Ferit Sahenk, general manager at Dogus Holdings, suffered from unlucky timing the last time he tried to sell a stake in Garanti Bank to Italy's Banca Intesa. It was September 2001. The due diligence had been done twice over, all loose ends were tied. The only thing that remained for closing was the deal approval of Intesa's board.
When the board met it was three days after September 11. "Due to sudden and serious change in the international scenario," said a statement issued in Milan, "the conditions to proceed to examine the investment proposal in Garanti Bank no longer recur [sic]." The wording might have been a little cryptic but the meaning was unmistakable.
The deal was off. Garanti's shares were badly hit and market cap dropped like a stone to $621 million. David Edgerly, a US banker who was then working for an affiliate of Garanti, was in Croatia when he received a call from Sahenk. "It didn't happen but it will," he recalls Sahenk saying in Turkish.
The negotiations were put on ice, but contacts were maintained, not least because 80% of Intesa's Turkish exposure was with Garanti. It was no surprise, therefore, that on March 8 2004 Sahenk announced that he had reopened talks to sell Garanti's controlling stake to Intesa. Due diligence started right away. According to a banker close to the talks: "The two sides are expected to sign a memorandum of understanding by the end of the first quarter, sign a share purchasing agreement at the end of the second and close the deal by the end of the third."
Details such as the amount of stake to be sold or the price remain a secret. has to find a foreign buyer by the end of the year. It has many desirable qualities including what many regard as the best IT infrastructure in the country, enviable shares in such markets as credit cards and well-regarded management. But at the start of the banking crisis the troubled industrial conglomerate Cukurova held 42% of its shares. The bank escaped being taken over Garanti's free float is 31.51%. The remaining shares are in the hands of the Sahenk group. Acquiring just over half of these would give Intesa a controlling interest.
Dogus Holding was founded in 1975 and is wholly owned by the Sahenk family. It is a conglomerate with interests in financial services and the automotive, food retail, construction, tourism and media sectors. The financial services – including banking, leasing, factoring, and insurance – will all be part of the acquisition.
Sources close to the negotiations say that Garanti's current market capitalization of $3 billion will not be the basis of transaction value or price tag.
"Intesa would require some adjustment to Garanti's book value for investments in non core assets (like the retail outlet Tansas) which exceed $700 million," says analyst Idil Dagdelen at boutique bank HC Istanbul. She believes Dogus will buy the non-core assets at 50% discount to their book value by using a part of the sales proceeds. The bank's book value would be adjusted downwards for the discount.
"Given these assumptions, I believe transaction value could be around $2.5 billion to $2.9 billion," Dagdelen says.
Lower price estimate
A source close to the negotiations has a lower estimate. "The sale price is likely to assume a market cap of between $2 billion and $2.5 billion," he says.
If the acquisition goes through it will be one small step for Intesa but a giant leap for Garanti. Intesa is Italy's largest bank, with total assets of $330 billion. Garanti would constitute less than 4% of Intesa's end-2003 assets, equalling the total assets of all three central European banks in which Intesa holds majority stakes.
"For Intesa, the acquisition of Garanti is less likely to be positive in the short term," says Fitch Ratings. For Garanti the takeover will be nothing less than a new lease on life. "It is a salvation for the bank," said a senior official on condition of anonymity. "Ferit Sahenk must have heaved a huge sigh of relief."
Smallest of the top three private banks in Turkey, Garanti is debilitated by shortage of capital and its over-exposure to the Dogus group.
Garanti Bank will benefit substantially from the acquisition of controlling shares by Intesa, states Mahmut Kaya, chief economist of Garanti Securities. "With a highly reputable foreign partner on board, Garanti will benefit from a flight to quality when the state guarantee for bank deposits ends in July 2004," he says.
The bank would be able to obtain lower-cost financing and to become more competitive in pricing its corporate and consumer loans. It would benefit from the banking expertise of Intesa, which offers a much wider range of products, some of which are non-existent in Turkey.
"Garanti will therefore enjoy an improvement in profitability," says Kaya. "The acquisition will improve the quality of the bank's equity base and increase the ratio of interest-earnings assets."
Intesa is being advised by Lazard Italy and Indosuez. Garanti is handling its advice in house. "That is not such a good idea," says a US banker following the negotiations. "It's a mismatch. This way Intesa will control the negotiations. Lazard and Indosuez are very professional, very big league. They will defend Intesa's interest intelligently and successfully. He who prepares the documents controls the deal."
Garanti is relying on Sencer Toker, a London-based veteran Turkish banker who is described as "more British than the British". An Italian speaker, Toker has brokered the deal on which he has been working for the better part of five years.