International investors have gained a taste for the Turkish market since Vestel, the leading colour television manufacturer, successfully closed a $40 million secondary offering in the international market. Other Turkish companies have taken their cue from Vestel’s success.
At least three others are on the way to the market:
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Sabanci Group, Turkey’s second largest private conglomerate with many quoted companies, will make a primary offering of its holding company;
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Yapi Kredi Bank (YKB), Turkey’s largest private sector bank, which will make a secondary offering; and
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Uzel Makina, Turkey’s largest tractor manufacturer, which will be a newcomer to the stock market.
The prevailing political confusion has, however, forced some companies to shelve their plans for international offerings. They include Koç Holding, Turkey’s biggest private group, which is working with Goldman Sachs, and Turkiye Ekonomi Bankasi (TEB).
CSFB and ING Barings will jointly lead the offering of about $150 million of stock in Yapi Kredi. The debut offerings for Uzel ($60 million) and Sabanci Holding ($200 million) are being prepared by Morgan Stanley. ING Barings is co-lead in both deals. In executing the Sabanci offering the US company will be joined by UBS as co-lead manager, with Schroders and Global Securities of Istanbul as co-managers.
The Vestel offering was a crucial test of the market’s feelings towards Turkey. It demonstrated that, even as Turkey tosses in the turbulent waters of yet another political storm, fund managers would still buy Turkish stock – provided it came from good companies. And they would be extremely discriminating. “One-offs will be OK,” says David Edgerley, general manager of Alliance Capital, Turkey. “If people see a good deal they will buy into it. But investors are unwilling to make a generic Turkish bet.”
Vestel’s offering surprised the market by countering the general trend of flight from Turkey. Since the advent a year ago of a coalition government led by the Islamist Refah Party, foreigners have been reducing their portfolio holdings. Since the beginning of this year foreign holdings of Turkish stocks have decreased by nearly a quarter to about $3.5 billion, according to Tuncay Artun, chairman of the Istanbul Stock Exchange. Political uncertainty has also depressed the IPO market. In 1996 there were 25 IPOs, in which shares worth $147 million, or an average of less than six million per offering, were sold.
New government
The political news is slightly better. After the forced resignation of Islamist prime minister Necmettin Erbakan there was no natural succession for his deputy and centre-right coalition partner Tansu Ciller. Instead, president Suleyman Demirel invited Ciller’s arch-rival Mesut Yilmaz, leader of the Motherland Party to form a government. Since Ciller and Yilmaz don’t get on, despite few ideological differences between Motherland and Ciller’s True Path party, the political stalemate looked set to last some time. But, as Euromoney went to press, Yilmaz appeared successfully to have formed a minority coalition with two left-of-centre parties, and the outside support of another, effectively shutting out Ciller. A vote of confidence was expected on July 12. A Yilmaz government was welcomed as the most likely to achieve technical economic stability.
Metin Ar, vice-president of the Industrial Development Bank of Turkey (TSKB), sole lead-manager in the Vestel offering, says he has long decided to ignore the political situation: “if we waited for political stability we might have to wait forever.”
Vestel’s success demonstrates, he says, that political uncertainty is not an obstacle to selling a good company. “If you take the right company to the right people and tell the right story you get the right results. Vestel showed us that.” There were reports that part of the offering was picked up by Vestel’s majority owners but Ar says this is nonsense. The deal was oversubscribed by 30%, he says.
Buyers were offered a 15% discount, calculated by taking the three-week average of the stock’s trading price on the ISE. Nearly two-thirds of the stock was sold directly by TSKB, an investment bank owned by Turkish public and private banks. The rest was sold by the agents, ING Barings and Multilateral Funding International (MFI) of New York. Mark Martin, an assistant director at ING Barings in London, admits that during the three- week roadshow the situation in Turkey was not encouraging.
“During the roadshow the amount the market moved up and down and the amount of political instability you got was very unhelpful for the issue. It helped a lot that we had a good story.”
The fact that the deal was done at all at a time of maximum political confusion is a testament to TSKB as well as to Vestel. Together with Global, a privately owned Istanbul securities firm, TSKB is Turkey’s biggest player in IPOs. TSKB floated 19% of the companies traded on the ISE.
“Investors made money with the TSKB in the past and they did not forget it,” says an American fund manager. The Vestel deal was a vote of confidence for TSKB, he says. TSKB has assumed the role of Turkish lead in both the Uzel and Sabanci deals.
Vestel is Turkey’s biggest producer of colour TV sets by volume and also manufactures PC monitors, refrigerators and other white goods. Its market capitalization is over $200 million and it ranked 74th among Turkey’s top 500 companies by turnover in 1995. It had 21% of the domestic TV market and had a 60% share in total colour TV exports in 1996.
Before the secondary offering 18% of Vestel’s stock was in free float. The $40 million sold represents a further 18.8%. According to TSKB’s Ar this was sold to 65 institutions – including Morgan Stanley and Old Mutual. Less than a third of the shares were sold in the US; the rest were picked up by European institutions.
