Cablegate: Privatization Authority Confident About Turk

Published: Thu 21 Jul 2005 12:49 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
211249Z Jul 05
E.O. 12958: N/A
Ref: A. 04 ANKARA 6673
B. 05 ANKARA 446
C. 05 ANKARA 2159
D. 05 ANKARA 2812
E. 05 ANKARA 3845
1. (SBU) Summary: The Turkish Privatization Authority (PA)
is confident that the privatization of Turk Telekom will be
finalized after Cabinet approval in the late fall, despite
initial confusion and allegations following announcement of
the Oger consortium winning the tender on July 1. The PA is
cautiously optimistic that the tender results will survive
challenges by labor unions and also by the second place
bidder. The Competition Authority approved the sale on July
21. The improved prospects for the Turk Telekom
privatization is a good sign for other privatizations, and
could represent a turning point after a series of failed
privatizations of large state companies. It would also
represent a huge infusion of badly-needed Foreign Direct
Investment. End Summary.
And the Winner is...
2. (SBU) The Oger Group-Telecom Italia (TI) consortium won
the Turk Telekom (TT) tender bid July 1(Ref E). TI already
has a significant interest in Avea, the number two mobile
company. The consortium offered $6.55bn for 55 percent of
TT, valuing the company at $11.9bn. The offer price is well
above the PA'a speculated price range per the local press
($8.2bn-$11bn) and the analysts' estimate range ($7bn-$9bn).
The transaction will be the largest single ticket FDI Turkey
has ever attracted, roughly doubling the pending FDI record
of $3.3bn from the Turkcell sale to Russian Alfa Group
announced this year (contested by Teliasonera, whose offer
Alfa trumped). The success to date in the TT tender process
is evidence of the Turkish government's commitment to the
privatization program and offers encouragement for the
upcoming Tupras and Erdemir privatisations as well as the
sale of Turkey's second GSM operator, Telsim from the
Savings Deposit Guarantee Fund's (SDIF) portfolio. Assuming
that all necessary approvals take place without any legal
difficulties, the winning consortium will make an up-front
payment of $1.31bn in 2005 and the remaining in five equal
payments with Libor+2.5% interest p.a. For purposes of
comparison, the $1.31 bn payment, if it happens, is not much
less than the total FDI inflow to Turkey in 2004 of $1.6
billion. The PA expects the transaction to be completed by
the end of 2005.
Positive Reaction
3. (SBU) The Turkish market perceived the sale to be very
positive on various grounds: First, the $1.3bn inflow this
year is expected to result in a minimum total FDI of $5bn in
2005 and a floor of roughly $1.1bn annually in the next 5
years. The FDI will provide a stable, long-term source of
financing for the widening current account deficit, and the
proceeds of the sale will help lower public sector
indebtedness. Second, the buyer will need to invest
substantially in the company's infrastructure and technology
over the coming years, leading to further upside in FDI, and
better telecommunications services. Oger is already talking
to the press about new technologies it will bring and new
services it will offer. Third, the completion of the
auction confirms the government's commitment to the
privatization program, which had been greeted with some
skepticism by the investor community. Fourth, the Turk
Telecom sale will lend positive momentum to the upcoming big-
ticket privatization items such as the state refinery-
Tupras, the steel company- Erdemir, as well as Turkey's
second largest GSM operator- TELSIM.
