Over the course of 2011, Turkey saw a significant increase in deal transactions, both numerically and in terms of volume, and the outlook for the remainder of 2012 is very positive indeed. Some 74% of the deals in 2011, by value, involved foreign investors, representing a significant recovery from 2010, when only 36% of deals involved an international firm. The total deal value in 2010 was $29bn. However, it later transpired that $11.8bn of these deals (mainly large energy sector privatisations) could not be closed due to financing difficulties. Compare those figures to the ones from record-breaking 2011, during which 241 deals, comprising a volume of $15bn, were transacted, accounting for both Turkish and foreign acquiring entities.
The first half of 2012 has seen a strong start. There are 40-50 private equity funds constantly focused on Turkey, and a wide range of multinational strategic investors. However, deal volume is still modest by international standards. The aforementioned $15bn was equivalent to only 2% of GDP, while in the Europe, Middle East and Africa region the average was 4.4% of GDP.
The attractions of the local market are centred on positive expectations, based on a variety of supporting factors: high growth rates achieved in the past decade; political stability under a government willing and able to implement reforms and planning measures with a long-term perspective; a large population with good demographics; the Customs union with the EU and increasing regional trade in the Middle East and Africa; the absence of banking problems or excessive public debt levels; businesses engaged in processes to improve efficiency; and the absence of bias against foreign companies, in theory and in practice, in the Commercial Code and the Tax Law. Turkey was the 21stlargest economy in the world in 1980; the 19th in 1990; the 18th in 2000; the 17th in 2010. This steady climb is expected to continue, and Goldman Sachs estimates it will be the 13th-largest economy by 2050.
The numbers for deal volume usually depend on the volume of privatisations, especially those privatisations in the energy sector, since those are big-ticket items.
The total volume of privatisations was only around $1bn in 2011, but is likely to be higher later in 2012.
What holds back deal volume for private sector deals?
The key factor is often a lack of supply. Many private equity executives will tell you they have looked at hundreds of candidates for investment. Nevertheless, the number of realistic options is quite low. The owners of many successful businesses do not yet need external capital, and would prefer not to dilute or lose control of their businesses. Accordingly, when an attractive company does come up for sale there is widespread interest. Since Turkish deals are always focused on future growth prospects, there is room for differences in opinion about future growth rates, and therefore value.
As a result of the limited supply of top businesses, we see deals occurring with those of lesser quality. Perhaps the most typical case is one in which growth has been good, maybe even spectacular, but profitability has been weak. In a good market, those businesses can be sold, sometimes for eye-watering multiples, based on a belief that adequate profitability will emerge later. Recently we have seen businesses that remind me of hormone-enhanced tomatoes: shiny, superficially attractive and displaying an amazing growth rate. However, it is unclear if they can provide sustenance.
Even where compliance with the accounting standards is faultless, the current Turkish general accepted accounting principles are simple and limited, far away from international financial reporting standards (IFRS). Revenue and costs may be recognised in the wrong periods, provisions even for almost certain losses may be missing and classifications of what is in or out of earnings before interest, taxes, depreciation, and amortisation may be wrong. We trust these problems will be reduced under the new commercial code.
However, there is a view that the IFRS and auditing provisions of the new code are just a racket to benefit accountants, so maybe the bad old ways will linger.
Make sure that you get good financial due diligence.
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