US embassy cable - 05ISTANBUL218

UNCLAS SECTION 01 OF 02 ISTANBUL 000218 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EINV, TU, Istanbul 
SUBJECT: YAPI KREDI DEAL WILL VAULT KOC INTO BIG LEAGUES OF 
HEALTHIER BANKING SECTOR 
 
REF: A. ISTANBUL 97 
     B. 2004 ANKARA 1437 
     C. 2004 ISTANBUL 1558 
 
Sensitive but unclassified.  Not for internet distribution. 
This message was coordinated with Embassy Ankara. 
 
1.  (SBU)  Summary: The January 31 deal to purchase Yapi 
Kredi Bank from the 
embattled Cukurova Group will vault Koc Financial Services 
into the front rank 
of Turkish banking, fulfilling a long-standing goal of the 
Koc Group.  More critically, it will remove a major cloud 
hanging over the Turkish banking sector stemming from 
Cukurova,s continued ownership of one of Turkey,s largest 
banks.  Details remain to be worked out, pending final 
completion of due diligence on the bank, but by reaching 
preliminary agreement before the January 31 expiration of the 
period when it alone had the right to sell the bank, the 
Cukurova Group avoided 
bringing the Savings Deposit Insurance Fund (SDIF) into the 
sale process. 
Istanbul markets and analysts have been generally bullish on 
the deal, with 
overall indexes rising and the two principal stocks 
themselves also 
appreciating handsomely.  Less clear is the fate of Turkcell, 
Turkey's leading 
GSM operator and the chief remaining asset of the ukuroa 
Group.  After a 
series of contradictory announcements from various partie, 
Ko GroupCEO 
ulent Ozaydinli made clear on Febuary 3that Koc is focused 
on Yapi Kredi and 
not on the Cukurova Group's telecommunications assets.  He 
confirmed that Koc 
had given Cukurova a 12-month option to repurchase the shares 
of Turkcell owned 
by Yapi Kredi, leaving the GSM operator's future clouded. 
End Summary. 
 
2.  (SBU) To the surprise of most analysts but the pleasure 
of Istanbul stock 
indexes, which took the opportunity to extend their rally, 
the Koc and Cukurova 
Groups met the January 31 deadline imposed by the SDIF for 
sale of Yapi Kredi. 
Under the agreement, Koc will buy the 44.53 percent of shares 
held by the 
Cukurova Group and its affiliated companies for just over USD 
1.3 billion and 
the 12.4 percent of shares held by the SDIF for USD 300 
million.   In addition, 
Koc will issue a tender call for other minority shareholders. 
 The USD 1.6 
billion sale price (EUR 1.157 billion) values the entire bank 
at USD 2.7 billion. 
The bulk of the purchase price is expected to be returned to 
the bank to repay the 
USD 2 billion the Cukurova Group owes the bank.  Given that 
final due diligence 
is yet to be completed, depending on its outcome the final 
purchase price may 
be adjusted.  Among the issues to be resolved are the 
valuation of A-Tel 
telecommunications (widely believed to be booked at an 
unrealistic value on the 
bank's balance sheet-- and the subject of a lawsuit brought 
by the Capital 
Markets Board (SPK) against the former Yapi Kredi Bank 
board), Fiskobirlik (USD 
400 million in overdue receivables from a hazelnut state farm 
cooperative, 
dating back to the 1980s, which few expect to be realized), 
and potential 
funding of the bank's pension plan. 
 
3.  (SBU) Given these issues, some of our banking contacts 
expressed mild 
surprise at the purchase price for the bank, judging it 
higher than they 
anticipated.  (Indeed, rumors earlier in January pegged the 
purchase price at 
USD 900 million, well below the announced figure.)  Though 
details are still a 
closely guarded secret (and we have not yet been successful 
in meeting with Koc 
Financial Services), they note that there are also 
indications that the Koc 
Group may write off some of the Cukurova Group's USD 2 
billion debt to the 
bank.  Also unclear is the manner in which the 13.1 percent 
of Turkcell held by 
the bank is handled in the valuation. 
 
4.  (SBU) An additional uncertainty relating to Turkcell 
surrounds the 
simultaneous expiration of the Cukurova Group's share 
repurchase option on 
January 31.  After a series of contradictory announcements 
regarding the 
option's status (Cukurova said it would run until October 31, 
while the SDIF 
and Banking Regulatory and Supervisory Agency (BRSA) said it 
had expired), the 
Koc Group announced that it would grant the Cukurova Group an 
additional year 
to purchase the shares, and would grant a slight discount 
(some EUR 55 million) 
if it exercised the option in the first six months. 
Subsequently, the Yapi 
Kredi Board (which was appointed by the BRSA in March 2004) 
said that it had 
final say over the shares' fate, and that it had not approved 
any such 
extension.   Most analysts have concluded that while 
technically true, the 
latter announcement is essentially irrelevant, since Koc will 
replace the board 
when the purchase is finalized, and it is doubtful the board 
would move on the 
sale in the interim. 
 
5. (U) The press has speculated that by purchasing the bank 
Koc was "killing two birds with one stone."  The move puts 
Koc into the banking big leagues and also positions itself to 
take over the Cukurova Group's telecommunications assets, Koc 
CEO Bulent Ozaydinli officially denied that goal in a 
February 3 press conference, however.  The bank purchase, he 
said, was simply aimed at raising the Koc Group's profile in 
the financial world.  While Koc is interested in 
telecommunications (and is partnering with Sabanci for the 
forthcoming Turk Telekom privatization), he said it does not 
intend to get into the sector by profiting from another 
group's misfortunes. 
 
6. (SBU) Comment: Much detail apparently remains to be worked 
out, and a number 
of important issues are still unclear, but indications are 
that the deal will 
move forward.  One senior executive in the bank told us that 
the process has 
been eased by the fact that four senior executives at Koc 
Financial Services, 
including the CEO, came up through the ranks at Yapi Kredi 
Bank, and had 
extensive familiarity with its operations up until the late 
1990s.  Most 
analysts are bullish on the acquisition, seeing speedy 
resolution of the Yapi 
Kredi ownership issue as good for Turkish markets and for the 
banking sector as 
a whole.  BRSA Chairman Tevfik Bilgin has several times told 
emboffs that Yapi Kredi is BRSA,s biggest concern, hinting 
that it was &too big to fail8.  If the Koc deal is 
finalized, it will be a major step forward in the long 
process of cleaning up the legacy of the 2001 crisis in the 
Turkish banking sector.  With the purchase, Koc will jump 
from 8th to 3rd in the ranks of Turkish banks, leap-frogging 
industry leader Akbank and trailing only Isbank and Halkbank. 
 One senior banking contact, however, who formerly headed the 
BRSA, warned us not to underestimate the challenge that Koc 
is taking on.  Up to now, he noted, Yapi Kredi has focused on 
maximizing its market share and not its profits.  (Kocbank, a 
third the size of Yapi Kredi, nonetheless 
outperformed it several fold in terms of profits in 2004). 
The challenge now, 
he said, will be to show that the bank can make money.  End 
comment. 
ARNETT