Nay-Sayers and confusion
4. (SBU) Because of past resistance to privatization from
labor unions, opposition politicians and, reportedly, the
military, the TT tender was expected to receive criticism
and also to be challenged in the courts. The PA had taken
care to seek to "inoculate" the tender from law suits
against previous (most failed) privatizations. Gunden Peker
Cinar, the working-level PA official with lead
responsibility for the TT transaction told us PA had
brainstormed extensively with its lawyers to ensure there
were no flaws in the tender document that a court could use
to invalidate the process, as happened with the Tupras
privatization in 2004. A few lawsuits seeking tender
cancellation have already being filed (Habersen, a union
which has members on TT's payroll was the first to file such
a lawsuit). The opposition party announced that they would
also file a lawsuit since TT was priced much more cheaply
than what it claimed as a "real" value of $30 billion. Note:
Despite this typically over-the-top criticism by the
opposition, the fact that the bid valued TT well above the
PA's and analysts' valuation has undercut the argument that
the GOT is selling too cheaply. This line of argument is a
recurring feature of the public debate over privatization in
Turkey, and it was the reason the Tekel tobacco tender was
cancelled in 2003. The fact that the PA seems to have
squeezed every last dollar-on live TV no less--out of a
process with multiple, well-heeled bidders makes it far less
likely this "fire sale" argument will kill the deal. End
5. (SBU) Transportation Minister Binali Yildirim triggered
confusion on July 3 when he announced that the tender was
not over, and the second short-listed consortium led by
Calik-Etisalat of UAE could still win. Encouraged by
Yildirim's remarks, the Etisalat Group subsequently
announced they would sacrifice their 5 percent cash payment
discount, and could sign an agreement with Telecom Italia.
Clear Way Forward
6. (SBU) In July 4 and 6 press statements, PA President
Metin Kilci sought to mitigate the resulting confusion, by
reaffirming the tender result and clarifying next steps in
the process. He noted that the PA short listed the two
groups with the highest offers on July 1, 2005, and the Oger
Telecom Group offered the highest auction price in the
bargaining. According to Kilci, The PA tender committee met
on July 4, 2005 and decided to submit both offers to the
Competition Authority. On July 21, the Competition
Authority announced it had approved the sale to Oger. The
next step will be submission of the transaction to the
Council of Ministers for approval. At his press conference,
Kilci said that, if the agreement cannot be finalized with
the highest bidder, then the second bidder would be
considered. The new owner of TT will sign a concession
agreement with the Telecom Authority following the Cabinet
approval of the tender. The Telecom Authority will submit
the concession agreement to Danistay (Council of State) for
opinion, since concessions relate to the Constitution.
Danistay's opinion, at this stage, will not be binding and
cannot change the sales decision or the concession contract
7. (SBU) Kilci also rejected allegations that the Telecom
Authority had granted a "free-of-charge third generation
frequency license to TT. (The tender document requires a
frequency arrangement to extend telecom services to even
small villages in Turkey. This is actually a burden, not a
privilege.) He reaffirmed that tender price was a key, but
not sole, criterion.
8. (SBU) PA official Cinar told us privately that unless
the winning Group failed to fulfill its tender commitments,
it was not possible for the PA to award TT to the second
group. Cinar suggested that Minister Yildirim had not been
fully briefed when he had made his initial comments to the
press. Note: We suspect Yildirim's outburst may in part
reflect his irritation that Finance Minister Unakitan,
rather than Yildirim (who has responsibility for telecoms)
had the lead on the privatization. Yildirim has kept quiet
on the TT privatization over since his July 3 outburst. End
Note. Cinar said that bidding companies were evaluated first
on their business plans (company's strategic position,
future strategy, financial performance, financial plan and
HR plans). If the groups' respective bids met passed muster
in these areas, the groups were pre-qualified, with the
final round of competition based on price alone.
9. (SBU) Cinar also said the state's "golden share" will
only be exercised in the cases where national interest and
security can become an issue. Cinar also revealed that
when the whole process is finalized Oger Telecom will own 99
percent of the purchased shares; Saudi Oger will own 1
percent and Italian Telecom will own 20 percent of the Oger
telecom shares in Turk Telecom. The consortium applied to
the PA on June 17 to change their partnership structure to
rename Oger Telecom as a Joint Venture Group.
10. (SBU) Comment: In the face of some skepticism and two
previous failures, the likelihood that the GOT and PA may be
successful in selling their state-owned telecom company has
substantially increased. If Turkey can bring the
transaction to fruition, it will open the way for future
privatizations, improve telecoms services, and boost
investor confidence not only for privatizations, but for
Turkey as a whole. It remains to be seen whether it will
facilitate liberalization, or replace a dominant public
company with a private one. Some industry participants and
observers are worried whether the Telecom Regulatory
Authority (and Competition Authority) has the strength,
independence, and expertise to facilitate and enforce
liberalization (and competition) steps and rulings.
End Comment.
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