US embassy cable - 03ANKARA7051

UNCLAS SECTION 01 OF 02 ANKARA 007051 
 
SIPDIS 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA AND MC KIBBEN 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, PGOV, TU 
SUBJECT: PRIVATIZATION UPDATE: UPDATE: ONE STEP FORWARD, 
TWO STEPS BACK 
 
 
REF: ANKARA 6165 
 
 
1. (SBU) Summary: The Turkish government has canceled the 
privatization of Tekel,s tobacco operations, because bids 
submitted were far lower than expected.  Though the 
cancellation is a blow to the privatization program, the 
government did accept the high bid for the smaller alcohol 
side of Tekel.  The Tupras tender awaits enactment of 
legislation that GOT authorities hope will improve the value 
of the company. The GOT Council of Ministers has approved a 
privatization plan for Turk Telekom, under which bids will be 
received by the end of May, 2004.  End Summary. 
 
 
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TEKEL 
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2.    (U) The Privatization Authority (PA) announced on 
November 5 that Japan Tobacco (JT) was the high bidder for 
the Tekel tobacco operations, offering USD 1.15 billion. A 
consortium led by Turkish company Tutsab was high bidder on 
Tekel's alcohol division, at USD 292 million.  While 
Tutsab,s bid was in line with expectations, JT,s bid was 
substantially below the USD 2-3 billion predicted by the 
market and expected by PA officials (Reftel). 
 
 
3.    (SBU) Initially, Finance Minister Unakitan resisted 
discussion of a possible cancellation, while State Minister 
Babacan said that the market sets the price and that 
privatization &has to happen.8 Nevertheless, on November 11 
the Privatization Tender Commission canceled the tender. 
Turkish newspapers report that, prior to deciding to cancel, 
Ministry of Finance officials met with JT and tried to induce 
JT to increase its bid. 
 
 
4.    (SBU) The cancellation had been presaged by PA 
President Kilci on November 10, who predicted to Econ 
Counselor that the tender would be canceled, stating that the 
GOT did not intend to sell Tekel &below its value.8 Econ 
Counselor cautioned Kilci to consider carefully the 
consequences of cancellation, noting that it would raise 
questions about the GOT's commitment to privatization and 
cause investors on future tenders to be more hesitant; that 
if the sale went forward the money could be used to pay off 
high interest rate debt, thus saving several hundreds of 
millions of dollars; and that there was no guarantee that a 
subsequent tender would produce higher bids. Kilci was, 
however, unmoved. He hinted that the bids had been corrupted 
by collusion, noting that, in the second round of bidding on 
Tekel the participants did not increase their bids, while 
typically in the second round bids are 2 to 3 times higher 
than in the first round. Kilci also said that alternate 
strategies available to GOT included selling the company in 
pieces, or holding it until market conditions improved. 
 
 
5.    (U) The Turkish stock market fell sharply (5.3 percent) 
on November 6.  Market analysts report that the disappointing 
Tekel bid was a major factor in the sell-off, along with the 
European Union Progress Report,s mention of the need to 
solve the Cyprus problem. On November 12, the market rallied 
despite the news of the tender cancellation, having already 
anticipated that event. 
 
 
6.    (U) Turkish press reports indicate that Philip Morris 
(PM) did not bid on Tekel. They claim that, because of PM,s 
market dominance (Reftel), the PA had asked PM to commit to 
divest some of Tekel,s cigarette brands.  When PM was unable 
to find buyers for those brands, it withdrew from the 
competition. The Financial Times reports that an advisor to 
one of the bidders said that companies took into account the 
unfriendly investment environment, unstable regulatory 
authorities, and the quote immoral unquote bureaucracy in 
Turkey. 
 
 
7. (SBU) Before the bids were announced, Competition 
Authority (CA) officials told Emboff that no matter which 
bidder won, the CA would have market dominance issues and 
would likely require some divestment.  One investment banker 
also told Emboff that the GOT will embark on a major 
anti-smoking campaign. 
 
 
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TUPRAS 
------ 
8.    (SBU) Although the Tupras bids remain sealed, press 
reports claim that only two companies bid on Tupras: 
Tataristan National Petroleum Company (TatarNeft) and a joint 
venture between Cukurova Holdings and a Kazakh oil company. 
While Kilci expressed optimism to Econ Counselor that the 
sale would proceed, he also noted that no final decision on 
the bids will be made until the new Petroleum Market Law 
(Ref) nears enactment. According to Kilci, the Petroleum Law 
is designed to make Tupras more attractive, thereby 
increasing the PA,s leverage on the bidders, or leading to a 
new round of bidding. Kilci said the situation should be 
resolved within the next couple of weeks. 
 
 
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PETKIM 
------ 
 
 
9.    (U) Petkim bids are due November 18. However, Kilci 
advised Econ Counselor that the bid deadline would probably 
be postponed until after the Tupras sale was approved, since 
the identity of the new owner of Tupras was important to 
Petkim bidders. 
 
 
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TELEKOM 
------ 
 
 
10.   (U) On November 11, Communication Ministry Binali 
Yildirim announced that the cabinet had agreed upon an 
IMF-backed privatization plan for Turk Telekom, under which 
bids for the block sale of at least 51% are to be made by the 
end of May, 2004. According to Yildirim, foreign investors 
will be permitted to purchase the entire block, and if the 
block sale is successful, a public offering of the remaining 
shares will be made. Five percent of the shares will be 
reserved for employees, and a golden share for GOT. Yildirim 
further said that the Transportation Ministry, the Treasury 
and the PA had formed a special commission to determine the 
value of Telekom. Local press reports state that, as a result 
of the Tekel debacle, the government will establish a floor 
for bids. An unidentified senior Telekom official reportedly 
has claimed that the company is worth USD 4 billion, and that 
Telecom Italia and Singapore Telecom are the most serious 
rivals for the sale. 
 
 
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COMMENT 
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11. (SBU) Comment:  The Tekel cancellation is a blow to the 
privatization program.  PA staff and many local observers had 
hoped that the Tekel and Tupras privatizations would 
demonstrate that the GOT was serious about privatization. 
The two deals were also expected to generate substantial 
revenues for the State.  Instead, the disappointing results 
suggest the PA may not have a good feel for the market. 
Moreover, the Tekel cancellation and Tupras delay will 
further reinforce market doubts about the GOT,s commitment 
to privatization and could become an issue in negotiations 
with the IFI,s. While the Telekom announcement is a bit of 
good news, approval of a plan --particularly one required by 
the IMF program -- is far easier than actual divestment of 
state enterprises. End Comment. 
EDELMAN