Cablegate: Military Pension Fund Wins Steel Privatization

Published: Thu 6 Oct 2005 03:00 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
REF: Ankara 5352
This cable was coordinated with Congen Istanbul.
1. (SBU) Summary: On October 5, the Turkish Privatization
Authority held a tender auction for another "Crown Jewel,"
the state-owned steel company, Erdemir (Eregli Iron and
Steel Industries of Turkey). The OYAK group, the military
pension fund with diversified industrial holdings, won the
auction by bidding $2.77bn for 46.12% of the company. The
final figure was higher than expected. If this tender and
those of Turk Telekom and Tupras are finalized, the
privatization program will have taken a huge step forward.
With the sale of Erdemir, the total value of privatizations
in the past 12 months has reached approximately $20bn,
though most of the deals await final regulatory approval and
the payments will be spread over several years. The fact
that both Tupras and Erdemir were won by local groups will
mean little increase in Foreign Direct Investment in the
balance of payments. Moreover, the wins by dominant local
groups without expertise in steel or oil refining suggests
economic nationalism may have played a role. End Summary.
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Oyak Bids Aggressively and Wins the Tender Auction
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2. (SBU) On October 5, in another tender auction broadcast
live on television, the Privatization Authority (PA) sold
46.12 percent of Erdemir to the military pension fund (Oyak)
for 2.77 billion USD. Together with the 3.17 percent share
in Erdemir held by the Turkish Development Bank (TKB), which
will be sold to the winner of the tender, the total bid
amount went up to $2.960 billion, valuing Erdemir at $6.8
billion -- an 83% premium over its current market valuation.
3. (SBU) The high valuation continued a pattern: both the
Turk Telekom and Tupras (oil refinery) tenders had achieved
higher-than-expected prices. This reflects both current
investor bullishness on Turkey, but also the PA's process
which, once companies are pre-qualified (short-listed),
drives up the price through open bidding, with price the
sole criteria. The transparency and the high bids are
helping the GOT deal with anti-privatization popular
opinion. Although the critics try to argue that state
assets are being sold too cheaply, the higher-than-market
prices render this argument a hollow one. Nevertheless, the
Black Sea community of Eregli, home of Erdemir's
headquarters and most of its production, has been boiling
with anti-privatization sentiment, including legal
challenges from the local chamber of commerce and the labor
union, as well as demonstrations. The CEO of Erdemir, a
career company executive generally credited with restoring
the company to profitability after he took over from a
political appointee, resigned this summer out of opposition
to the policy of selling a profitable state-owned company.
4. (SBU) Although 13 consortia purchased the privatization
bid document for Erdemir, including U.S. Steel, only 6
groups actually competed on October 5. Big foreign steel
companies like Luxembourg-based Arcelor and Indian-British
Mittal; as well as Russian steelmaker Severstal, which had
teamed up with a local consortium, bowed out during the
auction when faced with aggressive bidding by Oyak and by a
consortium of local companies led by TOBB (Union of Chambers
and Commodity Exchanges of Turkey).
Economic Nationalism Raises its Ugly Head
5. (SBU) More than the other recent privatizations, the
possibility that Erdemir might fall into foreign hands had
set off a wave of nationalist hand-wringing in recent
months. The fact that a group of companies who buy
Erdemir's steel combined under TOBB's leadership to act as a
"national champion" was symptomatic. TOBB, which claims to
be in favor of foreign investment and has been a key
constituency in support of the economic reform program,
revealed deep-seated nationalist reflexes, going along with
local businessmen's claims that a foreign owner might close
Erdemir in a global downturn of the steel market, or fail to
supply Turkish industry in a tight market.
6. (SBU) In the end, TOBB Chairman Rifat Hisarciklioglu,
even though his group lost out to OYAK, gushed with
nationalist pride that Erdemir had not fallen into foreign
hands, publicly saying he was glad the Turkish flag would
still fly over Erdemir. Hisarciklioglu's tone was also
reflected in much of the press coverage of the tender. Oyak
President Coskun Ulusoy, in his remarks that followed the
auction, hinted that the Group was open to partnership in
Erdemir. According the tender document Oyak cannot lay off
any workers in the next two years, and is required to invest
a minimum of USD 2.5 billion in three years. Unlike most of
the other bidders, Oyak Group has no experience in the steel
sector except as a customer through OYAK-Renault, a joint
venture in Turkey of the French car manufacturer Renault.
Who is OYAK?
7. (SBU) International observers have long debated how to
view OYAK. Is it the military's way of exerting influence in
the economy or is it, as OYAK executives insist, a true
pension fund that has invested in industrial assets because
of the small size of Turkish financial markets? Huseyin
Kelezoglu, an equity analyst at an Istanbul brokerage, told
econoff he would not rule out that some of Oyak's motivation
may have stemmed from the military's desire to keep Erdemir
Turkish. Kelezoglu was careful, however, to say the GOT's
only interest was to sell to the highest bidder. Opinion
is divided on OYAK. The group's executives have business
backgrounds and we understand the military leadership lets
the businessmen run the company. Two of OYAK's executives,
including the CEO, have strong U.S. connections: the CEO is
married to an American and one of the Executive Vice
Presidents used to be a business school professor in the
Next Steps
8. (SBU) The PA will send the tender decision to the
Competition Authority (CA) for its review. The Competition
Authority (CA) will have three weeks to rule on the
transaction's compliance wtih competition law. Once the
transaction is cleared by the CA, it will move to the
Supreme Privatization Council for its ruling. As with Turk
Telekom, the Erdemir transaction includes a "golden share"
to protect the continuity of the company. The PA will
appoint a board member representing this share in Erdemir.
9. (SBU) The Privatization Administration is on a roll:
after years of failed privatizations there have been three
highly-successful tenders of flagship companies which seem
to be on their way to a successful conclusion. If these
transactions are finalized, Turkey will have taken a major
step away from its dirigiste, state-dominated past.
10. (SBU) On the other hand, the fact that two out of the
three transactions were won by major local groups, will mean
little new Foreign Direct Investment in the balance of
payments, unless Koc expands Shell's role in Tupras and/or
Oyak brings in an international steel group. The balance of
payments is, however, likely to benefit from increased long-
term borrowing from abroad to finance the acquisitions --
preferable to the current reliance on short-term portfolio
investment to finance the current account deficit.
11. (SBU) The wins by Koc and OYAK also raise suspicions
that economic nationalism, in one way or another, played too
much of a role in the outcome. It seems unlikely that the
PA rigged the bidding, but Oyak in particular may have bid
too aggressively for reasons other than the profit motive.
Huseyin Kelezoglu told econoff Koc only thinks in terms of
business, but he went on to say Koc, as one of Turkey's
largest groups, felt it had to get a piece of the
privatization action, which is not the same thing as
focusing on return-on-equity.
12. (SBU) American and most European corporations have long
since abandoned the diversified conglomerate model, but it
is alive and well in Turkey, personified by groups like Koc,
Sabanci, Dogan and OYAK. The large number of joint ventures
between these groups and foreign multinationals demonstrates
that foreign groups need a local partner to run interference
with non-transparent and anti-foreigner courts and
regulators. This legacy of Turkey's closed-economy days is
outmoded, but these private groups are still preferable to
state control, so the privatizations are unquestionably a
net plus.
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