US embassy cable - 05ANKARA6065

UNCLAS SECTION 01 OF 03 ANKARA 006065 
 
SIPDIS 
 
TREASURY FOR CPLANTIER 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: KPRV, EFIN, ECON, BEXP, EIND, EINV, TU 
SUBJECT: MILITARY PENSION FUND WINS STEEL PRIVATIZATION 
TENDER 
 
REF: Ankara 5352 
 
This cable was coordinated with Congen Istanbul. 
 
1. (SBU) Summary: On October 5, the Turkish Privatization 
Authority held a tender auction for another "Crown Jewel," 
the state-owned steel company, Erdemir (Eregli Iron and 
Steel Industries of Turkey). The OYAK group, the military 
pension fund with diversified industrial holdings, won the 
auction by bidding $2.77bn for 46.12% of the company. The 
final figure was higher than expected.  If this tender and 
those of Turk Telekom and Tupras are finalized, the 
privatization program will have taken a huge step forward. 
With the sale of Erdemir, the total value of privatizations 
in the past 12 months has reached approximately $20bn, 
though most of the deals await final regulatory approval and 
the payments will be spread over several years. The fact 
that both Tupras and Erdemir were won by local groups will 
mean little increase in Foreign Direct Investment in the 
balance of payments.  Moreover, the wins by dominant local 
groups without expertise in steel or oil refining suggests 
economic nationalism may have played a role.  End Summary. 
 
--------------------------------------------- ----- 
Oyak Bids Aggressively and Wins the Tender Auction 
--------------------------------------------- ----- 
 
2. (SBU) On October 5, in another tender auction broadcast 
live on television, the Privatization Authority (PA) sold 
46.12 percent of Erdemir to the military pension fund (Oyak) 
for 2.77 billion USD.  Together with the 3.17 percent share 
in Erdemir held by the Turkish Development Bank (TKB), which 
will be sold to the winner of the tender, the total bid 
amount went up to $2.960 billion, valuing Erdemir at $6.8 
billion -- an 83% premium over its current market valuation. 
 
3. (SBU) The high valuation continued a pattern: both the 
Turk Telekom and Tupras (oil refinery) tenders had achieved 
higher-than-expected prices.  This reflects both current 
investor bullishness on Turkey, but also the PA's process 
which, once companies are pre-qualified (short-listed), 
drives up the price through open bidding, with price the 
sole criteria.  The transparency and the high bids are 
helping the GOT deal with anti-privatization popular 
opinion.  Although the critics try to argue that state 
assets are being sold too cheaply, the higher-than-market 
prices render this argument a hollow one.  Nevertheless, the 
Black Sea community of Eregli, home of Erdemir's 
headquarters and most of its production, has been boiling 
with anti-privatization sentiment, including legal 
challenges from the local chamber of commerce and the labor 
union, as well as demonstrations.  The CEO of Erdemir, a 
career company executive generally credited with restoring 
the company to profitability after he took over from a 
political appointee, resigned this summer out of opposition 
to the policy of selling a profitable state-owned company. 
 
4. (SBU) Although 13 consortia purchased the privatization 
bid document for Erdemir, including U.S. Steel, only 6 
groups actually competed on October 5.   Big foreign steel 
companies like Luxembourg-based Arcelor and Indian-British 
Mittal; as well as Russian steelmaker Severstal, which had 
teamed up with a local consortium, bowed out during the 
auction when faced with aggressive bidding by Oyak and by a 
consortium of local companies led by TOBB (Union of Chambers 
and Commodity Exchanges of Turkey). 
 
----------------------------------------- 
Economic Nationalism Raises its Ugly Head 
----------------------------------------- 
 
