Economic Update
The acquisition of a majority stake in local retailer Migros Turk by a British-led private equity consortium was a conspicuous event given the global slowdown in merger and acquisition (M&A) activity since the credit crunch took root in August 2007. While the country will inevitably feel the effects of the slowdown, there remain plenty of opportunities in Turkey for private equity firms.

On June 2, a consortium led by the London-based private equity firm BC Partners completed the purchase of a 50.8% share of Migros Turk for $3.2bn. The other members of the consortium were local firm Turkven Private Equity and Italian outfit Dea Capital, the private equity arm of Italian De Agostini Group. It was one of the largest private equity deal in Turkish history and the third biggest leveraged deal globally in the first quarter of this financial year. With 14,800 employees and 2007 revenues of $3.7bn, Migros is the market leader in Turkey.

The deal was finalised at a time when buyout activity has virtually ground to a halt in the region. The total values of the next nine largest buyout deals in Central and Eastern Europe totaled just $616m according to Dealogic, a UK-based financial analyst firm. Nevertheless, there is a great deal of potential in the Turkish private equity market, which began in earnest five years ago. According to financial consultancy firm Deloitte, the volume of private equity deals totalled $6.5bn between 2005-2007, with private equity firms involved in 24 transactions in 2007.

The make-up of the Turkish business community, with its high proportion of local players, make it ripe for future deals. Orhan Ayanlar, vice president of Bedminster Capital Turkey, which runs Southeast Equity Fund II – a $320m private equity fund investing in Turkey and the Balkans – told OBG, “In terms of economic size, population and deal potential, Turkey is the largest country covered by our fund. When we talk about deal potential we like to separate it into two groups; in the first group we see entrepreneurs who have established a good business but need equity financing to reach the true potential of the business, while in the second group we see a large number of family-run enterprises where there is not a second or third generation to continue the business and therefore the owners realise that they need to sell it. Only in the past three years have we seen the realisation of this pent-up demand and we expect this to continue.”

Previously, the buyout rate of such family enterprises has been slow, often due to unrealistic valuations from owners and the sentimental attachment to the family company. There are signs that this culture is beginning to change however. Gokce Kabatepe, managing director of Raymond James Securities Turkey, told OBG, “When the Turkish economy was growing at record levels some owners would ask for impossibly high multiples of their company’s true value. In times of a slowdown, Turkish businesses tend to become more reasonable and their prices drop.”

In addition, the nature of private equity has also changed, according to Selcuk Yorgancioglu, Abraaj Capital’s Executive Director for Turkey. “Private equity used to mean venture capital. Now it is more organised, works as a strategic partner, takes a softer approach to entry and has fairer exit expectations. This makes it a better fit to family businesses,” he told OBG. Dubai-based Abraaj Capital acquired a 49.9% share of the Turkish Acýbadem Health Group in 2007.

As well as the abundance of skilled managers in Turkey, the country rates well in terms of ease of doing business according to Yorgancioglu. “The financial regulators in Turkey are the best managed in the region, using strict rules and timelines making business easier for private equity firms both in the transaction process and the running of the company,” he said.

Some medium-sized companies view private equity investment as an important stage to become big enough to list on the Istanbul Stock Exchange. Mavi, one of Turkey’s most famous fashion brands, is currently in talks with Turkven Private Equity. Arsin Akarlilar, CEO of Mavi, told local press that strongly seasonal profits were a barrier to listing. “It would be hard for a medium-sized company to manage these ups and downs in the stock market,” said Akarlilar. “Therefore we have chosen a private equity [firm] as a partner. That is a mechanism to prepare a medium size company to go public,” he added. The details of the partnership are expected to be finalised in the next three months.

The sources of private equity funding are also likely to change according to Ayanlar. “We are seeing a lot more private equity funds looking for investments in Turkey than we originally imagined. This is mainly due to the current global and local market conditions. With around $1bn of net oil export revenues per day by Arab countries in 2007, we are seeing and expect to see many more institutional investors coming from the Middle East; in Europe, private equity activity is currently on hold and we are seeing and expect to see large private equity firms looking at the Turkish market for deals below their normal minimum ticket value; and lastly we are seeing and expect to see establishment of local private equity funds,” he said.

The coming years will be an interesting time for private equity in Turkey according to Yorgancioglu. “As global strategic players restructure and refocus their businesses, committed private equity funds in Turkey will continue to make acquisitions. Target companies will benefit from private equity led growth in preparation for the next round of global M&A activity. This is a sizeable opportunity and its only the beginning,” he said.