Half empty yet half full

Equity issuance in Turkey has ground to a halt in recent months, after a strong 2010. Prospects look good for the second half of the year and beyond, as long as the lessons of 2010 have been learnt. Nick Lord reports.

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Depending on whom you ask, Turkey’s equity capital markets are either doing quite well, or are stuck in the doldrums. This largely depends on the time frame in which you analyse the market. In 2010 there were 23 IPOs, a recent record, especially compared to 2009 when there were none. But in 2011, there have only been four, with a number of large-sized cancelations.

As far as Huseyin Erkan, chairman and CEO of the Istanbul stock exchange (ISE) is concerned, the market is coming along nicely. He points to a number of standout deals such as the first foreign listing by Austrian airline caterer Do & Co, and the huge success of Emlak REIT (see REIT article) as proof that the equity markets can deliver fresh capital to Turkish companies, while providing solid returns to international and local investors. But he does admit there have been problems.

First among these has been the relatively poor performance of the IPOs that listed in 2010. Of those that have listed, only a handful are above issue price, with the standout performer being Emlak REIT which is up 65% on issue price. But the more fundamental problem the authorities are trying to address is the creation of an equity culture among Turkish companies.

“Institutions are not doing enough to increase awareness of the benefits of IPOs,” said Erkan. “Secondly Turkey has been affected by the financial crisis in the rest of the world. However, companies do now realise the importance of the domestic capital markets because bank credit is not as easily accessible from abroad as before. So this leaves room for public offerings. “

Allowing the primary equity markets to flourish is as much a top down exercise in generating awareness as it is a bottom up exercise in completing successful deals. Overall, the prospects for Turkish equity capital markets are very good, said Erkan. “I have visited around 50 companies myself last year,” he said. “So in this way we have been able to bring in a large number of companies [to the market].”

But equity capital markets need both the supportive general environment as well as good particular deals. And in recent months weak global equity markets, especially in emerging markets, have combined with the poor performance of individual IPOs to cause the market to come to something of a standstill. This year there have only been four IPOs (at the time of going to press). Many sizeable deals that analysts were expecting have been shelved. Chief among these have been the IPO of local lender Finansbank, which at an anticipated US$1bn would have been the largest IPO in Turkey for five years.

Another deal the market is watching for is the IPO of low cost carrier Pegasus Airlines. The IPO will be led by Credit Suisse and Is Investments in a deal originally planned for the second half of 2010. Also in the airline space is a potential secondary sell down by the government of some of its 49% stake in Turkish Airlines. That deal has been derailed by a 40% collapse in the underlying share price caused by trouble in the Middle East and skyrocketing oil prices. The government has awarded the mandate to Unicredit and TSKB, largely in recognition of their success in the Emlak REIT transaction.

The timing of these deals has been their undoing. “Due to global market conditions affecting ISE, now is not the best time to go public,” said Haluk Bilgic, partner at the affiliate firm of international law firm Gide Loyrette Nouel in Istanbul. “A number of deals have been postponed.”

Two deals that did get away this year are in the retail sector, taking advantage of international interest in Turkey’s rapid overall economic growth (which came in at 8.9% in 2010). In January, retail group Kiler Holding sold 17.6m shares at the top of its TL5.3-TL6.1 guidance in a book that was 6.7 times covered. The TL107m deal was sold 55% to international institutions and 45% to local institutions and retail accounts and was led by local broker Oyak Yatirim.

Coming close on its heels was the IPO of local supermarket chain Bizim. This IPO priced near the bottom of its range of TL22.5-TL30 at TL25 a share, raising TL400m. The deal was led by Bank of America Merrill Lynch, with Standard Unlu as co-bookrunner, with 80% sold to international accounts.

Since the IPOs of both deals, Bizim is up 23% while Kiler is up a more modest 18%. The slight divergence in performance of the IPOs offers lessons as to what is needed for IPOs to be successful in the Turkish market. Firstly, deals over US$100m attract a much higher international institutional following. This allows the leads to restrict the primary distribution away from local retail and institutional accounts, which creates for strong demand in the aftermarket.

Secondly, it is important not to price at the very top of the range. In both the Emlak REIT and Bizim deals, enough was left on the table for secondary market demand to come in post-IPO.

Many Turkish bankers complain that one of their most difficult tasks is explaining to issuers that pricing at the top of the range is not necessarily the best tactic. Maximizing proceeds might work on the first deals, but it leaves the shares looking fully valued. Those issuers that have priced at the top have significantly underperformed those who did not.

“There were various contributing factors to the success - or lack - of IPOs last year in terms of aftermarket performance and a wide distribution,” said Kaan Basaran, CEO of Unicredit Menkul Degerler in Istanbul. “There was no single reason for some of the 2010 struggling IPO transactions. There was also bad luck.” Fortune did not smile on the IPO of Akfen Holdings back in February 2010. It had to be dramatically cut back when the deal team got stock in London due to the Icelandic volcano and then they had to price on the same day as the flash crash in the US (see article on Akfen Holdings).

