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 000758 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER AND MMILLS 
DEPT PASS EXIM AND OPIC 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV BEXP TU
SUBJECT: CLOSURE OF YAPI KREDI DEAL HIGHLIGHTS FOREIGN 
INTEREST IN TURKISH BANKS 
 
REF: A. ISTANBUL 218 
 
     ¶B. ISTANBUL 97 
     ¶C. 2004 ANKARA 1437 
     ¶D. 2004 ISTANBUL 1558 
 
Sensitive but unclassified.  Not for internet distribution. 
This message was coordinated with Embassy Ankara. 
 
¶1.  (SBU)  Summary: The announcement on Monday, May 9 that 
Koc Financial Services and the Cukurova Group had reached 
final agreement by which Koc and its Italian partner 
Unicredito will purchase Yapi Kredi Bank vaults Koc into the 
banking big leagues and removes the largest remaining cloud 
hanging over the banking sector after the 2001 crisis. 
Together with the planned sale of much of his Turkcell stake 
to Nordic Telia Sonera, it will also permit Cukurova owner 
Mehmet Karamehmet to climb out from under his USD 4 billion 
debt to Yapi Kredi and the Savings Deposit Insurance Fund 
(TMSF).  When coupled with other recent international 
transactions, the deal also highlights the fact that foreign 
investors are looking first to the financial sector as they 
consider making direct investments in the Turkish economy. 
End Summary. 
 
¶2.  (SBU) At last a deal: Koc and Cukurova reached 
preliminary agreement on sale of the bank at the end of 
January (ref A), but concern had grown in recent weeks over 
the amount of time negotiations and due diligence were 
taking.  Some speculated that Karamehmet was unhappy with the 
sale price, given recent more lucrative deals for other 
banks.  (Mid-sized Disbank was sold in April to Belgium's 
Fortis Bank at 1.9 times book value, whereas the Koc deal 
effectively was at book value itself.)  Speculation grew more 
heated last week that rival Sabanci Group's Akbank might make 
a late bid, as competition in other sectors between the two 
giants intensified.  The delay prompted a warning on May 7 
from Banking Regulatory and Supervisory Agency (BDDK) Chief 
Tevfik Bilgin that the process was taking too long.  With 
that encouragement, agreement was initialed a short three 
days later. 
 
¶3. (SBU) A new start: For both Koc and Yapi, the deal 
represents the opportunity to make a new start.  By bringing 
together Yapi with its own smaller Kocbank, Koc will be among 
the sector leaders, with an 11.4 percent market share and 567 
branches, roughly equal to the rival Sabanci group's Akbank, 
but with a larger presence in retail banking and credit 
cards.  Yapi staff have been anxious for some time for the 
deal to be finalized.  Under the board appointed by the BDDK 
last year, they have complained that Yapi has essentially 
been taken over by the state and has lost its earlier 
dynamism and market leadership.  That problem is evident in 
recent sectoral statistics, which shows banks ranging from 
market leader Akbank to small players like TEB and Denizbank 
gaining market share in loans at Yapi's expense.  The current 
board, an observer told us, is more preoccupied with 
investigating the past than developing new business, as is 
reflected in the number of court cases opened against former 
directors and management for deals that went sour.  The 
practice has poisoned attitudes at the bank and led to 
inactivity.  Koc has promised to end the practice. 
 
