Deutsche Bank has proven that if the structure is right, large-scale privatisations and emerging markets are still attractive. The emerging markets ECM team that drove through Türk Telecom’s deal in Turkey’s first IPO of the year talks to Edward Russell-Walling.

Get the equity story right and the rest will follow. It worked for Türk Telekom’s recent initial public offering (IPO), Turkey’s largest ever and its first of this year. Although this was a privatisation and a household name, the markets have not been kind to Turkish IPOs this year and Türk Telekom has got a history of failed ­privatisation attempts. The emerging markets equity capital markets (ECM) team at Deutsche Bank navigated those rapids to raise $1.9m for 15% of the firm, at a price near the top of the range.

 

Triumph for Deutsche (l-r): Gonzalo Garrigues, Robert Snow, Raj Batra, Marco Schwartz, Christopher Laing, Tolga Onel and Ahmet Tacer

After ending 2007 on a high, the Turkish equity market has had an altogether dismal year, falling more than 20% because of worries about political stability. That took its toll on two earlier would-be IPOs: one for Islamic bank Kuveyt Türk Bank and another for miner Koza Gold. Both were planned for February and were cancelled as the market descended.

Two months earlier, in mid-December, the Turkish government – which still owned 45% of Türk Telekom – issued a request for proposal (RFP) for an IPO on the Istanbul Stock Exchange. The investment banking community knew it was coming but was unaware of the detail. With Christmas already in sight, the prospect of spending the festive season writing an RFP should have prompted groans all round. “But it was quite exciting,” recalls Christopher Laing, Deutsche Bank’s co-head of emerging markets ECM. “We were on the lookout for higher-quality deals, ones that had a better chance of getting done.”

Need for speed

The government wanted to sell a 15% stake and one of its key demands was for speed of execution. It was under budgetary pressure and wanted to get its hands on the money before the end of this year – and preferably during the first half.

Deutsche’s first move was to find a local bank to team up with. It had a good relationship with Garanti Bank and the two had worked well together on the IPO of motor distributor Dogus Oto in 2004, so they joined forces for the telecoms pitch.

With the government wanting speed, Turkey’s Privatisation Administration pulled out all the stops to get it. A week after the RFP deadline, 10 of the world’s top investment banks were summoned to Ankara for interview. The process was squeezed into two days, so that many of the merchant bankers had the anxious pleasure of spotting their competitors on the same plane.

The Privatisation Administration said it would make a decision in a week. Elsewhere, that would usually translate into a couple of months but, sure enough, exactly one week later Deutsche learned that it had won the mandate. “That made us feel rather positive about the Privatisation Administration,” says Mr Laing.

It was mid-January and the considerable task of preparing for a May float began – the due diligence, the sign-offs, carrying out the research, finding the right comparables, drafting a prospectus. And there was no slacking at the company either.

Failed flotations

After two unsuccessful attempts at ­privatisation, in 2005 the government sold 55% of Türk Telecom to Oger, a Dubai-based investor. In 2006, Oger attempted its own IPO. It failed, for a number of reasons. While a stake in a Turkish telco was its prime asset, Oger had opted to list elsewhere, in Dubai. The pricing was overambitious. And given its relatively short period under Oger’s ownership, the telecoms business had yet to benefit from any major restructuring. But that has since been addressed.

“Five years ago, Türk Telecom was a government department with nearly 60,000 employees,” observes Robert Snow, the Deutsche Bank ECM vice-president who led the deal’s execution. “The company has gone through a rapid process of change – in reporting lines, accounting systems, financial controls and corporate governance – and employees are down to less than 40,000.”

As in earlier privatisations, the government wanted a meaningful tranche to go to Turkish investors; the traditional split has been 30% domestic to 70% inter­national. In this case, it was initially deci­ded to go for a 35% to 65% split, with ­­30% going to Turkish retail investors.

The question was how to position the company. What was the story? Like Turkey itself, Türk Telekom falls somewhere between the developed world model and a typical emerging market model. It is the dominant provider of fixed-line services, which contribute 82% of its turnover. Through its 81% stake in Avea, Turkey’s number three mobile operator, it also has a growing mobile business.

Different breed

“The company is one of the last of its breed,” says Marco Schwartz, Deutsche Bank’s head of equity syndicate for central and eastern Europe, the Middle East and Africa (CEEMEA). “European telcos have all gone through the cycle of leveraging off their fixed-line businesses to drive the higher growth mobile and broadband business and then suffering margin contraction because of greater competition in all areas. Pure emerging market plays, such as Africa, are almost entirely mobile.”

Deutsche Bank and Garanti, together with Merrill Lynch and ING, who joined the team later as lead managers, pitched Türk Telecom as occupying a sweet spot between these two extremes. “The company is creating significant cash flow out of its fixed-line business, while at the same time buying into the growth of broadband and mobile,” Mr Schwarz explains. “And, if you believe that it will follow the model of European telcos, it will enjoy significant scope for mobile and broadband expansion.”

International audiences

This message was directed at two principal international audiences: emerging markets specialists and global telecoms specialists. The story was of an emerging markets play but one that was much ­further along the road to the established European model than most. And telecoms operators are among the first beneficiaries as emerging markets mature.

A two-week roadshow began in late April, taking in Europe, the US and, importantly, the Middle East. Türk Telecom CEO Paul Doany clearly impressed investors with both his strategic view and his communication skills. “On the roadshow, management is one of the key assets that the company uses to sell itself,” Mr Schwarz says. “If they are perceived as weak or they can’t communicate, that’s a severe handicap in these markets. Paul was gold dust in talking about how the company is run.”

Management may have been a marketing plus but the markets were less helpful. The share price of Turkcell, the mobile market leader and one of the key comparable stocks for valuation purposes, fell by nearly 30% during the marketing phase. Ironically, this may have been partly because investors were shedding the stock to make room for Türk Telecom, although the company had also suffered a dip in subscribers.

By the time the shares were priced in mid-May, however, the team was able to lock into the higher end of the Tl3.90 to Tl4.70 marketing range, at Tl4.60 ($3.7). The issue raised Tl2.4bn and valued the company at Tl16bn. The final domestic allocation was increased to 40%, 33% with retail investors. Middle East investors took the largest slice of the remainder at 20%, followed by the UK at 19% and the US at 7%. The shares traded up slightly for a few days but have since fallen along with the rest of the Istanbul market.

Satisfying outcome

The Turkish government will have taken considerable satisfaction from the outcome. “Given the recent volatile environment, the government was keen to send a message to the markets that it remained committed to its economic reform agenda,” says Tolga Onel, the Deutsche Bank director responsible for Turkish coverage. “This IPO is one of the ways that it is achieving its objectives.”

Mr Onel believes that the offering’s success will now prompt other Turkish companies to try to come to market.

“It shows that large-scale privatisations are still attractive – and that emerging markets are still attractive,” Mr Laing says. “But deal structure is important and, if you don’t tick all the boxes, you will fail,” he warns.

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