5. (SBU) More than the other recent privatizations, the 
possibility that Erdemir might fall into foreign hands had 
set off a wave of nationalist hand-wringing in recent 
months.  The fact that a group of companies who buy 
Erdemir's steel combined under TOBB's leadership to act as a 
"national champion" was symptomatic.  TOBB, which claims to 
be in favor of foreign investment and has been a key 
constituency in support of the economic reform program, 
revealed deep-seated nationalist reflexes, going along with 
local businessmen's claims that a foreign owner might close 
Erdemir in a global downturn of the steel market, or fail to 
supply Turkish industry in a tight market. 
6. (SBU) In the end, TOBB Chairman Rifat Hisarciklioglu, 
even though his group lost out to OYAK, gushed with 
nationalist pride that Erdemir had not fallen into foreign 
hands, publicly saying he was glad the Turkish flag would 
still fly over Erdemir.  Hisarciklioglu's tone was also 
reflected in much of the press coverage of the tender.  Oyak 
President Coskun Ulusoy, in his remarks that followed the 
auction, hinted that the Group was open to partnership in 
Erdemir.  According the tender document Oyak cannot lay off 
any workers in the next two years, and is required to invest 
a minimum of USD 2.5 billion in three years.  Unlike most of 
the other bidders, Oyak Group has no experience in the steel 
sector except as a customer through OYAK-Renault, a joint 
venture in Turkey of the French car manufacturer Renault. 
 
----------- 
Who is OYAK? 
----------- 
 
7. (SBU) International observers have long debated how to 
view OYAK. Is it the military's way of exerting influence in 
the economy or is it, as OYAK executives insist, a true 
pension fund that has invested in industrial assets because 
of the small size of Turkish financial markets?  Huseyin 
Kelezoglu, an equity analyst at an Istanbul brokerage, told 
econoff he would not rule out that some of Oyak's motivation 
may have stemmed from the military's desire to keep Erdemir 
Turkish.  Kelezoglu was careful, however, to say the GOT's 
only interest was to sell to the highest bidder.   Opinion 
is divided on OYAK.  The group's executives have business 
backgrounds and we understand the military leadership lets 
the businessmen run the company.  Two of OYAK's executives, 
including the CEO, have strong U.S. connections: the CEO is 
married to an American and one of the Executive Vice 
Presidents used to be a business school professor in the 
U.S. 
 
---------- 
Next Steps 
---------- 
 
8. (SBU) The PA will send the tender decision to the 
Competition Authority (CA) for its review. The Competition 
Authority (CA) will have three weeks to rule on the 
transaction's compliance wtih competition law. Once the 
transaction is cleared by the CA, it will move to the 
Supreme Privatization Council for its ruling.  As with Turk 
Telekom, the Erdemir transaction includes a "golden share" 
to protect the continuity of the company.  The PA will 
appoint a board member representing this share in Erdemir. 
------- 
Comment 
------- 
 
9. (SBU) The Privatization Administration is on a roll: 
after years of failed privatizations there have been three 
highly-successful tenders of flagship companies which seem 
to be on their way to a successful conclusion.  If these 
transactions are finalized, Turkey will have taken a major 
step away from its dirigiste, state-dominated past. 
 
10. (SBU)  On the other hand, the fact that two out of the 
three transactions were won by major local groups, will mean 
little new Foreign Direct Investment in the balance of 
payments, unless Koc expands Shell's role in Tupras and/or 
Oyak brings in an international steel group.  The balance of 
payments is, however, likely to benefit from increased long- 
term borrowing from abroad to finance the acquisitions -- 
preferable to the current reliance on short-term portfolio 
investment to finance the current account deficit. 
 
11. (SBU) The wins by Koc and OYAK also raise suspicions 
that economic nationalism, in one way or another, played too 
much of a role in the outcome.  It seems unlikely that the 
PA rigged the bidding, but Oyak in particular may have bid 
too aggressively for reasons other than the profit motive. 
Huseyin Kelezoglu told econoff Koc only thinks in terms of 
business, but he went on to say Koc, as one of Turkey's 
largest groups, felt it had to get a piece of the 
privatization action, which is not the same thing as 
focusing on return-on-equity. 
 
12. (SBU) American and most European corporations have long 
since abandoned the diversified conglomerate model, but it 
is alive and well in Turkey, personified by groups like Koc, 
Sabanci, Dogan and OYAK.  The large number of joint ventures 
between these groups and foreign multinationals demonstrates 
that foreign groups need a local partner to run interference 
with non-transparent and anti-foreigner courts and 
regulators.  This legacy of Turkey's closed-economy days is 
outmoded, but these private groups are still preferable to 
state control, so the privatizations are unquestionably a 
net plus. 
 
McEldowney