Nicholas Birch in Istanbul -

The thinking behind a mooted bid by Turkey's Dogan Yayin Holding for a controlling stake in ProSiebenSat.1 baffles investors.

Turkish markets reacted with bafflement to Dogan Yayin Holding's confirmation on Monday morning that it would bid for a controlling stake in ProSiebenSat.1, with Dogan's shares losing 3.5% on the Istanbul Stock Exchange in early trade to 5.50.

The Turkish media giant will probably be competing against private equity firm CVC, a consortium of Kohlberg Kravis Roberts with Permira, and another consortium of Goldman Sachs, Apax and Cinven, for the 50.5% share in Germany’s leading broadcaster, which could end up costing the winning bidder at least €3bn.

In one sense, Dogan’s announcement is not a surprise: the company has been hinting at plans to expand outside Turkey for some time, most recently last week, when CEO Mehmet Ali Yalcindag talked of moving "beyond our borders."

What has raised eyebrows and lowered the share price is that he and his fellow directors have plumped for Germany over Eastern and Southeast Europe, where markets are credited with holding much higher potential for growth.

"There’s so much space for development inside Turkey and the Balkans," says Osman Memisoglu, an analyst with EFG Istanbul. "Why bid for an asset in a developed market?"

Analysts’ puzzlement has been deepened by the likely price that bidders will have to pay. US media mogul Haim Saban, who owns the 50.5% stake in ProSiebenSat, is thought be asking for at least €3bn.

It’s a figure that dwarfs Dogan, which has a market capitalisation of $2.4bn and total assets worth $1.8bn. And while a leveraged buy-out of the sort Dogan has confirmed it is planning puts the acquisition – at a pinch – within its grasp, analysts fear the sum may leave it excessively leveraged.

Already indebted

Largely because of the $306.5m it forked out last September to buy competitor Star TV, Dogan already has one of the highest debt-per-asset ratios of any Turkish listed company at 36%.

That’s an outlay that will be more than offset by the €375m Axel Springer agreed to pay last Thursday for a 25% stake in Dogan TV, of course. But that’s a detail that fails to convince some analysts.

"A successful bid for ProSieben would completely change Dogan’s [net asset value], significantly reducing its Turkish exposure," says Onder Zorba, an analyst with brokers Ata Invest.

Given that Turkey’s media sector look set to grow at 15-20% for the next three years, Zorba thinks that’s unlikely to help the company’s prospects.

Ultimately, however, growth outside Turkey is likely to prove Dogan's only avenue for expansion. A portfolio including two of the Turkey’s leading TV channels and three of its top newspapers already ensures that the company holds around 42% of national advertising revenues, and it’s difficult to see what is left to buy.

Indeed, if Turkey succeeds in its bid to join the EU – admittedly a big "if" – European media ownership laws may eventually oblige Dogan to sell some of its assets.

Springer a surprise

Amid all the uncertainties, though, there is one player for whom a successful Dogan bid would be an unquestionable success: Dogan's new partner in its TV business, German’s biggest publisher Axel Springer.

ProSieben had agreed to sell the same 50.5% stake to Axel Springer for €2.5bn earlier this year, but the deal was blocked by German regulators who were afraid that the combination of print and TV empires violated local media concentration laws.

Springer has a 12% share in ProSieben already. Add to that the prospect of two representatives on Dogan's seven-member governing board – part of last Thursday’s deal with the Turkish company – and a successful Dogan bid would increase its say over the German channel considerably.

It’s early days yet. Bidders have yet to take a close look at ProSieben’s books, and they are not expected to make their final offers before next month. And it remains to be seen whether Dogan's unwieldy ownership structure will be enough to smuggle Axel Springer past the market regulators the second time round.

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