David OâByrne in Istanbul -
To date, international interest in Turkey's gas market has been almost exclusively confined to exporting large volumes to meet rapidly growing demand. That looks set to change with the imminent privatization of Izgaz, the gas distribution company in Turkey's industrial heartland of Izmit, which has sparked major domestic and international interest.
One of only two gas distribution companies still in state hands, the tender for the sale of Izgaz was formally opened in May and is set to be concluded on July 10, with the company transferred to its new owners by September. With interest from both local and international players expected to be keen, estimates of the expected sale price are hovering above the $1bn mark. Some Turkish brokerages are predicting it could go as high as $1.3bn. Not bad, considering the Ankara gas company whose sales are double Izgaz' 1.5bn cubic metres a year (cm/y) was sold earlier this year for only $1.6bn. The general secretary of Izmit Metropolitan municipality, Munir Karaloglu, was quoted by the press on June 6 as saying that 14 local and foreign investors obtained tender documents for the 100% stake in Izgaz.
"The Turkish gas market is liberalising, and in a few years companies will be able to import their own gas," says Ozan Ozcan of EFG Istanbul Securities, the brokerage charged with organizing the sale. Ozcan notes that Izgaz offers several unique selling points that should serve to make it particularly attractive to major international gas players, namely it has the highest distribution margin of all Turkey's gas distribution companies and that 80% of the gas it distributes going to industrial consumers.
That high margin, currently set at 6.5c per cm but set to fall to 6.1c after privatization, is due to Izgaz having been established by the local Izmit municipality before market liberalization was an issue and before Turkey's energy regulator began selling off licenses for newly established distribution regions on an "under bid" basis. That system saw companies submitting bids competing on how low a profit margin they will charge on the gas they distribute, which has led to 39 of Turkey's 55 newly established gas distributors operating on margins of 1c or less. "It's going to be difficult for those companies to fund their network rollout," observes Ozcan, pointing out that this hasn't been a problem for Izgaz, which has increased the length of its network from 800 kilometres to 2,500 km in the past five years.
Equally enticing is Izgaz' customer portfolio, which includes many of the countries biggest businesses including major international names such as Ford and Hyundai. While the biggest industrial customers are eligible to buy gas at bulk rate, substantially below the normal margin, they also give Izgaz a significant advantage. Unlike residential gas demand which fluctuates according to the temperature, industrial demand only rises in line with economic expansion. And economic expansion is something Izmit is no stranger to, being responsible for 5% of Turkish GDP, 13% of manufactured exports and 18% of foreign trade.
Expansion of residential demand is also expected as Izgaz this year plans to invest $8m in extending its network into the north of the region. Little wonder, then, that Izgaz expects its volume gas sales to rise from the current 1.5bn cm/y to 2.9bn by 2014.
Little wonder, too, that Ozcan, fresh back in Istanbul from an international roadshow promoting the sale, is decidedly upbeat about the level of interest in the sale. "We're expecting serious interest from Europe and the Middle East," he says. "For international companies wanting to enter the Turkish market, it's an unrepeatable opportunity."
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