Medium term potential

Going into the second half of the year and beyond, the Turkish equity capital markets look highly promising. The large deals that have been postponed from the first half will need to refile their IPO prospectuses if they don’t get them away by mid-May. According to the Capital Markets Board Rule 135a, they need to use their latest accounts for the IPO, which means that after May, they will need to use their 2011 interim numbers for the filing, which are due in June.

This coincides with the general election to be held on June 12. It is unlikely there will be any more issuance before that anyway, but once the election is held, and as expected the ruling AK Party regains power, the market is expected to open strongly. The political uncertainty surrounding the election has been compounded by unrest in Turkey’s neighbours. While most investors do not count Turkey as a Middle Eastern country (nor clearly as North African one), the country has suffered nevertheless. In recent years, many Turkish companies have expanded aggressively into these countries and companies such as Akfen Holdings have as a result borne material losses due to the fighting.

Turkey is also uniquely vulnerable to high oil prices, as it has to import all of its energy needs. This has caused a yawning current account deficit, which economists see as the biggest macroeconomic problem facing the country. Indeed, it is cited by most rating agencies as the main reason why Turkey might not achieve is heartfelt desire of being upgraded to investment grade status.

Once the unrest dies down, Turkey will be seen as cheap again and international equity investors believe the recent fall in share prices could reverse. “The continued correction is not primarily driven by the social unrest in MENA but rather investors’ concern about consistently high energy prices and their impact on Turkey’s current account deficit”, said Aziz Unan, fund manager of Griffin Ottoman Fund in London. “The market correction has now made valuations of a number of high quality companies in Turkey increasingly attractive, especially in euro terms. Thus, we will probably look to buy selective Turkish stocks that we like in the coming weeks and months.”

A Game of two halves

A potential pipeline of at least 12 IPOs worth a possible US$862m have filed for listing with the ISE, although this doesn’t include large deals such as the Finansbank IPO, and the secondary privatizations of Turkish Airlines and Halk Bank.

Going further out, deal flow will come from four key sources: privatisation related deals, subsidiary listings from holding companies, private equity monetisation exercises and SME listings.

After the election the government is planning on undertaking the next major push in its privatisation drive (see article page XX). This will see it sell almost all of Turkey’s power generation capacity, all its toll roads as well as other individual assets such as sugar factories and the national lottery. All of these deals will be trade sales, but the sums are so vast that winning bidders are likely to establish standalone companies (often as foreign local JVs), which will seek local market equity listings.

Turkish family conglomerates, known as the holding companies, are also likely to be a big source of deal flow. Traditionally, these holding companies did not like to IPO their subsidiaries but the need to find fresh equity for international expansion will send them into the arms of the public markets. For instance Turkey’s second biggest holding company Sabanci Holdings has announced that it will be undertaking three IPOs of some of its biggest subsidiaries over the next three years.

According to Zafer Kurtul, CEO of Sabanci, the first deal is likely to be the IPO of Teknosa, the country’s leading electronics retailer. Planned for the first quarter of 2012, this will tap into the strong international demand for exposure to Turkish retail. Also provisionally planned for 2012 is the IPO of its insurance subsidiary Avivasa, a JV with UK insurance group Aviva. Then in 2014 it is planning to list Enerjisa, the joint venture utility company it set up with Austria’s Verbund back in 2007. This company is actively bidding for power assets in the government’s privatization programme and hopes to have up to 5,000MW of installed capacity by 2015. Achieving that growth will require having substantial financial firepower, for which a public listing will be key.

Monetisation of private equity holdings should also serve up a rich source of potential deals going into 2012. According to figures compiled by Is Investment there were 27 private equity investments in 2007 and 38 in 2008, for a combined total of US$6.5bn. Given that most private equity firms look to exit their investment at around year five, this suggests a large number of potential transactions.

The equity capital markets will face strong competition from trade sales in this regard, given the greater certainty that such exits give the sponsors. This was seen early in 2011 when TPG decided to sell its local alcoholic beverage company Mey Icki to Diageo of the UK in a US$2bn trade sale, rather than going to the public markets. Given it made its original investment in May 2006, the time frame for more deals in early 2012 looks solid.

Finally there is the huge number of unlisted SMEs which the government is trying to lure to the public markets. Erkan at the ISE says that only 12% of the top 1000 companies in Turkey are listed. Persuading a small fraction of these to go public will significantly increase the liquidity of the local market.

Bringing the equity capital markets to the level they should be will not be without difficulties. Bankers need to work hard to persuade issuers to leave upside for investors in the IPOs. The government needs to do more work to develop a local institutional investor base. And Turkey, for all its domestic strength remains vulnerable to wider geopolitical risks. But perhaps the most important change is underway already: the development of a mindset that sees the public equity markets as a force for growth and capital, rather than losses and frustration.

“The Turkish business world has rediscovered IPOs,” said Bilgic at Gide Loyrette Nouel. “They were, until recently, not considered as a way of injecting cash into the company but companies are now persuaded that they can get cheaper funding through going public. As a result, many more deals are doable.”