times in recent years to beef up its balance sheet and fund investments.
He would remain in management control for five years after the ChemChina deal, one of the sources said. Camfin had about 380 million euros of debt at the end of 2013.
Pirelli shares closed 2.2 percent up at 15.23 euros, above the proposed buyout price and extending gains made on Thursday after a press report it was seeking to bring on board an unnamed Asian investor.
Mediobanca said in a note that there was not much of a premium in the offer price and it did not expect other shareholders to tender their shares at that level.
One of the sources with knowledge of the matter said the deal on Pirelli would involve the company's less profitable truck tire business being spun off or the setting up of a joint venture with ChemChina's Aeolus unit.
Broker Banca Akros argued that a spin-off could add 6 euros to Pirelli's share price -- another reason why shareholders may be reluctant to tender their shares at the proposed 15 euros level.
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