Cablegate: Zorlu Cfo Outlines the Group's Tupras Plans

Published: Tue 24 Feb 2004 12:34 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
1. Sensitive but unclassified - not for internet
2. (SBU) Summary: In a February 18 meeting with Econoff,
Zorlu Group Chief Financial Officer Cem Koksal outlined the
group's strategy for completion of the purchase of the
Turkish refiner Tupras, predicting agreement with Turkey's
Privatization Administration on a 60-day timeline for
conclusion of the final share purchase agreement in coming
days. Koksal stressed that Zorlu entered the deal on the
basis of equality with its Russian partner, Tatneft (which
participated in the tender through a German subsidiary--
Efremov), and will contribute half of the purchase price. He
dismissed questions that have been raised about the partners'
ability to finance the deal, suggesting that the two
companies will pay half of the 1.3 billion USD purchase price
in cash and will finance the remainder through a consortium
of Turkish and international banks. Given existing
management's ongoing 750 million USD investment program at
Tupras, Koksal sees little need for the immediate injection
of additional funds, though the new owners will try to speed
up implementation of the program to ensure that the refinery
meets E.U. standards when they come into force next year.
End Summary.
3. (SBU) Finishing Touches: Accepting congratulations on the
group's success in the Tupras tender, Koksal noted that the
timeline for completing the share purchase agreement between
the winning bidders and the Turkish Privatization
Administration should be finalized in coming days. He noted
that Zorlu's Russian partner Tatneft had initially wanted a
90 day term, but would compromise on 60 days (in place of the
usual 45). He stressed that although Zorlu entered the
process on the basis of full equality with Tatneft, and will
split the purchase price 50-50, initially it will only have a
minority 49 percent stake. He ascribed this complication to
the fact that Tatneft's initial bid envisioned a 51 percent
share for Tatneft, and that this cannot be changed until the
process is completed. Any attempt to do so, he noted, would
spark negative publicity that the group wants to avoid,
particularly given the complaints about the process already
voiced by the losing Cukorova Group. It might also provide
ammunition for legal challenges that will be mounted by labor
opponents of the sale.
4. (SBU) Financing: Koksal said that Zorlu and Tatneft will
each put in 325 million in cash for an initial 650 million
USD downpayment, and will finance the rest from a consortium
of Turkish and international banks. The partners intend to
pay the entire amount up front, he indicated, to "put to
rest" rumors that the companies may not be able to meet their
obligations, though he emphasized that they did not expect to
receive a discount in the purchase price from the PA for
doing so. He noted that the financing on the installment
plan offered by the PA, at 7 percent, was too high, and that
since the group would need to finance the remainder in any
case, it is better to do so in today's "bullish" markets.
Koksal added that some part of Zorlu's downpayment would also
be financed, though the bulk would come from contributions
from various group companies. Turkish banks, he said, are
very interested in the deal, since they currently enjoy a
strong equity base with excess liquidity. They are also
attracted by the prospect of regular business from Tupras,
given that its banking activities will be channeled through
financing banks. Koksal noted that the group's financing
focus is currently on large Turkish banks like Garanti and
Isbank; the group's Denizbank will not participate to avoid
any appearance of connected lending, and they would prefer to
avoid using industry leader Akbank, with which the group does
not have an existing relationship.
5. (SBU) Tatneft: Koksal expressed little concern about the
various legal challenges Zorlu's Russian partner faces,
suggesting that such legal processes as shareholder
consultation were required only if the company had
participated directly in the tender. Instead, by using its
German subsidiary, Efremov, it had effectively shielded
itself from these legal requirements. Once the deal is
completed, however, it would assume direct responsibility for
it. He hailed the project, suggesting that it represents
Russia's biggest overseas investment and is equal in scope to
the Blue Stream project. He added that Tatneft's interest in
Tupras stems in part from recent delays on the Bosporus, in
that Tupras shipments are able to "jump the queue" and sail
directly to the company's Izmit refinery. The ability to
avoid these delays was a powerful incentive for Tatneft, as
is the fact that as part of the purchase the partners agreed
that assuming that pricing and quality are equal, Tupras will
first purchase oil from Tatneft. (Earlier, managers at
Ditas, Tupras' tanker company, had told us that the company
only sources 2.5 million tons of oil each year from Russia,
with the bulk of its supplies coming from Iran and Syria.)
6. (SBU) Labor woes: Koksal conceded that the purchase will
confront challenges from organized labor, which he attributed
more to the fear of the petroleum workers union (Petrol-Is)
that it will continue to lose power and influence than to
concern about job losses. In fact, Koksal suggested,
employment at Tupras is not far from world standards, and
exceeds that level by only 10 percent or so. Hence he does
not anticipate major layoffs, believing instead that the
labor force can be thinned mostly through attrition as
workers retire. He added that Zorlu had expected the legal
challenges, but does not expect them to be successful.
7. (SBU) Investment: Koksal stressed that Zorlu and Tatneft
see little need for large immediate investments in their new
acquisition. A major capital investment program has been
underway since 2001, he noted, and will total 750 million USD
by 2006. The bulk of this total (two-thirds) is dedicated to
bringing Tupras' diesel production into line with EU
standards. This is key to Tupras' future, he argued, since
under Turkey's new petroleum law, from next year distributors
will be able to source 100 percent of their purchases from
overseas, rather than the current 40 percent. Implementation
of EU standards, however, will create a natural entry barrier
which will keep out cheaper low quality products, while
Turkey will retain its competitive advantage against its
European rivals. He added that overall refineries in Izmit
and Izmir are up to world standards, while the
Baku-Tbilisi-Ceyhan pipeline will bring new raw materials to
the Kirikkale refinery. The major question is Tupras' oldest
refinery at Batman in Turkey's southeast, which cannot be
brought into compliance with EU sulphur rules. Koksal noted
that the government retains a golden share in the company,
and the military may desire to keep this site operational for
strategic reasons. Koksal added that the new partners also
have serious questions about Tupras' plans for a new refinery
in Izmit, believing that it may lead to excess capacity and
would be a mistake, given that investments in refineries
typically trade at half their "book" value. He noted that
the partners' consultants have told them that Tupras capacity
can increase from 25-26 million tons per year to 30 million
tons simply by shifting production from "black to white
8. (SBU) Comment: Koksal is Ahmet Zorlu's key advisor on
financial and other issues, and as his comments reflect has
been deeply involved in the group's strategy on the Tupras
acquisition. He noted too that the group is moving ahead on
other fronts as well, planning to increase its volume of
exports of white goods to Europe from 1.5 billion USD to 2.3
billion. End Comment.
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