US embassy cable - 05ANKARA5352

UNCLAS SECTION 01 OF 03 ANKARA 005352 
 
SIPDIS 
 
TREASURY FOR CPLANTIER AND MNUGENT 
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK 
DOE FOR CHUCK WASHINGTON 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EPET, ENRG, EINV, KTDB, TU 
SUBJECT: TURKEY'S REFINERY PRIVATIZATION: ANOTHER CROWN 
JEWEL IS SOLD AT A GOOD PRICE, BUT THE FAT LADY HASN'T SUNG 
 
REF: a) Ankara 269, b)Ankara 3258 
 
This cable has been coordinated with Congen Istanbul. 
 
1. (SBU) Summary: Turkey's Privatization Authority seems to 
have taken another important step forward, with a Koc 
Holding - Shell consortium committing to pay a higher-than- 
expected $4.14 billion for a 51 percent stake in TUPRAS, 
Turkey's state-owned monopoly refiner.  Given past court 
rulings against privatization decisions, and in light of 
current challenges to the recent Turk Telekom tender, it is 
early to call the TUPRAS privatization a done deal. 
However, the GOT is showing it is pushing ahead--despite 
controversy--on major privatizations and has a reasonable 
chance of consummating one or both of these large 
transactions.  End Summary. 
 
2.  (SBU) In a remarkably transparent televised process, 
reminiscent of that for Turk Telekom three months ago, a 
consortium of domestic giant Koc Holding and Shell won the 
privatization tender for TUPRAS, committing to pay USD 4.14 
billion for a 51% share of the refiner.  Surpassing all 
expectations, the winning tender represented a $8.2 billion 
valuation of the company, a 79% premium over current market 
capitalization.  There was broad domestic and foreign 
representation in the nine consortia bidding in the auction. 
Losing bidders included Turkey's military pension fund and 
industrial group OYAK, Italian ENI, Hungarian MOL, Austrian 
OMV, Indian Oil/Calik Enerji, Polish PKN Orlen/Zorlu, a 
Petrol Ofisi-led group, and Anadolu/Cukurova.  The auction 
price commenced at USD 2.78 billion, increasing in bidding 
rounds up to USD 4.14 billion.  Traded TUPRAS shares 
increased 9.18 percent at the opening of the equity market 
September 13 (Note: 49 percent of TUPRAS shares are traded 
on the stock exchange.  The state's share in the company 
decreased to 51 percent through small IPO's since 1991. End 
Note). 
 
3. (SBU) The TUPRAS privatization gained a record level of 
international interest (however without any U.S. interest), 
and was the second in pricing following the Turk Telekom 
tender in July this year.  The wining consortium consists of 
Koc Holding (80 percent) and Koc related energy companies 
(Aygaz 7 percent, Opet 3 percent); Shell Overseas INV BV 
(9.9 percent); and the Shell company of Turkey Ltd (0.1 
percent).  Following the auction, Koc Holding Energy Group 
head Erol Memiogli said Koc Holding would aim at becoming a 
regional energy player.  He said they would establish a big 
retail distribution chain together with TUPRAS, 
Opet(domestic retail gasoline company and Aygaz (household 
type liquid gas).  Memisoglu said the consortium had not yet 
decided on how to make the payment as the process had not 
been finalized. 
 
4. (SBU) A previous attempt to privatize TUPRAS via sale of 
a 65 percent stake in 2004 was annulled when Turkey's top 
administrative court, Danistay (Council of State),ruled that 
the Privatization Administration (PA) failed to adhere to 
the privatization process requirements.  A joint venture 
between Russian Tatneft and local group Zorlu had won the 
tender for a $1.3 billion sale price.  The court ruling 
responded to a case brought by the Petroleum Labor Union 
representing TUPRAS employees. 
 
