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Getting into the right mindset

09 Jun 2005

Turkey has not been a source of great revenue for ECM bankers since the financial crisis of 2001 and while bankers are not predicting a revenue windfall from the country, they are pleased at last to see some large deals on the horizon. However, European politics and concerns about EU convergence have sparked uncertainty in the equity market, reports Harry Wilson.

With rising equity valuations, EU entry on the distant horizon and a $19bn IMF economic restructuring programme, Turkey is well placed for a take-off in new equity issuance. However, despite those symptoms, Turkey has yet to get the stock market bug.

Since 2000, the Turkish government privatisation programme has only led to three equity issues, totalling $1.42bn. At the same time, Turkish issuers have generally ignored the stock market, instead using internally generated cash and bank loans to fund their businesses. Turkish companies have issued stock worth just $5.27bn since 2000, a tiny amount compared to other emerging European nations such as Poland and Russia, which have both become frequent users of the equity capital markets.

Indeed, when issuers have wanted to access the equity markets, they have sometimes found it far from easy. Turkish drinks producer Coca-Cola Icecek Uretim, for example, was forced to postpone its IPO in November last year because of insufficient demand. Citigroup, the original lead manager for the deal, is believed to have lost the mandate.

"Turkish issuance has always been a bit spotty, in terms of volumes," says David Jennison, head of CEEMEA equity capital markets at JP Morgan in London. "The country has a deep and liquid equity market, however issuance has generally come in at only $1bn-$1.5bn a year. Also, most of the market is self-financing."

Speed dial
Historically, last year was not a bad one for Turkish ECM bankers, with issuance of around $1.06bn, the highest level since 2000.

One of the most notable deals was the government's sale in December of a 23% stake in Turkish Airlines through an accelerated offering, which raised $173m and was the first public equity market privatisation from the government since it sold a $167m stake in oil company Petrol Ofisi in March 2002.

Bankers say the sale showed that the government is becoming more positive towards the idea of using ECM transactions to sell down its holdings, rather than block sales of majority stakes to strategic investors, which has been its normal privatisation method.

1st quarter ECM volumes (2000-2005)
QuarterDeal value ($ m)No.
2000 Q1644.555
2002 Q1220.804
2004 Q1291.143
2005 Q1170.591
Source: Dealogic

Market observers suggests that the government is planning a further sale of Turkish Airlines stock, worth between $100m and $200m, with bankers saying a deal could come any time. However, the government will probably wait to judge the fall out from the French no vote on the European constitution, which many think could be important to Turkey's chances of gaining entry into the EU.

There is little doubt that demand is strong for Turkish equity. Indeed, the accelerated sale of a 2% stake in mobile operator Turkcell — the only Turkish company listed on the New York Stock Exchange — by investment company Cukurova Investments in March showed how far the market has come.

The sale, lead managed by JP Morgan, was hugely popular with investors and the 24.36m shares were sold in an hour and a half — a stunning result. "The Turkcell ABB showed that a wide range of investors are following the Turkish market closely," says Jennison at JP Morgan.

"You only buy into an ABB if you know the stock well, since you don't have a lot of time to make your investment decision. This shows the buy side's shift away from narrow regional or country emerging markets investment to a global emerging markets style. It shows the ascendance of sector and absolute return investors who have been instrumental in expanding the range of permissible investments. These trends have dramatically increased the number of accounts that we can approach with an emerging markets ABB."

Banking on Vakif
While the potential privatisations of Turk Telecom, Tupras and Petkim have grabbed most of the headlines as potential jumbo offerings in the equity market, most bankers think it unlikely that the government will choose to dispose of these companies through the stock market.

The big hope for bankers in 2005 is the possible IPO of Vakifbank, Turkey's largest banking group, which will be valued at between $4bn and $5bn.

"The IPO of Vakifbank will be the marquee transaction for Turkish ECM in 2005," says Jennison at JP Morgan. "We are not expecting any other similar size deals from the government or the corporate sector."

