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MILAN (Reuters) - Italy's Finmeccanica SIFI.MI is expected to broaden the powers of its long-standing No. 2 on Wednesday after the arrest of its head left the aerospace and defense group facing serious damage to its reputation and delays to vital asset sales.
On Tuesday Italian police arrested Chairman and Chief Executive Giuseppe Orsi on allegations he paid bribes to win a 560 million euro ($754million) Indian contract for 12 helicopters. Orsi denies any wrongdoing.
Finmeccanica, 32 percent owned by the Italian state, is scheduled to hold a board meeting on Wednesday afternoon to address the governance vacuum.
Chief Operating Officer Alessandro Pansa, who joined Italy's second largest corporate employer in 2001 as CFO, was likely to receive wider powers as a stop-gap measure until a shareholder meeting is called, a source familiar with the situation said.
"Pansa has been involved in the asset sales process and so can give the market guarantees," the source said.
The heavily indebted group is seeking to sell assets including its AnsaldoEnergia power engineering business to focus on its core aerospace and defense activities and avoid more credit rating downgrades.
In a statement on Tuesday the company said business would continue as usual as it seeks to limit damage from the probe, including impact on the disposals process under way.
However investors are concerned the departure of Orsi, who was appreciated for his market-friendly style, could disrupt the company's turnaround ambitions.
"If CEO Orsi is forced (or chooses) to step down this would introduce risk and significantly alter our investment case which is based on Orsi's ability to drive the restructuring and cost cutting through the whole of Finmeccanica," UBS said in a note.
On Tuesday Fitch put Finmeccanica's rating under review for a possible downgrade saying the arrest raised risks of "material disruption".
Standard & Poor's already cut Finmeccanica to junk in January after the group missed its target for 1 billion euros of asset sales by the end of 2012.
Analysts said another downgrade to junk could impact the group's ability to receive pre-payments from customers and harm its competitiveness outside Italy.
A series of scandals including derivatives losses at bank Monte dei Paschi (BMPS.MI) and a graft probe involving oil services group Saipem (SPMI.MI) has rocked Italy's business world in recent weeks and sent waves through the political elite.
On Wednesday Silvio Berlusconi, head of the center-right's leading party, said the arrest of Orsi would have very bad consequences for the Italian economy.
"Finmeccanica acts just like the rest of its international competitors, with the difference that magistrates elsewhere do no react the same as in Italy," he said in a TV interview.
Concern is growing that the corruption probe could tarnish Finmeccanica's reputation and the market is now looking to see the reaction of important customers, especially in the US.
India has already said it would blacklist Finmeccanica and cancel the helicopter deal if allegations of bribery are proven against the company.
Being excluded from the growing Indian market could be a major problem for the group, which faces defense budget cuts in its main Italian, British and U.S. markets.
Reporting By Stephen Jewkes, Danilo Masoni and Steve Scherer; Editing by Peter Graff