Market Analysts of Two Minds: 
---------------------------- 
 
5. (SBU) Market analysts we queried are of two minds about 
the result.  Given the heavy foreign interest in Tupras, 
Turk Telekom, and the forthcoming Erdemir privatizations, on 
the one hand they view the price as indicative of a paradigm 
shift for Turkish assets, in that both local and 
international players have made the "strategic decision" to 
invest in Turkey and are "ready to pay the price" to do so, 
even when it involves a significant premium.  The Tupras 
outcome already has led one brokerage, EFG Istanbul 
Securities, to upgrade its target valuations for other 
Turkish assets, and to predict that the enthusiasm is 
"unlikely to subside." 
6. (SBU) Analysts are not sure, however, whether the Tupras 
deal itself makes economic sense.  Murat Gulkan of Bender 
Securities noted to us that it is "hard to justify" the 
auction outcome in comparison to pre-auction market cap, and 
that the "scope for error is huge" in proportion both to 
Koc's funding resources and its own market cap.  He conceded 
that money is cheap and funding is readily available, but 
stressed that the size of the financing requirement is such 
that it will require Koc to provide greater collateral and 
stricter covenants than it traditionally has for other 
financing.  These concerns were reflected on the Istanbul 
Stock Exchange on September 13, as Koc shares closed down 
nearly 10 percent, and led Bender to downgrade Koc to a 
target 5 percent below even that closing level.  Even 
analysts who see a natural fit between Shell and Koc's 
distribution network for petroleum products and Tupras, such 
as EFG, note that the "high price paid may be hard to 
justify in the short term." 
 
Privatization Process - Next Steps 
---------------------------------- 
 
7. (SBU) The Tender Committee will send the tender result 
first to the Competition Authority for its view (30 day 
limit), and then to the Privatization Supreme Council for 
its approval.  The consortium would then establish a company 
to put in place the share transfer agreement, and TUPRAS 
privatization process would be finalized.  Despite Shell's 
retail presence in the Turkish market, the general view is 
that the sale would not be in conflict with the competition 
rules.  Arzu Atik from the PA told econ specialist that, 
assuming the Shell share stayed at 10 percent, the PA 
expected a positive view from the Competition Authority 
(Note:  Following the decision to sell the all public stake 
in TUPRAS in March 2005, the PA established a C-type 
privileged "Golden Share" belonging to the Privatization 
Authority, which can be exercised at the discretion of the 
Turkish Military.  The Golden share will remain unless 
annulled by the Privatization Supreme Council, and the PA 
will appoint a board member to represent the share. End 
Note). 
 
8. (SBU) The PA believes newly-crafted legislation 
supporting the privatization process will reduce the 
potential for a legal challenge like that which led to the 
cancellation of the 2004 privatization of TUPRAS.  On the 
other hand, the Petrol-Is labor union immediately announced 
that the union would apply to the Danistay for cancellation 
of the TUPRAS sale. 
 
9. (SBU) TUPRAS dominates the petroleum refining and 
downstream operations sector in Turkey.  The company has 
four main refining complexes: Batman in the Southeast, 
Aliaga near Izmir, Izmit near Istanbul (the country's 
largest refinery), and the Central Anatolian Refinery at 
Kirikkale near Ankara.  In 2002, TUPRAS' share of the 
Turkish fuels and lubricants market was around 78 %, with 
other major retailers including BP, ExxonMobil, 
TotalFinaElf, Agip, and ConocoPhillips.  TUPRAS is Turkey's 
largest company in terms of revenues. 
 
10. (SBU) Comment: A favorable economic environment in 
Turkey, the EU process, global tight refinery capacity, and 
lively domestic and foreign interest in Turkey in general 
and in this particular deal in particular generated a hefty 
auction price.  The Privatization Authority has achieved a 
banner year, holding-but not finalizing-- tenders totaling 
$13.9 billion, and striving to make its privatization 
transactions less subject to judicial attack, but it still 
must bring to closure the big Turk Telekom and TUPRAS deals. 
The apparent success of the privatization efforts are 
indicative of steady improvement in investors' perception of 
Turkey's investment environment.  Turkish economic 
nationalists, who feared delivering the TUPRAS "crown jewel" 
to foreigners, may be more comfortable with majority control 
by an important domestic interest, the Koc Group.  On the 
other hand, the very small foreign share in the winning 
consortium will mean only a small increase in Foreign Direct 
Investment. 
 
 
McEldowney