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

211249Z Jul 05

UNCLAS SECTION 01 OF 03 ANKARA 004226 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/CBA FOR FRANK MERMOUD, EUR/SE, and EB/OMA 
USTR FOR LERRION 
TREASURY FOR CPLANTIER AND MMILLS 
USDOC/ITA/MAC/DAVID DEFALCO 
DEPT PASS EXIM FOR MARGARET KOSTIC 
 
E.O. 12958: N/A 
TAGS: EINV BEXP EFIN TU
SUBJECT: PRIVATIZATION AUTHORITY CONFIDENT ABOUT TURK 
TELECOM PRIVATIZATION 
 
 
Ref: A. 04 ANKARA 6673 
     ¶B. 05 ANKARA 446 
     ¶C. 05 ANKARA 2159 
     ¶D. 05 ANKARA 2812 
     ¶E. 05 ANKARA 3845 
 
¶1.  (SBU) Summary:  The Turkish Privatization Authority (PA) 
is confident that the privatization of Turk Telekom will be 
finalized after Cabinet approval in the late fall, despite 
initial confusion and allegations following announcement of 
the Oger consortium winning the tender on July 1.  The PA is 
cautiously optimistic that the tender results will survive 
challenges by labor unions and also by the second place 
bidder.  The Competition Authority approved the sale on July 
¶21.  The improved prospects for the Turk Telekom 
privatization is a good sign for other privatizations, and 
could represent a turning point after a series of failed 
privatizations of large state companies.  It would also 
represent a huge infusion of badly-needed Foreign Direct 
Investment.  End Summary. 
 
-------------------- 
And the Winner is... 
-------------------- 
 
¶2.  (SBU) The Oger Group-Telecom Italia (TI) consortium won 
the Turk Telekom (TT) tender bid July 1(Ref E).  TI already 
has a significant interest in Avea, the number two mobile 
company.  The consortium offered $6.55bn for 55 percent of 
TT, valuing the company at $11.9bn.  The offer price is well 
above the PA'a speculated price range per the local press 
($8.2bn-$11bn) and the analysts' estimate range ($7bn-$9bn). 
The transaction will be the largest single ticket FDI Turkey 
has ever attracted, roughly doubling the pending FDI record 
of $3.3bn from the Turkcell sale to Russian Alfa Group 
announced this year (contested by Teliasonera, whose offer 
Alfa trumped).  The success to date in the TT tender process 
is evidence of the Turkish government's commitment to the 
privatization program and offers encouragement for the 
upcoming Tupras and Erdemir privatisations as well as the 
sale of Turkey's second GSM operator, Telsim from the 
Savings Deposit Guarantee Fund's (SDIF) portfolio.  Assuming 
that all necessary approvals take place without any legal 
difficulties, the winning consortium will make an up-front 
payment of $1.31bn in 2005 and the remaining in five equal 
payments with Libor+2.5% interest p.a.  For purposes of 
comparison, the $1.31 bn payment, if it happens, is not much 
less than the total FDI inflow to Turkey in 2004 of $1.6 
billion.  The PA expects the transaction to be completed by 
the end of 2005. 
 
----------------- 
Positive Reaction 
----------------- 
 
¶3.  (SBU) The Turkish market perceived the sale to be very 
positive on various grounds: First, the $1.3bn inflow this 
year is expected to result in a minimum total FDI of $5bn in 
2005 and a floor of roughly $1.1bn annually in the next 5 
years.  The FDI will provide a stable, long-term source of 
financing for the widening current account deficit, and the 
proceeds of the sale will help lower public sector 
indebtedness.  Second, the buyer will need to invest 
substantially in the company's infrastructure and technology 
over the coming years, leading to further upside in FDI, and 
better telecommunications services.  Oger is already talking 
to the press about new technologies it will bring and new 
services it will offer.  Third, the completion of the 
auction confirms the government's commitment to the 
privatization program, which had been greeted with some 
skepticism by the investor community.  Fourth, the Turk 
Telecom sale will lend positive momentum to the upcoming big- 
ticket privatization items such as the state refinery- 
Tupras, the steel company- Erdemir, as well as Turkey's 
second largest GSM operator- TELSIM. 
------------------------ 
Nay-Sayers and confusion 
------------------------ 
 
