Peaks and pitfalls

IFR Turkey Special Report May 2013
6 min read

Foreign companies are eager to get a foothold in Turkey, but there are concerns as surging valuations are driven by eager foreign investors and family businesses dominate parts of the economic landscape.

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Turkey is not just a darling for international bond investors – it is a sought-after location for foreign companies looking to gain a foothold in an economy with the growth profile of an emerging market but the stability of a developed one.

The country’s strong economic growth, its high-spending, tech-savvy young population and growing middle class combined with the country’s enviable location as a gateway to the Middle East and Africa hold an allure for Western investors seeking respite from moribund home markets.

But the challenge for those looking to secure their place in the country lies in finding assets that match their valuation, or picking an industry that is not dominated by the powerful Turkish families that account for huge swathes of the country’s GDP. There’s the Dogan family, which owns nearly half of Turkey’s print and broadcasting media and 10 publicly traded companies, or the Kocs, which hold assets in the automotive, energy, financial services, petrochemical, retail and food sectors.

“With that sort of influence, you can easily end up being the sucker at the negotiating table, so you have to take your time,” said one banker.

The chief of the Istanbul Stock Exchange, Ibrahim Turhan, wants to change the culture of private ownership and move towards a broader public equity culture, but for the moment, international investors attracted to the buzz of Turkey are proceeding with caution.

In September, US growth equity firm General Atlantic ended a five-year hunt for assets in the Turkish market when it paid US$44m for a minority stake in, an online food delivery business.

Talking in dollars

Gabriel Caillaux, managing director at General Atlantic, said: “The exciting growth trends in Turkey are hard to ignore but it took us a while to get comfortable, not least because the lira had taken some big discounts against the US dollar against a backdrop of rising inflation. This is now being well-managed and nowadays when Turkish businesses are talking to foreign investors, they talk in dollars. It’s important to find a sector that is open to foreign investment and partnership.”

There’s another reason for the caution. The plane-loads of bankers that are heading with their pitch-books to Istanbul are wary of a bubble. Caillaux said: “There is a real disconnect between buyers and sellers. Turkey is a hugely exciting place to do business because of its people and economic fundamentals, but that is driving valuations higher for certain assets. There’s real concern about overheating.”

Turkey’s positioning on the international stage is something of a contradiction. Its biggest economic challenge lies in its huge balance of payments deficit, which is down to the fact that it has to import its energy to meet its growth needs. The government is looking to develop a home energy market but in the meantime it acknowledges its reliance on outside help.

“There is a real disconnect between buyers and sellers. Turkey is a hugely exciting place to do business because of its people and economic fundamentals, but that is driving valuations higher for certain assets. There’s real concern about overheating”

Haluk Bilgic, a partner at law firm Ozdirekcan Bilgic Dundar, the correspondent law firm of Gide Loyrette Nouel in Istanbul said: “The government is trying to reduce its dependence on foreign capital but in reality, the financial markets still depend on it. For instance, without the support of foreign capital, big IPOs in the country are unsuccessful.”

The country’s apparently contradictory relationship with the EU speaks to its ambition to be close to the currency bloc while at the same time looking eastwards to forge big alliances. The introduction of its new Commercial Code in July 2012 and the Capital Markets Act on January 1 this year, provides further evidence of a country getting its regulatory house in order to smooth the path to accession. Bilgic said: “Turkey’s long-term plan is to become part of the EU and the introduction of the new Commercial Code and the Capital Markets Act both bring them closer to the EU in terms of legislation.”

The Commercial Code is based on corporate governance and its four main foundations – transparency, accountability, fairness and responsibility – were established to bring Turkey in line with the EU and contains provisions to facilitate foreign investment and acquisitions. The code includes a provision to squeeze out minority shareholders and a rule allowing boards to comprise one person, as opposed to three previously, to ease the process of setting up a company.

Accession hurdles

Turkey has been in talks to become a member of the EU since 2005, but its bid for entry has been blocked by France and Germany over its long-running dispute with Greece over the division of Cyprus. Turkey has completed only one of 35 policy “chapters” every accession candidate must conclude, but in February France lifted its veto on one relating to regional aid.

While the debate over EU accession rumbles on, Turkey is busy strengthening its ties with Middle East, Africa and Asia. The government’s debut sukuk bond in November is intended to provide diversification of funding for the sovereign but also for the private sector, with Turk Telecom and Abraaj both expected to follow the government’s lead in the coming months. Meanwhile, is expanding across the Middle East.

The government is trying to raise funds through its privatisation programme, but has been accused of setting its sights too high. In February, the government cancelled a US$5.7bn tender for the privatisation of toll roads and bridges over the Bosphorus because it deemed the price was too low. A consortium of Koc Holding, Turkish partner Gozde Girisim and Malaysia’s UEM Group Berhad had won the tender in December.

A hot air balloon is seen over Cappadocia