Turkey: From strength to strength

Increased foreign mergers and acquisitions (M&A) activity and regulatory changes that encourage consolidation are expected to dramatically alter the commercial playing field in Turkey over the next several years.

A new commercial code coming into effect in July should increase and improve disclosure requirements, which should attract investor interest while pushing small and medium-sized enterprises (SMEs) toward mergers. At the same time, both incoming and outgoing M&As are at record highs.

“Turkey is not a fly-in, fly-out market, and it is important for investors to realise this,” Selcuk Yorgancioglu, the senior partner and head of Turkey, Iraq and Central Asia for Abraaj Capital, told OBG. “Turks want to see the time and commitment from investors. These expectations have resulted in a large number of M&A transactions and minimal greenfield investments, because the market is only understood by those who commit to being here.”

According to a report from Deloitte, a global professional services firm, Turkish companies were the targets of 241 deals in 2011, which surpassed a record set in 2010. Publicly disclosed deal values reached $11.9bn, and the audit firm estimated that including undisclosed values would put the total at around $15bn.

While this marks a significant decrease in volume from the estimated $29bn in 2010 deals, much of that volume came from energy privatisations that were never finalised, thus the actual amounts held steady in 2011.

The average deal size actually fell in 2011, from $140m to $62m, as the focus shifted to the acquisition of SMEs. Approximately 83% of the deals were for less than $50m, accounting for just 22% of total deal volume, while the top four deals represented 42% of the total.

These mega-deals came from across the economic spectrum: Vallares’ $2.1bn purchase of Genel Enerji, Diageo’s $2.09bn acquisition of beverage producer Mey Içki and the sale of Turkish insurance giant Acıbadem Sağlık Hizmetleri to Integrated Health Holdings for $1.26bn. The fourth was a privatisation of Istanbul’s IDO ferryboat company, which was sold to a consortium that included Turkish companies Tepe, Akfen and Sera, and the Scottish investment company Souter.

The lower level of privatisation activity decreased the overall volume of acquisitions, although the government’s transport plans indicate that 2010 may be a blip in this regard. On the docket for 2012 is the privatisation of 1139 km of roads and bridges across Turkey, including the two bridges spanning the Bosphorus Strait in Istanbul. Galataport, Istanbul’s cruise ship port, is also scheduled for sale later this year.

Electricity and gas distribution privatisations that were postponed in 2011 over a lack of funding will also be re-tendered in 2012. A report from PricewaterhouseCoopers has deemed the successful sale of any of the electricity grids “unlikely”, but views the tenders for gas distributers Başkent Gaz and IGDAŞ as having a greater chance of success. However, the combination of a worldwide credit crunch and regulatory uncertainty makes the availability of financing for these privatisation deals far from certain.

At the small- and mid-market level, however, where purchases require less capital, M&A activity is brisk. Deloitte reports that food and beverage, energy, manufacturing, and health care companies accounted for the most deals in 2011. Moreover, firms are looking to July 2012, when the new Turkish commercial code is expected to shake up the M&A field.

The regulations would require companies to have independent and qualified auditors, and force joint- and limited-stock companies to adhere to international financial reporting standards (IFRS). SMEs would be required to adhere to a simplified version of the IFRS, and mergers and other corporate transactions will follow EU regulations under the new regime.

The code is expected to boost M&A activity in a number of ways, primarily through the diminution of risk associated with increased transparency. The cost of compliance with the new regime has been estimated at $30,000-$60,000; while this may be small change for large businesses, it could be too costly for some SMEs, pushing them into unprofitability. As a result, M&As would be the natural outcome.

Finally, the growing strength of Turkish corporations is reflected in strong numbers for outbound M&A activity. Turkish acquisitions of foreign companies were at record levels for both number of deals and volume in 2011, with 25 deals worth $2.9bn. Two-thirds of the total value came from the largest Turkish acquisition in many years; beverage company Anadolu Efes purchased SABMiller’s Russian and Ukrainian holdings for $1.9bn.

Meanwhile, recent years in Turkey have seen the country’s largest brands become even bigger, such as Coca Cola İçecek’s purchase of its parent company’s Iraq and Turkmenistan holdings, or white goods manufacturer Arcelik’s acquisition of a South African brand.

Increased corporate expansion will likely position Turkish firms to benefit from the wave of mergers expected from the new commercial code. Foreign investors, who represented 74% of the total deal value of incoming acquisitions in 2011, will thus be competing with the rising strength of home-grown companies.

“Turkey has one of the best-regulated financial markets in this time zone, and a healthy and well-capitalised banking system,” Yorgancioglu said. “We expect M&A volumes to reach the level of continental Europe soon.”