Turkey 2005 - Mixed picture for ECM
The equity capital markets continue to offer a mixed picture in Turkey. While the secondary market was one of the top global performers in 2004, the picture in ECM was much more confused. Paul Farrow looks at the reasons for success and failure in the past, and the outlook for ECM activity over the next 12 months.
Last year saw a total of US$700m raised from marketed equity deals in Turkey, with 12 IPOs and one marketed secondary offer. Add in some accelerated bookbuilds, and total ECM activity in 2004 was US$1.03bn equivalent, according to Thomson Financial.
But what was perhaps the highest profile deal failed to complete. The IPO of Coca Cola Bottlers had been mandated to Citigroup and Is Investment, the securities arm of Is Bank. Citi declined to comment on what happened, but the market talk is that although the deal was covered, the US$250m offer was poorly subscribed by foreign investors and therefore cancelled last October. The deal is now expected to be remandated, as family owners of a minority (20%) stake are still keen to sell. The company is also 40% owned by Coca Cola and 40% by Efes, the Turkish brewing group.
Those deals that did price had very mixed fortunes in the secondary market. The US$62m IPO of 24.9% of Turk Tractor in June was twice covered but priced too aggressively, to judge from the aftermarket where the stock fell 30%.
And the US$172m IPO of 34.5% of Dogus Otomotiv (a car importer owned by the Dogus conglomerate) was a similar story. The June deal through Deutsche Bank and Garanti Bank was 1.5 times covered but fell 40% in the secondary market.
But it was not all bad news. In September, Deniz Bank completed a US$140m IPO (on 25% of its stock) that was twice covered and had risen 40% to mid March in secondary trading. Merrill Lynch led that deal.
And the government’s sell-down of 23% of Turkish Airlines (THY) in December was five times covered, rising 20% above the average offer price during the first month after pricing. THY was a virtual IPO given the stock’s miniscule free float. Is Investment and CAIB led the offer.
Foreign investors accounted for a significant proportion of demand in most of these cases, rising to 67% of the deal in the case of THY. Efsane Cam, a corporate financier at Is Investment, said that foreign institutional investors’ appetite for IPOs in Turkey is extremely high, and their share in IPOs has increased to an average of 40% in the big and medium-sized IPOs.
Aside from IPOs, there have been a number of accelerated bookbuilds in which local conglomerates and banks sold minority positions. In February this year, the Cukurova group sold 1.65% of mobile phone company Turkcell in a US$173m accelerated offer through JP Morgan. The book was about three times covered, according to a banker close to the company, with interest strong in Europe, though US participation was muted because of the timing of the transaction. The deal was equivalent to about eight days’ trading.
These placings of secondary stock have soaked up a considerable proportion of the foreign money that has gone into the Turkish equity market in the last two years. According to local broker Global Securities, the total flow of foreign funds into the Turkish equity market was US$4bn in the 26 months from January 2003 to the end of March 2005, and over half of that money went to placings of secondary shares.
Emre Ozben, a corporate finance banker at Is Investment, notes that block sales have the advantage of giving foreign investors the chance to buy in size without pushing up the price in secondary – a common experience. By contrast, discounts to the market price on such blocks are usually in the 4%–8% range.
According to Murat Gulkan, managing partner at another local broker, Bender Securities, there is not much momentum in the stock market in the short term, though he adds, “that could encourage more block sales by banks and conglomerates if they think the rally is over”.
Given the roller-coaster history of the Turkish equity market, there is a tradition of controlling interests selling into upswings, and Serhat Gurleyen, research manager at Is Investment, believes that this will only change if the controlling interests in Turkish companies become convinced that the current upswing and economic improvement is not going to be reversed.
Looking ahead, there is a small pipeline of pending deals from the private sector. Shopping centre Ak Merkez is an IPO candidate with an estimated market cap of US$400m, and retailer BIM is rumoured to want to IPO. But the government could provide more ECM volume. The successful sale of a minority stake in THY seems to have convinced the government that the stock market can be a useful method of partial privatisation.
The state sold 15% of oil company Tupras to six institutional investors in March this year for US$448m, and it now aims to sell a 15% stake in chemicals company Petkim. That deal is expected to surface in April via local house Finans Investment and total around US$100m.
This new-found enthusiasm for the public markets is only the latest twist in the painfully slow course of privatisation in Turkey. While the country was early off the blocks in its bid to sell off state assets, successive governments failed to carry through their plans, and at a time when many countries have little or nothing left to sell, Turkey’s Privatisation Administration still has significant assets on its books.
In the case of tobacco group Tekel, the government tried to sell the company but decided at the last moment that the US$1.15bn bid from JTI was too low. The resolution since then of some legal issues could mean a higher price this time. Citigroup and Is Investment are advising, and the tender process for the sale of a stake has been extended to April 8.
Turk Telekom, the fixed-line operator, is also set to see the sale of a block to foreign investors. The date for submission of bids for a 54% stake is the end of May, and BNP Paribas leads a consortium of advisers. According to local analysts, Spain’s Telefonica is ready to bid €6bn for the company’s fixed-line and mobile businesses.
The sale of a 46% stake in steel company Erdemir is planned though local boutique HC Investment, while in the electricity sector, the distribution activity is going to be broken up and sold in regional chunks. Management consultancy firm McKinsey is advising on that process, and the tender period opened in March. But pending regulatory changes continue to delay the sale of lottery company Milli Piyango, where PwC is advising the government.
The state also continues to own a sizeable chunk of the banking industry in the form of Halk Bank, Ziraat Bank and Vakif Bank. Over the years there has been much talk of selling these off, but according to Mina Toksoz (country risk head at Standard Bank), it is too convenient for the government to retain them.
Halk and Ziraat still account for about half the deposit base nationally, but they retain important functions in terms of social policy and as development banks. The state-owned banks have been restructured, but ironically it will be easier to keep them in government hands now that they are profitable.
That said, some Turkish bankers suspect that given the government’s enthusiasm for the approach, even the state-owned banks might be candidates for the sale of a minority stake through the stock market.
To ensure successful ECM transactions, it always helps to have a good-performing secondary market. The problem for Turkish brokers is that at current valuations it is hard to attract equity investors. Many international funds that traditionally invest in Turkey are overweight – generally very concentrated in about 15 stocks – while domestic retail investors have not forgotten their bruising experience during the crisis earlier this decade. Last year’s THY deal saw retail interest largely evaporate when the pricing was announced.
There is a growing pool of institutionally-managed money in Turkey, but domestic mutual funds are still overwhelmingly (about 95%) invested in bonds, and the country’s growing pension funds are equally focused on low-risk investment.
Retail demand for IPOs in Turkey continues to be weak, the only exception being participation by high net worth individuals. Is Investment’s Cam estimates that retail investors would need to see a discount of up to 30% to fair value to be enticed into IPOs, though Gurleyen of the same firm notes that as interest rates come down on deposit accounts and Turkish government bonds lose their relative tax advantage, that discount should be reduced.
One important change for equity investors would be if companies started to pay cash dividends. Turkish companies have to distribute 30% of profits to investors, but there is no requirement to do so in cash. A change here could also boost equity investment.
Overall, Yavuz Uzay, head of research at Global Securities, argues that beyond 2005 there is a favourable investment case for Turkish equities. The key question is whether it will be enough to attract crossover money, which would make all the difference.
“Before the announcement last December of a date for EU negotiations to start, the old image of Turkey prevailed in valuing assets. Since then there has been a rerating. The EU is a new anchor for Turkey, the added factor that puts the country above Brazil in my opinion,” he said.