A consortium including Goldman Sachs won the mandate for a strategic review and IPO execution for Turkey’s state-owned Halkbank. A tight schedule for US distribution and a political/religious row that spilled volatility into the Istanbul stock market failed to derail the sale. Edward Russell-Walling reports.
Even if the Turkish economy could promise investors a smooth ride – and there are certainly no guarantees in that department – Turkish politics would always have a firecracker up its sleeve. Yet the recent initial public offering (IPO) of Halkbank revealed a robust appetite for the right Turkish story at the right time, notwithstanding political turbulence. It also provided a glimpse of the concentrated co-ordination and plain hard work required to meet the tight schedules now forced on international equity issues looking for US distribution.
The Halkbank transaction brought together two prominent Turkish economic themes, each urged upon the nation by the International Monetary Fund (IMF) in the wake of the 2001 financial crisis: the rehabilitation of the banking sector and privatisation. And it gave Goldman Sachs, which has been highly visible in the local banking and telecoms sectors for much of the past decade, another opportunity to polish its Turkish credentials.
Beset by capital deficiency and related party lending, Turkey’s banking sector all but collapsed in 2001, along with the economy at large. Under the aegis of the Banking Regulatory and Supervision Agency (BRSA) and the Savings Deposit Insurance Fund, it has since been restored to a measure of health, with closures and mergers halving the number of surviving institutions. As part of its undertakings in return for IMF support, the government promised to privatise the two state-owned commercial banks: Ziraat, the agricultural bank, and Halkbank, founded in 1938 to support small and medium-sized enterprises (SMEs).
Walking on eggshells
Given the political sensitivities over privatising Ziraat – even the chairman of the BRSA has publicly opposed it – Halkbank was clearly the easier prospect. Turkey’s Privatisation Administration issued a tender for advisers early in 2006 and Goldman Sachs pitched as part of a consortium with what is now UniCredit Markets & Investment Banking, and I¾ Investment, Turkey’s largest brokerage firm. They won a mandate not only to prepare a strategic review but also to execute the eventual transaction.
“We were asked to specify the options for Halkbank, with their pros and cons, but not to make any recommendation,” says Husnu Okvuran, Goldman’s investment banking managing director who became responsible for the IPO’s execution. “We reported to the Privatisation Administration in June 2006 and, once the favoured option was selected, we were told to go ahead and execute the strategy.”
SME champion
Although not the largest bank in Turkey, Halkbank has a valuable franchise among the country’s SMEs, tradesmen and artisans. It ranks seventh in terms of total assets, with Tl33.8bn ($19bn) and fourth in deposits (Tl19.9bn). With more than six million customers, it is one of only four banks with a branch in every Turkish city.
In 2004, as part of the banking reform process, Halkbank acquired Pamukbank and, with it, greater retail strength as well as a more advanced and flexible IT infrastructure, which has since been adopted throughout the bank. It plans to grow its SME business and its share of retail banking, partly by increasing its product range and cross-selling to existing customers.
In August 2006, the Privatisation High Council, consisting of the prime minister and five ministers, decided to pursue the privatisation of Halkbank via a block sale of up to 100% of its shares. This would have had the potential advantage of disposing of the asset and discharging the government’s obligations in a single transaction. The downside was that, given Halkbank’s size, only a few banks would be large enough to digest it and there was no existing price benchmark.
Nonetheless, the bank and its advisers began to prepare for a trade auction and started preliminary discussions with several possible trade buyers. “These discussions were mainly to explain the Turkish auction process before it started,” says Mustafa Bagriacik, Goldman’s relationship banker in charge of Turkish coverage.
“Once the rules for bidding have been set, there is no flexibility or discretion,” he says. In essence, this meant that once the process was under way, the Turkish authorities could not turn away bidders simply because they did not like the look of them.
Turkish privatisation law insists on a mercilessly transparent process, regardless of the route. Even so, at the start of 2007 – an election year – the government decided that it would prefer an IPO, not least as a way of establishing a price. By then it knew that there would be interest in buying the stock.
“They needed to do it by May,” says Richard Cormack, head of European emerging markets ECM at Goldman Sachs. “When you sell securities to US investors under Section Rule 144a, you can’t close the transaction more than 135 days after the last financial reports were signed off.” For any company with a December year end, that means going to market before mid-May, when the numbers go ‘stale’.
It is a tight window. As it will take anything from 60 to 90 days to draw up the transaction (in Halkbank’s case, this included securing the passage of various pieces of legislation), that leaves as little as 45 days to market the deal, with everything that entails. And because US investors are vital to the success of any large IPO, the window gets pretty crowded.
When the Halkbank offer was being marketed, it jostled with three other big emerging Europe deals: VTB, AFI Development and Pharmstandard. Between them, the four companies raised nearly $12bn in just nine days. “It’s a high-wire act,” Mr Okvuran observes.
It was decided that 25% of Halkbank, would be offered within a price range of Tl6.4-Tl8 per share, listed in Istanbul. “We were confident we could do it on the Istanbul Stock Exchange only – and if you can avoid a dual listing, you do,” Mr Cormack says.
The story the team told to investors was of a bank in good shape, showing 24% return on equity, with a strong franchise in the SME market and in deposit-taking, and one that was a scarce asset in a promising economy. In the fortnight before pricing, the roadshow met more than 180 investors in seven countries. The investors were impressed by the bank’s management, despite the fact that not all of them spoke English.
Then, halfway through the roadshow, Turkish politics (and religion) intruded in the most dramatic way. In a row over election nominations for the next president, the Turkish military threatened to intervene and a wave of selling hit the Istanbul market. Under Turkish law, however, the Halkbank pricing range could not be changed. “We knew the election could be volatile, but we had felt the price range was achievable and could withstand a bit of volatility,” Mr Cormack says.
And so it proved. The offer was priced at Tl8, at the top of the range, valuing the company at $7.5bn, compared with earlier market predictions of $5bn.
Successful sell out
Turkish retail investors bought the full 30% of the issue that must be offered to them by law. Turkish institutions (described by one banker as “still very nascent”) bought a mere 0.5%. International institutions, led by the UK and followed by the US, continental Europe and the Middle East, took 69.5%, and their demand was 10 times the amount of stock available to them. The shares have since traded up by 10%-15% – not so much as to make the offer price seem misguidedly cheap.
“The Turkish market opens and closes, and there has not been a lot of issuance since the currency crisis in May last year,” notes Mr Cormack. “But this showed that the right Turkish story can attract a lot of international liquidity. It showed that Istanbul can support a very large transaction – this was the largest by 50% on the Istanbul Stock Exchange only. And it showed that the Turkish market can support sizeable retail placings – the retail offering achieved more than twice the previous record subscription level.”
Goldman Sachs: standing: (left-right) Tolga Sengel, Arnab Bhattasali; sitting: (l-r) Scott Convery, Gunnar Lange, Richard Cormack, Husnu Okvuran, Daniel Martin, Mustafa Bagriacik
