Boom gone sour: Are Turkish companies selling on the cheap?

Boom gone sour: Are Turkish companies selling on the cheap?
Islamic creationist televangelist Adnan Oktar is notorious for his devotee “kittens” who featured on his now-shutdown A9 TV channel. Widely described as a cult leader, Oktar was last year detained on multiple financial, sexual and other charges. The state has seized, and may sell, his companies.
By Akin Nazli in Belgrade January 17, 2019

The view that many Turkish companies hit by their country’s economic woes can now be snapped up on the cheap was strengthened on January 17 when it was reported that Lotte Advanced Materials of South Korea’s Lotte Chemical Group had acquired 72.5% of Turkish quartz surfaces producer Belenco for South Korean won 125bn ($112mn).

The deal, reported by Reuters, will have potential deal takers examining Turkish companies struggling since last August’s currency crash. Many corporates, loaded with FX debt, are suffering from financing difficulties amid an emerging severe credit crunch. However, FDI appetite is limited given what some observers see as an utter lack of dependable adherence to the rule of law in Turkey under Recep Tayyip Erdogan’s new presidential republic—on the Rule of Law Index of the World Justice Project Turkey ranks 101st out of 113 assessed countries.

Nevertheless, despite the toxic combination of legal and political stability concerns, coupled with shrinking domestic demand under the new executive presidential regime as the country heads into a recession, foreign companies have lately shown interest in export-focused production in Turkey. They aim to benefit from falling labour and investment costs.

Belenco is Turkey's largest quartz surfaces producer with an annual production capacity of 230,000 sheets from its two production lines at its factory in Manisa Organized Industrial Zone, near Izmir, western Turkey. The production area ranges over 19,000 sqm of closed and 36,000 sqm of open space. Belenco’s export revenues grew 21% y/y to $25mn in 2017, with the enterprise climbing to 787th place in the Turkish Exporters Assembly's (TIM) Top 1,000 Turkish Exporters ranking. It placed at 883rd in 2016, Alper Ocal of Haberturk reported.

Supporting the export-focused production theme, on January 15, Volkswagen CEO Herbert Diess told reporters that Volkswagen and Ford Motor Co. would join forces to produce commercial vans. Some of the vans could be built in Ford’s plant in Turkey.

Net debt payers
Turkish private corporates have been net debt payers since August. The country’s private sector had obligations to repay $64.56bn in foreign-loan principal payments within one-year as of end-November, down from $64.75bn at end-October, the central bank said on January 16.

Turkey was obliged to repay a total of $174.5bn in foreign debt within one year as of end-November, up from $173.8bn at end-October due to rising public debt, the central bank said on January 17.

As of the end of November, Turkish public lenders were obliged to pay a total of $28bn in foreign-debt within a one-year period while private lenders were obliged to pay $64bn and non-financial private companies were obliged to redeem $65.5bn.

According to the latest balance of payments (BoP) data from the central bank, net FDI inflows into Turkey rose by 2% y/y to $10.3bn in January-November, including $4.44bn in real estate investments.

Decline of equity capital inflows
Equity capital inflows into Turkey declined by 2% y/y to $7.4bn in 2017, the lowest level recorded since 2010 when the global economy was still suffering from the 2008 financial crisis, while equity capital outflows jumped by 201% y/y to a record high of $1.87bn, according to the latest annual BoP data.

Pro-Erdogan publication Daily Sabah reported earlier this week that Turkey recorded a 17% increase in M&A deals in 2018, hitting $12bn in total from 256 transactions. The 74 recorded foreign investor transactions totalled $7.6bn in value, while Turkish investors made 182 transactions with a value of $4.4bn.

According to data from the country’s Competition Board, the value of a total of 223 M&A deals in Turkey rose by 35% to TRY30.1bn ($5.6bn) last year.

Ernst & Young also put total M&A volume in Turkey at $12bn in 2018. It forecast that the M&A market would reach some $10-12bn in 2019, placing it below potential, Reuters reported on January 16.

Sharp fall in M&A
M&A volume in Turkey amounted to $23.2bn in 2012, but subsequently declined sharply due to geopolitical risks, downgrades to Turkey’s sovereign credit ratings and the attempted coup in 2016, when M&A volume shrank to $4.6bn, according to Reuters.

Capital funds’ equity investments in Turkey last year also included Mediterra’s investment in pizza maker PizzaPizza as well as Venture Capital Bank and First Energy Bank’s investment in pasta maker Oba Makarnacilik, although deal values were not disclosed, according to Ernst & Young report.

“The 55% stake in TurkTelekom was taken over by a special purpose vehicle, Levent Yapılandırma Yönetimi (LYY), which is in turn controlled by major Turkish banks (the largest holders are Akbank and Garanti). We doubt the change in ownership will result in a significant strategy shift for TurkTelekom. The key question is who is going to be the ultimate strategic owner of the company, as the banks are captive temporary investors,” Ivan Kim of VTB Capital said on January 16 in a research note on Turk Telekom.

VTB Capital upgraded Turk Telekom to Hold from Sell as lira stabilisation had improved its investment case, although the telco’s balance sheet remains the biggest headache due to $4.1bn worth of gross FX debts. The hedged portion of those debts rose to 57% in Q3 from 31% a year ago.

“[Turkcell] expects the sale of the Fintur stake to close in 1Q19, with Turkcell receiving EUR 350mn for its 41.45% holding. We view the transaction favourably, especially as it allows the company to reduce FX leverage. The other two potential transactions—the IPO/sale of Global Towers and the sale of Turkcell Consumer Finance Company (TCF)—are on hold,” Kim said on January 15 in a separate research note on Turkcell.

VTB Capital rates Turkcell at Buy thanks to its hefty growth profile and strong balance sheet.

Turkey’s Deposit Insurance Fund (TMSF) was targeting the start of a programme to sell problematic companies under its control, Muhiddin Gulal, head of TMSF, said on January 15, according to Daily Sabah.

TMSF had almost solved the problematic parts in the sale of property developer Dumankaya to a German firm while it also planned to sell two companies beset by difficulties, plastics producer Naksan Plastik and carpet manufacturer Royal Hali, this year, Gulal also said.

Companies seized from preacher idle
In addition to seizing companies linked to the Gulenist network blamed by Ankara for the attempted coup two and a half years ago, the TMSF has also seized 86 companies owned by Islamic creationist and televangelist preacher Adnan Oktar, remanded in custody in July last year pending trial on a range of charges, including several sexual and financial charges, along with 168 of his associates. Of those Oktar companies, 80 are almost idle, while the total asset volume of Oktar’s companies stands at TRY10mn, according to Gulal. TMSF has pledged support to finance minister Berat Albayrak’s “all-out-war” against inflation. It has under its wing a total of 955 companies that operate with an overall asset volume of TRY56.5bn and total equity of TRY19.8bn, Gulal said also on January 15 in a press release on TMSF’s website.

Gulal added that TMSF is not considering selling Boydak Group.

On January 14, hard-discount chain BIM said in a bourse filing that it had decided to acquire a 14% stake in cleaning papers maker Aktul Kagit from the troubled Yildiz Holding for a consideration of TRY91mn in cash.

Islamic fashion online retailer Modanisa has sold a minority stake to Goldman Sachs and Dubai-based Wamda Capital for an undisclosed sum, Wamda reported on January 14.