Author: Denise Bedell
With most first-tier banking assets now sold off, foreign investors are looking to second-tier banks, privatization plans and the corporate market for further investment in Turkey.

feart03a Investor interest in Turkey continues to grow rapidly in the run-up to EU accession talks. Massive regulatory and economic changes, necessary for EU membership and much more palatable to the international investment community, are now firmly ensconced in the Turkish infrastructure, and foreign investors are rushing to get in while the getting is good.

One area that has seen formidable interest from external entities is the banking sector. Most of the first-tier players have been bought up, and many investors are looking to second-tier banks to get a foothold.

External investors are also waiting with bated breath for Turkey’s privatization program to step up the pace. With a number of assets already sold and many more expected to be sold off in the coming year, this will be a major area of action for foreign capital.

The trickle-down effect is just beginning to be felt as well, as the financial markets kick up a gear and investors begin to look at high-quality corporate assets for acquisition or investment. However, some analysts stress that there are continued risks in investing in Turkey, and the next few weeks will be a critical time in how the future plays out for the EU-hopeful.

Tolga Ediz, executive director at Lehman Brothers, says that there are three key reasons why Turkey has performed so well. “First, it is an emerging market, and the outlook on emerging markets has been quite positive,” he says. With low real interest rates around the world, funds and investors are starting to put more money to work in high-interest-rate, high-yielding assets, he explains, and thus emerging markets are quite attractive. Turkey has the highest interest rates in the emerging markets, so it has attracted lots of capital.

Second, Ediz notes that the government’s economic and regulatory changes have played a big role. “For the first time in decades Turkey has a single-party government. That government has managed to put its economic house in order and stick to a tough fiscal policy. In addition, we have seen greater credibility for the central bank on the policy front,” he says.

Third is the EU-accession story and the changes that have been made to meet EU requirements. “Although it has been complicated, we believe that negotiations will start on time in October,” Ediz says. EU accession talks are scheduled to begin on October 2, although some have questioned whether this will, indeed, happen on schedule.

Banks Lead the Way

Stuart Richards of Barings

The government has been working to bring in more foreign direct investment. As finance minister Kemal Unakitan said at a conference in Milan in July: “We have enforced a new law on direct foreign capital investments which eliminates all differences between local and foreign businessmen investing in Turkey. We have simplified procedures to establish a company.” In addition, incentives have been put in place for foreign investment in various cities across Turkey. “All these initiatives have increased interest of foreign investors in Turkey,” said Unakitan.

The interest of foreign concerns is clearly demonstrated in the banking sector. Most first-tier banks have been snapped up already. A prime example is the 50-50 partnership between HSBC and Koç Bank and the subsequent purchase of 57.4% of Yapi ve Kredi Bankasi by Koç Bank. The deal for Yapi—Turkey’s fifth-largest bank—closed in August and came in at about _1.2 billion.

Hungary’s National Savings and Commercial Bank is in negotiations to buy a majority share of first-tier Turkish firm Denizbank. Deniz completed a $140 million IPO for 25% of its stock in September last year.

Türkiye Garanti Bankasi, Turkey's third-largest privately owned bank, underwent merger discussions with a number of groups before reaching a deal with GE Consumer Finance, the financial arm of General Electric. The American group has agreed to pay $1.55 billion for a 25.5% stake from majority-owner Dogus Group—a Turkish conglomerate. The two will form a 50-50 partnership in the bank.

BNP Paribas also staked its claim, recently closing a deal to acquire 50% of Türk Ekonomi Bankasi (TEB) from majority owner Çolakoglu Group. TEB is Turkey’s 10th-largest bank, demonstrating the interest of foreign investment in the next rung of Turkish banking assets. A number of other deals are also in the works, with more announcements expected in the coming months.

Privatization Bonanza

feart03c Turkey’s privatization plans are already under way: Turkey raised $2.1 billion in 2004 from privatization projects. Future sell-offs will include the Turkish Oil Refineries company, Petkim, Turkish Petrochemical Industries, Eregli Iron & Steel Enterprises, Turk Telecom and the Turkish airline THY, as well as tobacco products, salt and alcohol assets.

In addition, the Turkish government is reducing its stake in Vakifbank through an IPO to be launched in late September. Joint-bookrunners are UBS and JPMorgan, and HC Istanbul will be the local partner. Through its General Directorate of Foundations, the Turkish government now has a 75% stake in the bank, which may be reduced by as much as 55%.

According to market participants, all the banking and state-owned acquisition hype is nothing but good news for the corporate sector in Turkey. Explains Stuart Richards, investment manager of Baring’s Emerging Europe fund: “We have seen considerable investment in the banking sector, and we will start to see a lot of foreign investment in other sectors as well. Banking is always the first area to get foreign direct investment, and then it spreads to other areas. It certainly gives encouragement to foreign investment knowing banking is in a good state.”

The capital markets are also showing strength. Federal bond issuance has been strong but hit a bump in March when US treasuries entered a downswing. They have since recovered, and the corporate bond market is beginning to open up for the first time since July 2004. But analysts are keeping a close eye on the US and emerging markets such as Brazil. Says Ediz at Lehman Brothers, “When there is uncertainty around the US and US treasuries, then there is risk aversion by investors, and Turkey is one of the most vulnerable.”

As for the equity markets, there are a number of deals coming out in the weeks ahead, with banks vying for the Coca-Cola Icecek IPO mandate. Shopping center Ak Merkez is believed to be considering an IPO, which would come in at around $400 million, and retail group BIM is considering a launch on the stock market. Vestel subsidiary Vestel White Goods is expected to raise $120 million through an IPO, with Deutsche Bank handling the launch.

Although it has been a tough few years in getting to the current position of strength, the future looks bright for Turkey. Says Richards at Baring: “I think we will see a lot of noise as we head toward accession talks in October. But we will not see the EU changing the goalposts it has set for Turkey. Turkey has done everything asked of them. There is still a long, rocky road ahead, but Turkey is heading in the right direction.”

Denise Bedell