Pains and gains
Akfen Holding’s adventures in the international capital markets show how important – and difficult - it is to develop a financing strategy. Others can learn much from the company. Nick Lord reports.
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At 10.30am on Friday April 8, Akfen Holding’s consortium won the bid for Istanbul’s ferry privatisation. The sale of IDO was broadcast on live TV and Akfen’s success was the latest chapter in a remarkable 18 months of activity. No other Turkish company has been as busy in all areas of international finance. Akfen’s story shows the difficulties these companies can face, but also the huge benefits they can derive from embracing the international markets.
“We have now used every type of financial tool both locally and internationally and it adds a lot of value to us as a company,” said Suha Gucsav, CEO of Akfen Holdings.
The company is a broad based infrastructure play, operating in airports, power, ports, hotels, construction and real estate. From its roots as a construction company, 14 years ago the company became a concession company. Since then its strategy has been to leverage cash generating assets to maximise its return on equity.
Akfen’s recent embrace of the capital markets began at the beginning of 2010 when it undertook a TL100m bond deal, becoming the first Turkish company to do a public deal like that for decades. “The bond deal was remarkable as for the last 20 or 30 years, no private Turkish company had issued local public bonds,” said Gucsav. “It was a big success even if it was not that big in size.”
The company then embarked on an IPO process that would fully test its desire to embrace the international markets. The deal team, including Gucsav, was stuck in London during the roadshow when the Icelandic volcano shut down Europe’s airspace. When the deal finally went to market, it priced on the day of the flash crash in the US. From an intended size of 25% of the company being sold, only 7% could be placed with investors, raising TL100m. Gucsav decided not to pull the deal out of respect to those investors who did commit to the 7%. It would be difficult to incentivise the bookrunners further if he did pull it, he joked.
Later in the year, he returned to the market with a secondary deal that raised a further TL400m and raised the free float to 28.2%, including institutional investors such as GIC, Genesis and Norges, the Norwegian SWF.
Over the course of the last 18 months the company has had to deal with significant problems arising out of the unrest in the Middle East. Not least in Libya where it had to evacuate staff who were building the country’s new international airport. That has caused the share price to underperform, admitted Gucsav.
A more specific reason concerns the cash flow dynamics between the listed holding company and its subsidiaries. For instance it has a port joint venture with PSA in Mersin which has a project finance loan that prevents dividends being distributed up to the holding company. TAV is also using much of its cash flow in construction projects, while its hydro plants are yet to come on stream (they are planned to do so by 2012).
As a result, Akfen’s focus will be on optimising the financing arrangements at both the subsidiary level and the holding company level. “If you can put bonds on the asset level replacing project finance it gives us more flexibility on our cash management,” he said. “But putting bonds at the holding company can limit our flexibility there.”
He is also building a war chest for future deals. The company has applied to the regulator to list its hotel assets (a JV with French group Accor), through a REIT. It is also looking at potentially selling its power assets. “There are some serious offers on the table for these and we are thinking about it. These are portfolio assets for us, not core assets.”
Its biggest opportunity will come with the privatisation of the country’s toll roads and bridges, a deal sized at around US$5bn. Akfen has a JV with Portugal’s Brisa and has been working on the deal for three years. That deal, along with its acquisition of IDO will undoubtedly propel it back into the markets, although Gucsav said this will be through debt rather than equity.
“Turkey historically is a bank market due to our high interest rates. Bond issuance will still be higher cost for companies due to the rating mechanism,” he said. “But bonds are a much stronger tool for us than they were a few years ago. The capital markets know us now, but we are just getting started.”