¶4. (SBU) Foreign Interest: With the deal, foreign ownership 
in the sector, which had already risen from 3 percent at 
end-2004 to 8 percent, will rise further to 15 percent. 
Other foreign players making moves in the Turkish market 
include BNP-Paribas, which purchased the small TEB Bank, 
Belgium's Fortis, which purchased 89.3 percent of the shares 
in mid-size Disbank for 1.28 billion USD, and now Yapi. 
Still on the block are Garanti Bank (with rumors that HSBC or 
Deutsche Bank may be interested), Finansbank, and Denizbank. 
Despite problems with the Turkish investment climate, the 
banking sector is one in which foreign investors seem to be 
able to operate without major problems (e.g. Citigroup and 
HSBC).  Now that Turkey has a date to begin EU accession 
negotiations, and Turkey's macro situation seems to be 
stabilizing, foreign (especially European) banks seem to be 
betting on the huge growth potential here.  Turkey's very low 
ratio of credit to GNP and its young population are in marked 
contrast to the mature, slow-growing home markets of the 
investing banks.  BDDK Chief Bilgin earlier predicted that 
foreign participation in the sector could reach 30 percent. 
The potential private deals, as well as recent rumors (viewed 
skeptically by Istanbul analysts) that foreign banks may also 
be interested in Turkish state banks, could make that a 
reality.  Already, however, concerns are being expressed 
about how high the foreign share should go, with Deputy Prime 
Minister Sener contradicting Bilgin and suggesting that the 
government may soon introduce a measure to limit foreign 
ownership in the sector. 
¶5. (SBU) Details: Much remains unknown about the deal, but 
what is known is that Koc will purchase 57.4 percent of 
Yapi's shares for EUR 1.16 billion, giving the bank an 
overall value of EUR 2.02 billion or USD 2.6 billion.  Koc 
will also issue a market call for minority shareholders, 
though this is unlikely to win much favor, as the bank's 
market capitalization is 13 percent higher-- valuing each 
share at 5.2 YTL, versus the deal price of 4.8 YTL.  Much of 
the purchase price will be returned to the bank to cover the 
Cukurova Group's USD 2 billion in receivables to Yapi, though 
some portion will be directed to the TMSF to cover group 
debts to it as a result of Pamukbank's failure. 
Significantly, Koc will renew Cukurova's option to purchase 
the 13.1 percent of Turkcell shares that are held as 
collateral against the debt-- Cukurova plans to exercise that 
option and then package the shares in its Turkcell sale to 
Telia Sonera.  All told, from the two deals Cukurova will 
generate some USD 3.5 billion, that should enable it to cover 
the lion's share of its obligations.  TMSF officials thus 
have privately been ecstatic about the development, viewing 
it and another USD 433 million deal to sell Medya Holding 
(owned by Dinc Bilgin, owner of the failed Etibank) to 
another media company as its largest triumphs to date in 
securing significant repayment of debts stemming from the 
banking crisis. 
 
¶6. (SBU) Pension Prerequisite: There is one prerequisite for 
the deal, however, which worries some market analysts, but 
which bank insiders predict will be finalized without 
difficulty.  That is the required transfer of the bank's 
pension fund to the state.  Like that of many other banks and 
other companies, that fund is significantly underfunded. 
(Note: Turkish "Ekonomist" Magazine estimated last month that 
economy-wide, there is a potential USD 5 billion gap that the 
government may have to cover.  End Note.)  Koc has apparently 
agreed to make up part of the shortfall, but some remainder 
must be assumed by the government.  Bank officials believe 
that this and other problems in the bank's balance sheet were 
the reason that the deal remained at the low January 
valuation, despite the higher multiples in other deals in the 
sector and the bank's market valuation of USD 3.4 billion. 
In addition to the pension problem, Yapi Kredi had other 
overvalued assets, including its Fiskobirlik receivable 
(which apparently will be handled in the same manner it was 
by the government for other banks-- Yapi had earlier sought a 
more generous settlement), real estate holdings, and others. 
One bank official estimated that after due diligence, Koc had 
written the bank's book down by half, from USD 3.4 to 1.8 
billion USD.  With the coming cash inflow that will follow 
the deal to pay the Cukurova Group's debt, he believes the 
bank will have no problems either regarding liquidity or 
capital adequacy.  Some USD 2.5 billion should come in, he 
predicted, much of it for items (the non-performing Cukurova 
loans, for instance) that were 100 percent risk on the bank's 
books. 
 
¶7. (SBU) Comment: The Koc deal, together with the parallel 
Turkcell sale, promises resolution of the problems of the 
Cukurova Group-- one of the largest remaining from the 2001 
crisis.  Thanks largely to improvements in Turkcell's 
valuation, Cukurova should be able to fully pay off its debts 
and retain assets valued at up to USD 2 billion.  Istanbul 
observers thus expect him to remain a major player in Turkish 
markets, and do not discount his taking an active role in the 
upcoming privatization of either Tupras, the National Lottery 
or Turk Telecom.  The banking sector too emerges from a 
cloud, and should face a period of increased competition, as 
the country's two largest conglomerates, Koc and Sabanci, for 
the first time take each other on in the financial sector on 
a roughly equal footing.  All in all, the multiple 
Cukurova-related deals constitute a win-win-win for Turkey: 
removing a cloud (by the name of Cukurova) from one of 
Turkey's top banks, confirming a substantial inflow of FDI, 
and facilitating large repayments to the TMSF.  End Comment. 
ARNETT