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Sunday, 17 December 2017

Privatisation progress

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  • Privatisation

Turkey’s privatisation programme ground to a halt during the crisis but came back strongly in 2010. Building on the successful sale of its electricity distribution assets, the government is now looking at power generation and transport infrastructure as the next sectors to be sold. The whole process will be much more important than the individual sales, instead ushering in a multi-year financing binge that is exciting local and foreign bankers alike. Nick Lord reports.

To view the digital version of this report, please click here.

For a government that enjoys power as much as it does, Turkey’s AK Party has made a lot of money by selling the country’s power assets. Over the course of the last year or so, the government has sold 12 separate electricity distribution companies raising some US$12.3bn. It is now looking to build on that success with the privatisation of some 20,000MW of electricity generation assets.

Added to its plans are the long awaited privatisations of ports, roads, bridges and tunnels, as well as possible secondary sell downs in banks, telecom and airlines stocks (see equity article on page XX). All told, Turkey could see a further US$25bn of privatisation receipts over the next few years.

Future proceeds will benefit greatly from the strong showing in 2010, during which the government had to essentially restart the privatisation process after it stalled during the global financial crisis. “Last year was a boom market in M&A generally with US$25.8bn of deals, and 60% of this total was due to the privatisations” said Efsane Cam, manager of corporate finance at Is Investments in Istanbul.

What is striking about the current wave of privatisations is how they have been dominated by local buyers over foreign buyers. That is a reversal of the previous wave of privatisations in 2004-2007 when foreign buyers bought upwards of 85% of the deals. This is due to the booming local economy, the strong availability of international and local finance for the local companies and the ongoing problems in Europe that have kept some of the larger strategic investors away.

With the electricity distribution deals, local players were able to significantly outbid the foreign players. In August 2010, local company MMEKA Holding paid a combined US$6.12bn for three of the distribution companies, two electric and one gas. The price for the electricity companies equated to around US$130 per KwH, much higher than the US$75 dollars per KwH that foreign investors were understood to be bidding.

This high price has caused some to scratch their heads. There is uncertainty around future changes to the tariff structures that will be imposed on the distribution companies, which frightened foreign investors but not locals. “The distribution business is local and open to different legislative changes before the auctions, which put some foreign bidders off,” said Cam. “They didn’t want to take the risks. The local investors were good at predicting the risks and that is why they took part in the tenders.”

The winning bidders are some of Turkey’s richest families. MMEKA Holding for instance is a joint venture between Mehmet Karamehmet and Mehmet Kazanci, two of Turkey’s richest men. Karamehmet made billions from setting up Turkcell, the leading mobile company in Turkey, although he fell foul of the authorities when his banking group went bust in the 2001 banking crisis.

Some local sources suggest that the reason they were willing to pay such a high price is that they are actually planning to use the distribution assets, which are little more than wires into people’s homes, as a way to build up new telecom broadband networks, a technology that exists elsewhere. Given the parlous state of Turkey’s existing internet services, this could be a very strong business.

Foreign investors tend to be single industry focused and as such would have difficulty driving such synergies out of the deals. Moreover, auction processes and the problems in their home markets, taken both foreign private equity players, and European strategics out of the picture. “I did not see any international interest in the energy distribution privatisations and the large private equity firms were not looking at it either,” said Luc Hanon, managing director at Rothschild in London. “Private equity players don’t tend to participate in privatisation auctions and don’t want to compete with motivated local buyers.”

Where foreign interest will be strong is in the financing of the deals that have gone through. According to Hanon at Rothschild the US$12bn of energy distribution privatisations will need ongoing financing and refinancing “While the local bank market is very liquid it is not unlimited,” he said. This is where foreign financing will come into play.

Cam at Is Investments said that these deals on average will have a debt to equity ratio of 80:20 and the maturities of the financing packages will be long. “The local banks will be interested in financing energy sector projects in the near future as well but if it goes up to more than US$10bn then they will need to tie up with international banks,” she said.

Moreover, there will be a need for financing structures and techniques that are not common in the Turkish market. This will require banks to transfer financing technology from other European markets into the Turkish market. “This is not just about whether the local banks can fund these projects or not,” said Kaan Basaran, CEO of UniCredit Menkul Degerler in Istanbul. “You need new financing techniques to do things like 20 year PPPs and the current liability structure of the local banks means they cannot do it on their own.”

Generating Interest

The privatisations that have happened have represented one of the greatest transfers of economic power from the state to the private sector in Turkey’s history. This will continue with the upcoming sales of generation assets as well as the privatisation of transport infrastructure assets.

