UK ruling unlikely to end Turkcell row

Cukurova determined to recover stake

ISTANBUL, Feb 27, (RTRS): A British court ruling next week which could help the Turkish co-founder of Turkcell recover a controlling stake may do little to end a boardroom dispute that has hobbled the firm for years.

The shareholder battle pits the Cukurova Holding company owned by Mehmet Emin Karamehmet, one of Turkey’s richest tycoons, against Altimo, the telecoms arm of Russian billionaire Mikhail Fridman’s Alfa Group.

It centres around a 13.8 percent controlling stake in Turkcell which Altimo appropriated from Cukurova after it defaulted on a $1.35 billion loan eight years ago.

Britain’s Privy Council will decide on Monday how much Cukurova would have to pay to recover the stake, with sources involved in the proceedings expecting the figure to be somewhere between $1.6 billion and $3.0 billion.

“Cukurova is determined to pay the money and get back the shares. But the final decision will be Karamehmet’s,” said one source close to the proceedings.

The Privy Council ruled last month that while Altimo had been entitled to take over the controlling Turkcell stake, Cukurova also had the right to recover it if it paid the outstanding loan plus interest and costs.

The row has left Turkcell unable to agree the composition of its board, distribute dividends or pursue a coherent growth strategy for several years.

Turkcell shares have risen around 8 percent since last month’s Privy Council ruling, partly buoyed by hopes that the court’s decision on to be around 4 percent this year, and the possibility that Turkey will win a second investment-grade rating from credit rating agencies have made sellers more demanding, widening the gap between the valuations they quote and what buyers feel they can afford to pay.

Turkey’s stock market soared 53 percent in 2012, making it one of the world’s biggest gainers. Turkish companies are trading at about 11.8 times estimated earnings for this year, a slight premium to emerging markets globally. Earnings growth is expected to be around 11 percent this year, compared to 15 percent last year.

“Company owners are asking for a high price. They are also not willing to give up control of family-held businesses in the final negotiation stage,” another industry source said, speaking on condition of anonymity because of the sensitivity of the matter.

Deldag said sellers in Turkey were in some cases demanding valuations of 20 to 25 times earnings before EBITDA (interest, taxes, depreciation and amortisation).

Valuations in Turkey have risen so high that private equity firms risk lowering their global profit rate on Monday will draw an end to the dispute.

But the row is part of a deeper boardroom rift - with Karamehmet, who co-founded Turkcell almost two decades ago, on one side, and Alfa Group and fellow shareholder TeliaSonera on the other.

Turkcell recovering the controlling stake is unlikely to resolve the broader dispute.

Altimo will not give up its 13.2 percent stake in Turkcell even if Cukurova wins back control, a source close to the Russian firm said, and will continue to work as an active shareholder alongside TeliaSonera, which holds 37 percent.

“Altimo has faith in the Turkish investment not only because of the potential of the Turkish market ... but also thanks to Turkcell’s favourable positioning for regional expansion,” Altimo Vice President Yevgeny Dumalkin said.

Global

“We would like to see Turkcell among global market leaders in 5-7 years ... and we know how to maximise its value on the market,” he told Reuters.

Whether Karamehmet shares that vision is an open question.

After co-founding the telecoms firm in 1994, he was forced to quit as chairman in 2010 as Altimo and TeliaSonera tried to limit his influence, although he still managed to install ally Colin Williams as his successor.

Altimo and TeliaSonera regard Williams, a designated independent board member, as a proxy for Karamehmet and the three have been unable to agree on the composition of the board since then, prompting investments by putting large sums into the country, some market participants say. High valuations also make exits from investments difficult.

Carlyle has been looking to sell its 40 percent stake in Turkish hospital chain Medical Park for nearly a year, mandating Credit Suisse and Goldman Sachs to arrange the deal. It may complete the sale in the first half of 2013, the Turkish group’s chairman said.

Competition in the private equity industry has increased substantially in the last few years as a number of local players expanded their operations.

Over 70 private equity funds are now looking for deals in the country. Local firms such as Turkven and Actera are increasingly active, taking market share from the foreigners.

The locals benefit from their extended on-the-ground presence, an understanding of local market conditions, and in some cases friendly relationships with Turkish family conglomerates and the government.

Since clients have become more demanding, it is important for senior private equity executives to be present in Turkey; for foreign firms covering the country from another financial warnings from the Turkish market regulator and the threat of legal action from minority shareholders.

Sources involved in the process said that if Cukurova regains the disputed stake it may then seek to bring a legal case against Altimo and TeliaSonera for breaching shareholder agreements by conspiring against it.

Key to Cukurova recovering the disputed stake will be how the court calculates the interest rate on the loan.

Sources say Cukurova wants global borrowing rates applied - which would bring the cost to around $1.8 billion - while Altimo argues default rates should be used, raising it to some $2.5 billion.

Cukurova has looked into raising a loan of up to $2 billion to secure the stake, with foreign banks expected to structure the deal, although no lenders have yet been mandated pending the outcome of Monday’s ruling.

“There are many foreign banks angling for the loan but there is no exclusivity as the amount is as yet unknown,” one source familiar with Cukurova’s plans said.

The source said that if the court set a figure below $1.9 billion, Cukurova may be able to use Turkcell’s potential future dividends as collateral, but if it went as high as $2.5 billion it may have to liquidate assets such as stakes in oil firm Genel Energy, steel maker Noksel Celik Boru, Swiss bank BCP or satellite television provider Digiturk.

“If the court rules that Cukurova has to pay around $3 billion ... it may or may not be feasible,” the source said. centre such as New York or London, that is a disadvantage.

“The kinds of names we want to do business with are the successful ones, and those names demand a lot of time and attention. They want to see us on the ground and be able to reach out at short notice,” Abraaj’s Yorgancioglu said.

Because of Turkey’s young and growing population, industry executives still see opportunities in sectors such as health care, the retailing of “fast-moving consumer goods” (FMCG) such as groceries, and education.

In some sectors, the government is moving to stimulate investment. Last week it passed regulations covering public-private partnerships, under which the state can rent city hospitals built and run by the private sector for 25 years.

For the foreseeable future, however, private equity deal sizes are expected to be smaller than they were a few years ago.

“We are interested in a range of sectors, from health care to FMCG and financial services. Obviously, the price expectations are high but there are still deals to be done at the right price,” Yorgancioglu said.