The privatisation will not be without hitches, particularly the sensitivity of selling a large chunk of a bank set up by Turkey's first President Kemal Ataturk to foreign investors, and also the fact that this will be the second attempt to IPO the firm.

However, a successful flotation of Vakifbank could lead to a string of further IPOs from Turkey's financial sector. Ziraat Bank and Halkbank, both state owned, have plans for IPOs, though neither are considered likely to come to the market before late 2006.

The likelihood of these banks reaching the stock market is high, and is crucial to the wider Turkish economy, as banking privatisation is a core part of the IMF's $19bn loan agreement with the government.

To sell or not to sell
Despite a bull run on the Istanbul stock exchange in 2004 and this year's continuing high equity valuations, it is puzzling that so few Turkish companies have taken advantage of the positive market sentiment to sell stock.

The decision last December to allow Turkey to begin entry negotiations to the EU was also widely seen as a trigger for equity issuance, yet six months on there has been no issuance bonanza.

While this can in part be explained by this month's European constitution vote in France, and Germany's regional elections — both campaigns that took a negative approach to Turkey's potential entry into the EU — this is not the whole story.

ECM issuance volumes (2000-2004)
QuarterDeal value ($ m)No.
Source: Dealogic

"High equity valuations are not of themselves a reason to issue," says Chris Laing, co-head of emerging European and Middle East ECM at Deutsche Bank in London. "There are a lot of opportunities at the moment, but Turkish companies and their owners do not want to sell out too soon."

However, with foreign direct investment in Turkey set to reach $4bn this year — double the highest level achieved by the country — and with portfolio investors expected to buy a net $1.5bn of stock, there are reasons to think valuations will get to a level where they will be more attractive to potential issuers.

Pioneer Investments is one fund manager that has made Turkey a focus for its investment strategy this year, and recently released an open statement announcing its plans to invest in the country.

"We are seeing significant opportunities as investment in the country accelerates, and as managements gear up to take advantage of a shift towards a more European approach," says John Pollen, head of emerging market equities at Pioneer. "In the near term we are cautious about the implications of Euro-scepticism in France and elsewhere on the Turkish accession process, but we think that regardless the country offers a compelling story for well positioned portfolio investors."

A volatile investment
One problem for investors in Turkey is that so much of the market is concentrated in a handful of large stocks — the shares of only 12 companies account for about 75% of the MSCI Turkey index. This means that valuations on the Istanbul stock exchange have a tendency to swing violently, driven by sentiment towards this small group of firms.

"Turkey is not a market where you focus on a particular sector, since everything is either up or down," says JP Morgan's Jennison. "However, no investor can afford to ignore Turkey any more — the broadening of the international investor base over the last couple of years has been dramatic."

But, with an average stock market freefloat of only about 30%, the Turkish equity market compares unfavourably with other emerging markets, particularly Brazil, which some consider the closest comparable to Turkey, where the average is nearer 67%.

The only market with a worse freefloat level is Russia at 23%. However, with high issuance levels in Russia this year, and a concerted effort from the Moscow stock exchanges operators to get companies to increase their freefloats, this might not be the case for much longer.

But, if investors decide, like Pioneer, to focus on the longer term potential of Turkey, and the government and companies begin to issue more of the type of shares investors are looking for, then 2005 may be looked back on as the year that things started to go Turkey's way in the equity markets. 

Turkish government ECM offerings (2000 to date)
Pricing dateIssuerIssuer nationalityDeal typeDeal value ($)Privatisation (Y/N)
10 Apr 00Turkiye Petrol Rafinerileri ASTurkishFO1,079,383,036Yes
6 Dec 04Turkish Airlines IncTurkishFO173,569,143Yes
18 Mar 02Petrol Ofisi AS - POASTurkishFO166,543,301Yes
Source: Dealogic
09 Jun 2005