Bankers on the ground suspect that there will be much more foreign interest in the upcoming generation sales than there was in distribution sales. The deal is being led by Citigroup, in a mandate it secured from Lehman Brothers after it went bust. The local state holding company is called EUAS and it will sell four individual plants and nine portfolios of other plants, through a combined asset and share sale overseen by the Turkish Privatisation authority called OIB. The first deal on the table is the sale of the 900MW Hamitabat combined coal and gas power plant and it will be indicative of the level of foreign and local interest.

“Hamitabat will test the appetite of investors for the generation assets,” said Cam at Is Investment. As with the distribution deals, there are some regulatory hurdles that have still to be addressed, not least the question of whether the power plants will be sold with their captive coal mines or not. This will play a large part in determining their attraction: with the mines investors can control and hedge the price of the feedstock and thus better assess the possible returns from the deals. Without clarity on this issue, foreign interest could be weaker than expected. Some in the market mutter than the government is deliberately making this opaque so as to skew the process towards the locals, echoing what happened with the distribution deals.

But even so, given the size of the deals to come, it is certain that there will be significant foreign involvement, both in the equity and debt portions of the eventual financing. “I think generation assets privatisations will be different from the distribution sales and many of the large foreign players are very interested,” said Cam. “The size of the packages of generation assets going to be tendered will be generally larger than majority of the distribution regions and we expect for large packages local investors to team up with international players.”

Transport Transfers

Coterminous with the sale of power generation assets will be the resuscitated sale of Turkey’s transport infrastructure. This began a few years ago with the sale of some of Turkey’s ports but these deals coincided with the global financial crisis and had to be put back.

The most recent deal to be completed was the sale by the Istanbul Metropolitan Municipality of IDO, the iconic company that runs Istanbul’s ferry system. Five bidders, mainly locals, came into the auction where a minimum price of US$700m was set. The winning bid of US$861m came from the Tepe-Akfen-Souter-Sera consortium. This is made up of local infrastructure companies Akfen and Tepe with 30% each, Souter Investments from the UK with 30% and local REIT Sera with 10%. (See article on Akfen Holdings on page XX).

Analysts point to a much higher degree of price discipline in this auction than was seen in the electricity distribution deals. The difference between the winning bid and the second bid (and indeed the minimum) was much lower than seen in the distribution deals. This could point to a new found focus on price in the privatisation process but could also point to the fact that it is hard to drive synergies out of a standalone ferry business than it could be from integrating energy assets.

Either way, it will sharpen the minds of financiers and other bidders for the sale of Turkey’s toll roads and bridges that are being prepared for after the election on June 12. OIB will conduct the sale as a transfer of operating rights, which is a system they have developed to get around constitutional problems with outright sales of national assets.

The sale will be of one package containing eight motorways and the two bridges across the Bosphorous in Istanbul. According to TSKB the local investment bank running the sales process, traffic on the roads and bridges has increased by an average of 15% in recent years. They also throw off a lot of cash, which would make them interesting to foreign players including infrastructure funds. In 2010 for instance they generated a gross income of US$561m and a net income of US$459m (up from comparable figures of US$390m gross and US$319m net income in 2009).

With the IDO transaction, the winning bid came in at 10.25 times previous year’s earnings, suggesting a comparable figure of between US$4bn and US$5bn for the roads and bridges. This is a sizeable sum and will require local and foreign participation. Akfen Holdings for instance has set up a joint venture with Brisa of Portugal to bid for the assets. Other infrastructure players are also paying close attention to the deal. “I am taking weekly calls from infrastructure funds and pension funds from the Middle East, Canada and the US who are looking to team up with local players,” said Cam.

Momentum

What really excites bankers about these deals is that they will not be individual transactions but will engender an ongoing wave of financial activity that will keep them busy for years. The individual sales will be financed through bridging finance, which will then be taken out by project loans and bonds. Local foreign joint ventures are also likely to list on the local market, using IPOs to raise fresh equity.

There will also be M&A among the individual energy companies. “We are seeing a consolidation trend in the power sector,” said Pierre Lebit, chief country officer for Societe Generale’s corporate and investment bank in Turkey. “Many Turkish groups have a license and we are starting to see the first moves. This should provide us with meaningful deal flow.”

In this way, the privatisation process is much bigger than just the individual sales and the revenues that the government will raise. It is about the deepening of the wholesale financial markets in Turkey. It is about marrying foreign appetite with local expertise. It is about transforming Turkey from into a real investment destination.  “Turkey still has massive infrastructure needs,” said Basaran at UniCredit Menkul Degerler. “There will be US$3.5bn of investments every year into the energy sector alone. We are going to be very busy.”

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