¶4.  (SBU) Because of past resistance to privatization from 
labor unions, opposition politicians and, reportedly, the 
military, the TT tender was expected to receive criticism 
and also to be challenged in the courts.  The PA had taken 
care to seek to "inoculate" the tender from law suits 
against previous (most failed) privatizations.  Gunden Peker 
Cinar, the working-level PA official with lead 
responsibility for the TT transaction told us PA had 
brainstormed extensively with its lawyers to ensure there 
were no flaws in the tender document that a court could use 
to invalidate the process, as happened with the Tupras 
privatization in 2004.  A few lawsuits seeking tender 
cancellation have already being filed (Habersen, a union 
which has members on TT's payroll was the first to file such 
a lawsuit).  The opposition party announced that they would 
also file a lawsuit since TT was priced much more cheaply 
than what it claimed as a "real" value of $30 billion. Note: 
Despite this typically over-the-top criticism by the 
opposition, the fact that the bid valued TT well above the 
PA's and analysts' valuation has undercut the argument that 
the GOT is selling too cheaply.  This line of argument is a 
recurring feature of the public debate over privatization in 
Turkey, and it was the reason the Tekel tobacco tender was 
cancelled in 2003.  The fact that the PA seems to have 
squeezed every last dollar-on live TV no less--out of a 
process with multiple, well-heeled bidders makes it far less 
likely this "fire sale" argument will kill the deal.  End 
Note. 
 
¶5. (SBU) Transportation Minister Binali Yildirim triggered 
confusion on July 3 when he announced that the tender was 
not over, and the second short-listed consortium led by 
Calik-Etisalat of UAE could still win.  Encouraged by 
Yildirim's remarks, the Etisalat Group subsequently 
announced they would sacrifice their 5 percent cash payment 
discount, and could sign an agreement with Telecom Italia. 
 
----------------- 
Clear Way Forward 
----------------- 
 
¶6.  (SBU) In July 4 and 6 press statements, PA President 
Metin Kilci sought to mitigate the resulting confusion, by 
reaffirming the tender result and clarifying next steps in 
the process.  He noted that the PA short listed the two 
groups with the highest offers on July 1, 2005, and the Oger 
Telecom Group offered the highest auction price in the 
bargaining.  According to Kilci, The PA tender committee met 
on July 4, 2005 and decided to submit both offers to the 
Competition Authority.   On July 21, the Competition 
Authority announced it had approved the sale to Oger.  The 
next step will be submission of the transaction to the 
Council of Ministers for approval.  At his press conference, 
Kilci said that, if the agreement cannot be finalized with 
the highest bidder, then the second bidder would be 
considered.  The new owner of TT will sign a concession 
agreement with the Telecom Authority following the Cabinet 
approval of the tender.  The Telecom Authority will submit 
the concession agreement to Danistay (Council of State) for 
opinion, since concessions relate to the Constitution. 
Danistay's opinion, at this stage, will not be binding and 
cannot change the sales decision or the concession contract 
terms. 
 
¶7. (SBU) Kilci also rejected allegations that the Telecom 
Authority had granted a "free-of-charge third generation 
frequency license to TT.  (The tender document requires a 
frequency arrangement to extend telecom services to even 
small villages in Turkey. This is actually a burden, not a 
privilege.)  He reaffirmed that tender price was a key, but 
not sole, criterion. 
¶8.  (SBU) PA official Cinar told us privately that unless 
the winning Group failed to fulfill its tender commitments, 
it was not possible for the PA to award TT to the second 
group.  Cinar suggested that Minister Yildirim had not been 
fully briefed when he had made his initial comments to the 
press.  Note: We suspect Yildirim's outburst may in part 
reflect his irritation that Finance Minister Unakitan, 
rather than Yildirim (who has responsibility for telecoms) 
had the lead on the privatization.  Yildirim has kept quiet 
on the TT privatization over since his July 3 outburst. End 
Note. Cinar said that bidding companies were evaluated first 
on their business plans (company's strategic position, 
future strategy, financial performance, financial plan and 
HR plans).  If the groups' respective bids met passed muster 
in these areas, the groups were pre-qualified, with the 
final round of competition based on price alone. 
 
¶9.  (SBU) Cinar also said the state's "golden share" will 
only be exercised in the cases where national interest and 
security can become an issue.   Cinar also revealed that 
when the whole process is finalized Oger Telecom will own 99 
percent of the purchased shares; Saudi Oger will own 1 
percent and Italian Telecom will own 20 percent of the Oger 
telecom shares in Turk Telecom.  The consortium applied to 
the PA on June 17 to change their partnership structure to 
rename Oger Telecom as a Joint Venture Group. 
 
¶10. (SBU) Comment: In the face of some skepticism and two 
previous failures, the likelihood that the GOT and PA may be 
successful in selling their state-owned telecom company has 
substantially increased.  If Turkey can bring the 
transaction to fruition, it will open the way for future 
privatizations, improve telecoms services, and boost 
investor confidence not only for privatizations, but for 
Turkey as a whole.  It remains to be seen whether it will 
facilitate liberalization, or replace a dominant public 
company with a private one.  Some industry participants and 
observers are worried whether the Telecom Regulatory 
Authority (and Competition Authority) has the strength, 
independence, and expertise to facilitate and enforce 
liberalization (and competition) steps and rulings. 
End Comment. 
 
McEldowney