This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ISTANBUL 000276 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB, CBED, EB/IFD AND EUR/SE 
DEPARTMENT PASS OPIC, NSC FOR BRYZA 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
USDOE FOR CHARLES WASHINGTON 
TREASURY FOR OASIA - MILLS AND LEICHTER 
 
 
E.O. 12958: N/A 
TAGS: ENRG EINV ECON PREL TU
SUBJECT: ZORLU CFO OUTLINES THE GROUP'S TUPRAS PLANS 
 
 
REF: A. ISTANBUL 90 
     ¶B. ANKARA 433 
 
 
¶1.  Sensitive but unclassified - not for internet 
distribution. 
 
 
¶2.  (SBU) Summary: In a February 18 meeting with Econoff, 
Zorlu Group Chief Financial Officer Cem Koksal outlined the 
group's strategy for completion of the purchase of the 
Turkish refiner Tupras, predicting agreement with Turkey's 
Privatization Administration on a 60-day timeline for 
conclusion of the final share purchase agreement in coming 
days.  Koksal stressed that Zorlu entered the deal on the 
basis of equality with its Russian partner, Tatneft (which 
participated in the tender through a German subsidiary-- 
Efremov), and will contribute half of the purchase price.  He 
dismissed questions that have been raised about the partners' 
ability to finance the deal, suggesting that the two 
companies will pay half of the 1.3 billion USD purchase price 
in cash and will finance the remainder through a consortium 
of Turkish and international banks.  Given existing 
management's ongoing 750 million USD investment program at 
Tupras, Koksal sees little need for the immediate injection 
of additional funds, though the new owners will try to speed 
up implementation of the program to ensure that the refinery 
meets E.U. standards when they come into force next year. 
End Summary. 
 
 
¶3. (SBU) Finishing Touches: Accepting congratulations on the 
group's success in the Tupras tender, Koksal noted that the 
timeline for completing the share purchase agreement between 
the winning bidders and the Turkish Privatization 
Administration should be finalized in coming days.  He noted 
that Zorlu's Russian partner Tatneft had initially wanted a 
90 day term, but would compromise on 60 days (in place of the 
usual 45).  He stressed that although Zorlu entered the 
process on the basis of full equality with Tatneft, and will 
split the purchase price 50-50, initially it will only have a 
minority 49 percent stake.  He ascribed this complication to 
the fact that Tatneft's initial bid envisioned a 51 percent 
share for Tatneft, and that this cannot be changed until the 
process is completed.  Any attempt to do so, he noted, would 
spark negative publicity that the group wants to avoid, 
particularly given the complaints about the process already 
voiced by the losing Cukorova Group.  It might also provide 
ammunition for legal challenges that will be mounted by labor 
opponents of the sale. 
 
 
¶4. (SBU) Financing: Koksal said that Zorlu and Tatneft will 
each put in 325 million in cash for an initial 650 million 
USD  downpayment, and will finance the rest from a consortium 
of Turkish and international banks.  The partners intend to 
pay the entire amount up front, he indicated, to "put to 
rest" rumors that the companies may not be able to meet their 
obligations, though he emphasized that they did not expect to 
receive a discount in the purchase price from the PA for 
doing so.  He noted that the financing on the installment 
plan offered by the PA, at 7 percent, was too high, and that 
since the group would need to finance the remainder in any 
case, it is better to do so in today's "bullish" markets. 
Koksal added that some part of Zorlu's downpayment would also 
be financed, though the bulk would come from contributions 
from various group companies.  Turkish banks, he said, are 
very interested in the deal, since they currently enjoy a 
strong equity base with excess liquidity.  They are also 
attracted by the prospect of regular business from Tupras, 
given that its banking activities will be channeled through 
financing banks.  Koksal noted that the group's financing 
focus is currently on large Turkish banks like Garanti and 
Isbank; the group's Denizbank will not participate to avoid 
any appearance of connected lending, and they would prefer to 
avoid using industry leader Akbank, with which the group does 
not have an existing relationship. 
 
 
¶5. (SBU) Tatneft: Koksal expressed little concern about the 
various legal challenges Zorlu's Russian partner faces, 
suggesting that such legal processes as shareholder 
consultation were required only if the company had 
participated directly in the tender.  Instead, by using its 
German subsidiary, Efremov, it had effectively shielded 
itself from these legal requirements.  Once the deal is 
completed, however, it would assume direct responsibility for 
it.  He hailed the project, suggesting that it represents 
Russia's biggest overseas investment and is equal in scope to 
the Blue Stream project.  He added that Tatneft's interest in 
Tupras stems in part from recent delays on the Bosporus, in 
that Tupras shipments are able to "jump the queue" and sail 
directly to the company's Izmit refinery.  The ability to 
avoid these delays was a powerful incentive for Tatneft, as 
is the fact that as part of the purchase the partners agreed 
that assuming that pricing and quality are equal, Tupras will 
first purchase oil from Tatneft.  (Earlier, managers at 
Ditas, Tupras' tanker company, had told us that the company 
only sources 2.5 million tons of oil each year from Russia, 
with the bulk of its supplies coming from Iran and Syria.) 
 
 
¶6. (SBU) Labor woes: Koksal conceded that the purchase will 
confront challenges from organized labor, which he attributed 
more to the fear of the petroleum workers union (Petrol-Is) 
that it will continue to lose power and influence than to 
concern about job losses.  In fact, Koksal suggested, 
employment at Tupras is not far from world standards, and 
exceeds that level by only 10 percent or so.  Hence he does 
not anticipate major layoffs, believing instead that the 
labor force can be thinned mostly through attrition as 
workers retire.  He added that Zorlu had expected the legal 
challenges, but does not expect them to be successful. 
 
 
¶7. (SBU) Investment: Koksal stressed that Zorlu and Tatneft 
see little need for large immediate investments in their new 
acquisition.  A major capital investment program has been 
underway since 2001, he noted, and will total 750 million USD 
by 2006.  The bulk of this total (two-thirds) is dedicated to 
bringing Tupras' diesel production into line with EU 
standards.  This is key to Tupras' future, he argued, since 
under Turkey's new petroleum law, from next year distributors 
will be able to source 100 percent of their purchases from 
overseas, rather than the current 40 percent.  Implementation 
of EU standards, however, will create a natural entry barrier 
which will keep out cheaper low quality products, while 
Turkey will retain its competitive advantage against its 
European rivals.  He added that overall refineries in Izmit 
and Izmir are up to world standards, while the 
Baku-Tbilisi-Ceyhan pipeline will bring new raw materials to 
the Kirikkale refinery.  The major question is Tupras' oldest 
refinery at Batman in Turkey's southeast, which cannot be 
brought into compliance with EU sulphur rules.  Koksal noted 
that the government retains a golden share in the company, 
and the military may desire to keep this site operational for 
strategic reasons.  Koksal added that the new partners also 
have serious questions about Tupras' plans for a new refinery 
in Izmit, believing that it may lead to excess capacity and 
would be a mistake, given that investments in refineries 
typically trade at half their "book" value.  He noted that 
the partners' consultants have told them that Tupras capacity 
can increase from 25-26 million tons per year to 30 million 
tons simply by shifting production from "black to white 
goods." 
 
 
¶8. (SBU) Comment: Koksal is Ahmet Zorlu's key advisor on 
financial and other issues, and as his comments reflect has 
been deeply involved in the group's strategy on the Tupras 
acquisition.  He noted too that the group is moving ahead on 
other fronts as well, planning to increase its volume of 
exports of white goods to Europe from 1.5 billion USD to 2.3 
billion.  End Comment. 
ARNETT