assessments

Mar 22, 2001 | 06:00 GMT

4 mins read

Turkey's Telecom Fire Sale

Summary

Turkey has redoubled efforts to privatize its landline monopoly, Turk Telekom. After failing to sell off a minority stake last year, Ankara sweetened the deal by granting the company a mobile (GSM) license and increasing the share to be privatized. But because of the ongoing financial crisis and a slowdown in the global telecom industry, Turkey will probably have difficulty attracting investors. With the IMF demanding progress in privatization, Turkey will likely be forced to part with Turk Telekom for less than its market value.

Analysis

Ankara is moving aggressively to privatize state-owned telecommunications giant Turk Telekom. New Economy Minister Kemal Dervis announced March 14 Ankara will increase a planned privatization stake from 33.5 percent to a controlling 51 percent. From the seller's perspective, the privatization couldn't come at a worse time. Turkey is in turmoil, international telecommunications companies are loaded down with debt and the global economy is slowing.

Turk Telekom, valued at $10 billion by Goldman Sachs two years ago, would be Turkey's largest privatization. With 18 million customers and a fixed-line capacity of 20 million, TT posted sales of $3.3 billion and profits of $745 million in 2000. TT has a monopoly on fixed-line service, which it must surrender in 2004, and also controls the fiber-optic cable network used by all mobile operators in Turkey.

The country's telecommunications market is growing rapidly. The U.S. Department of Commerce (DOC) valued Turkish telecom services at $3.1 billion in 1998 and projected a 12 percent annual increase. In cellular usage alone, Turkey has far exceeded growth estimates. Turkcell, Turkey's leading global system for mobiles (GSM) operator, boasted 10 million subscribers in December 2000. Turkcell has a 65 percent market share, meaning Turkey's total wireless market now approaches 15 million, far surpassing 1998 DOC estimates of 12 million subscribers by 2005.

Despite its size, the market is underdeveloped. Turkey's 25 percent basic telephone density in 1997 was far below the European average, as was its 2.5 percent cellular density. The sector's lack of development demonstrates its potential for growth, given the country's large, youthful population and future technological needs as it integrates, presumably, with the EU.

To sweeten the pot for potential investors, Ankara awarded Turkey's fourth GSM license to Turk Telekom last September. TT contracted with Siemens and Ericsson in February to build a new GSM network infrastructure for an estimated $100 million. With new infrastructure and its existing market share in traditional service, TT should be well positioned to compete with the country's other three cellular providers. And, considering its monopoly position and Turkey's market potential, Turk Telekom seems like an easy sell.

But obstacles exist. The global telecommunications sector woke up with a nasty hangover a few months ago, resulting primarily from a spending spree on third-generation mobile licenses. Shroder Salomon Smith Barney reported in January that indebtedness drove down share prices for the average European telecommunications company by 40 percent last year. The merger mania that swept the industry for the past few years is over.

Political and economic uncertainty further compound a pessimistic outlook. Financial crises in November and again last month led to steep drops in the Turkish stock market and the lira, which dropped 30 percent against the dollar in three weeks. Turkey's banking and financial systems are shaky, as is Ankara's ability to service an estimated $15 billion in foreign debt. The United States and the EU have yet to offer much more than moral support, and, after 17 failed financial rescue programs in Turkey, the IMF is balking at supporting a bailout without serious structural reform.

One such reform is the privatization of Turk Telekom, which Ankara agreed to last year as part of a three-year disinflation program. In order to get back into the IMF's good graces - and to access $6.25 billion dollars in outstanding loans - Turkey may be willing to sacrifice Turk Telekom. A successful sale would send a much-needed positive signal to global capital markets. Such a sale would also generate billions of desperately needed dollars for the treasury.

Turkey failed to receive bids last September for a 20 percent stake in the company, in large part due to concerns over management control. The Middle East Economic Digest reported the Turkish Privatization Administration had not received a suitable bidder for the 33.5 percent stake as of March 2. With bids due by March's end, officials apparently decided to deal directly with the control issue by offering a majority stake.

This does nothing to address concerns over Turkey's stability or the depressed state of the global telecom market. Nevertheless, pressure on Ankara is intense and should lead to generous selling terms. Ankara may be forced to part with Turk Telekom for far below its market value. So there may be a good deal out there, if anyone is feeling lucky.

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