Unusually, the Vestel offering was also roadshowed in Hong Kong, which is not a natural market for Turkish stock. Barings hoped for buyers in Hong Kong because investors there understand the sector Vestel is in and its competitors include regional companies. In the event there were no takers.
The macroeconomic and political environment was very harmful to the issue, particularly in the US and Hong Kong. “Even though we explained the virtues of Vestel as a stock, US investors took the view that the macro was so uncertain that they could not commit large amounts of money,” says Barings’ Martin. “European investors are much more willing to look at the merits of individual companies and take a grown-up view of the political and economic instability. If you are an investor in Turkey this is the sort of thing you would be used to and would be prepared to accept. The Americans were waiting for perhaps a nice, calm, happy period. Which does not occur very often [in Turkey].”
Blue-chip attractions
Yet, however unstable the political situation, investors are being attracted by the quality of the Turkish blue chips soon to go to market.
Sabanci Group, one of the Fortune Global 500 companies outside the US, is Turkey’s second-largest private conglomerate, with diversified investments in banking, insurance, manufacturing and services. In 1995 its consolidated assets were $6.3 billion and sales $8.4 billion. The group, which started as a small cotton mill in the south of Turkey in 1932, is controlled by the Sabanci family.
The holding company is repository of the shares of 40 companies, 11 of which are quoted on the ISE. Eighteen of these are joint ventures with blue-chip international companies, including DuPont, IBM, Dresdner Bank, Philips, Philip Morris, and Toyota.
Although the group is highly diversified nearly half of the holding company’s revenues in 1996 (and an estimated 63% in 1997) were derived from its shares in Akbank, Turkey’s most profitable private-sector bank. Several of its large investments are still very new and not bringing in profits.
While there is no doubt of Sabanci’s credentials, some fund managers point out that the value of the parts of the group could be greater than the whole. “Superficially, the deal looks very attractive, but it is worth keeping in mind that the holding company has no earnings in its own right,” says an American fund manager. “You are buying the dividends. It’s like eating from the menu when you can choose à la carteand buy into whichever Sabanci stock you want.”
Other fund managers say that’s precisely what makes Sabanci Holding attractive: it gives investors a piece of the Sabanci companies that are listed, as well as those that are not.
YKB is Turkey’s largest private-sector commercial bank, ranked by assets totalling TL557,000 billion ($3.95 billion) at year-end 1996. About 30% of YKB shares are in free float. The bank is owned by Cukurova, one of the largest industrial and financial conglomerates in Turkey, which in turn is majority-owned by the Karamehmet family. Cukurova is made up of approximately 100 corporate entities involved in a diverse variety of activities. YKB has substantial hidden asset value through its equity stakes in the Cukurova group companies and real estate. The bank’s independent auditors have estimated the difference between the market value and book value of these assets to be $1 billion, compared with the bank’s market value of $500 million.
The bank strengthened its balance sheet substantially by selling one of these assets – a stake in a cement company sold for $265 million to Belgium’s SA Cimenteries CBR. However, YKB seems to be less profitable than other banks in its peer group. In 1996 its net profit totalled TL23,000 billion compared with the TL38,000 billion of rival Akbank.
According to a 1996 report by ING Barings, YKB’s $150 million free float, its weight in the Istanbul Stock Exchange index and liquidity on the ISE, makes it the best candidate to gain exposure to Turkey.
In New York Caspian Securities said that YKB was the most attractive of the major Turkish banks on most parameters.
According to Standard & Poor’s, the structure of the Turkish economy makes for high-risk banking because the huge government budget deficit and rising interest rate burden leave Turkish banks, which finance a large part of the deficit, at the mercy of the state’s monetary policies and vulnerable to payment problems.
However, some private-sector banks have evolved into modern and dynamic institutions that compare well with banks round the world in terms of financial performance and quality of operations. YKB, according to S&P, is one of this select group of profitable, commercially successful private-sector banks.
Family-owned Uzel Makina was number 30 in the Istanbul Chamber of Commerce’s 1995 list of Turkey’s 500 largest companies, up from 58 the previous year. It is one of the world’s 10 largest tractor makers in terms of units produced and in 1996 accounted for 46% of Turkish output. Its 1996 turnover through the sale of 23,000 tractors was $300 million.
“Ours is a clear, straightforward story,” says Onder Uzel, a board member. “We are an old, sound, conservative company. We control 46% of the Turkish market. No other tractor company in the world has such a share of its domestic market.”
The company will float 15% of its shares to finance a $100 million expansion plan. Eighty per cent of the shares will be offered to foreign investors and 20% to the domestic market.
Uzel said the political uncertainty was not a cause of concern. Private companies in Turkey have succeeded in divorcing themselves from politics, he says. “We know that the political situation will not resolve itself in the short term. So why wait?”
