Turkey 2006 - Buy on the dips

IFR Corporate Hybrid Capital 2006
11 min read
Emerging Markets

Equity capital market deal volumes in Turkey doubled between 2004 and 2005, but investors were not offered many more opportunities to invest. In 2004 the total issuance through IPOs, follow-ons and accelerated bookbuilds came to US$1.03bn. That figure rose to US$2.16bn last year, according to figures from Thomson Financial. However the increase was accounted for by the privatisation IPO of Vakifbank in November, and included in these volumes is the IPO of Akmerkez, an IPO effectively closed to most investors. Government selling also accounted for a further US$245m through the quasi-IPO of petrochemicals company Petkim, so total ECM volumes would actually have fallen had it not been for privatisations.

Turkey is one of the most established emerging equity markets in Europe, alongside Poland, and with a stock market that has been trending up since mid-2000 it also offers an attractive prospect for investors. However this has failed to translate into significant ECM activity in recent years.

One reason for that is the significant volatility within the general upward trend. ECM activity requires stability to ensure that deals can get done. IPOs that are run over four weeks are particularly vulnerable to market corrections over that time, while pricing constraints on secondary deals mean that market moves can also lead to these being cancelled.

As a result Turkey is a market where it can be very challenging turning mandates into completed deals. However, the fact that the market has continued to perform in 2006 suggests that deals which have been discussed for years may finally get done.

Deutsche Bank has already managed to complete one deal that had been cancelled at the previous attempt. The bank had attempted to bring a secondary sale in Petrol Ofisi (Poas) in October 2004, but fell foul of pricing restrictions. The company at that time had a freefloat of below 10% and its market price was deemed unrealistic. However, local market rules stated a follow-on could not be priced any lower than a 20% discount to the weighted market price, which was not achievable considering the implied valuation provided by the prevailing market price.

The deal was subsequently completed in January 2006 following an unsuccessful attempt by largest shareholder Dogan Group to take the company private. The company had been restructured in the interim and investors were more comfortable with the valuation provided by the share price.

This was the first of a small group of revived deals. March 2006 saw the revival of the IPO plan for Vestel White Goods, part of the Zorlu Group. This listing had originally been planned for the previous autumn, but a sell-off on the market caused postponement at an early stage. Again this was not such a bad result, as by the time the company returned to the market it was a much more attractive prospect. Much of Vestel’s business was in its infancy at the time, so a delay of approximately six months provided more data on how sales were growing in these areas. The company is again seeking to raise US$120m in the all-primary deal through Deutsche Bank/Bender Securities and Deniz Bank.

Also due in April is an IPO from wholesale pharmaceutical company Selcuk. Is Investments is the lead on a deal expected to be for 20% of the company, which has an estimated market cap of US$800m.

Some market participants have been surprised at the slow start to 2006 considering where the market is trading relative to levels in 2000. “Part of the problem is that in the period 2001–2004 [after the economic crisis] companies got used to looking away from the equity market,” said one originator in Turkey. “Another factor is that in 2004 the aftermarket performance of some IPOs was poor."

The sensitivity of the market underlines why some companies are not willing to stake their future plans on an IPO that may not be possible to complete on plan. The Turkish market was up 11% from the start of the year when Vestel re-launched, but the lead would not commit to a timetable for the offer due to the vulnerability of the market. This was evidenced by the index, which started the year at 50,551 and hit a high of 60,772 on February 27, before trading back down to 53,299 by the end of March.

That said, bankers repeat that 10–15 IPOs are in the works, many of them already mandated. Together with Vestel, TAV and Coca-Cola Bottling are seen as the main deals for the year.

Turkish airport operator TAV has mandated Garanti, HSBC and Credit Suisse for an IPO likely to come in the last quarter of 2006. The deal is expected to be a combination of primary and secondary stock with the company achieving a market capitalisation in excess of US$1bn. The company has a dominant position in both the construction and operation of airports in Turkey and increasingly elsewhere. It has a contract to run Istanbul airport until 2020 and is currently building Cairo airport.

And a perennial IPO candidate, the bottling company Coca-Cola Icecek (CCI), has reportedly applied for authorisation from Turkey's domestic regulator, the Capital Markets Board, for its IPO. That deal is mandated to Is Investment and Credit Suisse, and is expected to price in Q2 2006. CCI had previously attempted an IPO through Citigroup and Is in November 2004, but then pricing was too ambitious, leading the deal to collapse at the end of the bookbuild.

Another notable name in the pipeline is Mey Group, the alcohol arm of former nationalised company Tekel (tobacco, tobacco products, salt and alcohol). Deutsche Bank is mandated to bring the business to market in Q3 this year.

In contrast with 2005, the government is likely to be absent from the market this year as banks are still pitching for the IPO mandate for Halk Bank. This deal is not expected until next year, though the bank has completed internal preparations for a listing. The government's privatisation focus in 2006 is the electricity distribution privatisation that is directed at strategic investors.

International attention

The only deal to price so far in 2006 has been a US$60m-equivalent IPO for logistics company Reysas. That deal, for a US$150m company, was covered 10 times domestically, and led by Finansbank.

Such a high level of local support is rare in the Turkish market. Foreigners own about 70% of the free float of the Istanbul exchange, and in the case of the top 25 stocks, that figure is probably around 85%. There is a contrast there with the debt market, which is much deeper and which has considerable involvement from domestic retail and institutional investors.

But according to Serhat Gurleyen, head of research at Is Investment, the lack of domestic investors in the Turkish equity market does not really matter.

"People are usually worried about foreign investors because they are perceived as being short term, but they aren't any more short term than Turkish domestic investors, and in fact, they generally adopt a more long-term approach to their investments, for example in their reaction to market fluctuations,” he said.

Some suggest that the market's fluctuations are actually bringing more investors in to the country. “Some investors took advantage of recent sell-offs to enter the country,” said another banker. The theory here is that corrections offer investors an opportunity to enter the market at a short-term low before the market continues its upward trend.

"In addition, the role of emerging markets in many international investors' portfolios has changed,” said Gurleyen. “As the proportion of global GDP accounted for by emerging markets grows, it makes it logical for foreigners to hold more EM equities. At current levels, analysts agree that further buying is driven by technical not fundamental valuations."

The increased attention – and money – going in to the Turkish market is highlighted by the success of the IPO of Vakifbank in November 2005. The deal was sold on a low multiple that ensured it successfully raised TL1.5bn (US$1.1bn), but more notable was the breadth of interest that left it seven times covered. In addition to the expected emerging market investors, orders came in from global funds using the stock as a proxy for Turkey and FIG specialists keen on an additional bank stock.

An increased investor audience could help to ensure that the cheap pricing of deals such as Vakifbank and the follow-on in Petkim is no longer needed. Petkim was an extreme example of discounting, every investor receiving a discount to the already discounted fixed price.

The IPO of discount retailer BIM was not aggressively priced, but equally was not seen as cheap. Yet the company completed the deal with a book more than 3.5x covered and found demand from a broad base. This included accounts in the Netherlands and Switzerland that are rare in emerging market deals, but were familiar with the company’s ‘pile it high’ proposition.

Overall then, the pipeline remains vulnerable to market swings and the sensitivity this creates on valuation, but Turkey is increasingly being accepted as a place for non-emerging market investors. With retail continuing to create sufficient demand to meet the 30% minimum allocation, deals should get away successfully. But a significant correction in the market could easily turn investors off, especially when there is such high issuance everywhere else in developed and emerging Europe.