Bernard Kennedy in Ankara -

Turkey's Privatisation Administration looks determined to ensure that May's IPO for Turk Telekom goes ahead in spite of the jittery markets and the legal attempt to close down the ruling semi-Islamist Justice and Development Party (AKP).

The IPO, for a 15-17.5% stake in the national fixed-line telecommunications operator, is slated to raise about $2.5bn, which would make it Turkey's largest-ever public offering. While a private owner might have waited for the global financial turmoil to settle and domestic political noise to abate, the Administration is forging ahead with a road show between April 27 and May 9.

The government is taking a calculated risk that any sacrifices it has to make in pricing will be outweighed by the benefits of keeping the privatisation programme on track. This year's extensive privatisation portfolio features a wide range of assets from banks to ports and power networks to sugar refineries. Besides generating revenue and harnessing the profit motive, privatisation currently has a key role to play in luring enough foreign capital to maintain stability in the foreign exchange market and the economy. Soaring energy costs have swollen the perennial current account deficit to around 6% of GDP, and flows of foreign financial, loan and equity capital to the private sector are all expected to slow.

Cash cow

Turk Telekom is not without its attractions. "It has huge cash flow from fixed-line telephony," says Bulent Yurdagul of HSBC Investment in Istanbul, referring to Turk Telekom's continued domination of the 18m-strong fixed-line market. "And it now also has 4.5m ADSL subscribers, which we understand to account for 25% of its revenues. There are no big competitors in this segment. In the data market, private companies have only a 5% share."

Turk Telekom announced April 18 that it made a net profit of TRY2.5bn (about €1.4bn, at the end-year exchange rate) in 2007, up 6% from the previous year. Net sales rose were up 5.9% to TRY7.5bn. Its mobile affiliate, Avea – the third-largest mobile operator behind Turkcell and Vodafone – claims 9.9m subscribers and stands to gain from the imminent introduction of number portability. Even so, Global Insight described the profit growth as fairly low considering the company's market position. "The operator needs to demonstrate significant growth opportunities to ensure success at its future road show for its anticipated IPO. Current market conditions are tough and investors would be seeking low-risk opportunities for higher growth potential," it said in a note.

The IPO will mark the second stage in Turk Telekom's privatisation. A 55% stake was sold to Lebanese-owned Saudi Oger for $6.55bn in 2005 and is now held by a Dubai-based vehicle, Oger Telekom. Saudi Telecommunications, the state-controlled Saudi Arabian fixed-line operator, took a 35% stake in Oger Telekom for a reported $2.6bn in January. The IPO's lead managers, Deutsche Bank and Garanti Investment, are understood to have included Dubai and Riyadh on the road show circuit in addition to London, Boston and New York.

Turk Telekom's ownership structure may worry investors in future, Yurdagul admits, but the majority owner's financial strength, its good relations with the government and the continuing government stake are all reassuring in today's climate. Yurdagul is also impressed by CEO Paul Doany, who has built a strong public personality, streamlined the payroll and staved off competition with the aid of tariff adjustments, courtroom manoeuvres and red tape.

"It is a monopoly and a protected operator," comments Ridvan Ugurlu, general secretary of Telkoder, the organisation formed by alternative operators. "Four or five long-distance operators are now offering call-by-call services, but they are only able to compete for 10% of the fixed-line market."

Ugurlu nevertheless remains hopeful that as the government's stake in Turk Telekom declines, more competition will be permitted, encompassing local calls and the local loop. The government has promised to pass an Electronic Communications Bill, bringing licensing and regulation into line with EU norms, in June. However, no draft has yet been published.

Part of a programme

Neither the faint footsteps of competition nor the retreat of fixed-line subscriptions before the onslaught of mobile technology has prevented fund managers from winding down their holdings in Turkey's only other telecom stock, Turkcell, in order not to miss out on any Turk Telekom premium. Other blue chips are also feeling the pressure. Yet even a successful IPO for Turk Telekom may not be enough to inspire confidence in the prospects for other privatisation deals. Yurdagul believes that a further offering of shares in the state-controlled bank Halkbank, for example, would be hazardous given the prevailing low valuations for financial stocks. The International Monetary Fund's calls for a sale to a strategic partner have fallen on deaf ears.

The head of the Privatisation Administration, Metin Kilci, enthusiastically told Turkish journalists in Antalya in April that the management of the National Lottery would be privatised in the second quarter. Like the outsourcing of the operation of the toll roads and Bosphorus bridges, however, this depends on parliamentary legislation. Similarly, Kilci suggested that bids would be invited for four regional power distribution networks within April, but the deadline may be protracted, with an automatic pricing mechanism for electricity yet to be introduced.

In the meantime, the Administration has yet to collect a total of some $5.7bn from recent sales of cigarette factories, a petrochemicals complex and port management rights, which await final approvals or the resolution of legal challenges by various trade unions.

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