Mobile Merger as Turkey Looks for FDI

Turkey

Economic News

22 Jul 2010
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The announcement that a preliminary agreement had been reached merging Turkey’s two smaller mobile phone networks during Italian Prime Minister Silvio Berlusconi’s visit May 12 brought relief on a number of fronts. Not the least of these was that it effectively headed off a potential USD3bn lawsuit against Turkey’s telecommunications regulatory authority. But the deal also served as a positive sign to potential foreign investors, with the government anxious to encourage more FDI and a good return on the year’s first major privatisation – the state alcohol and tobacco giant, TEKEL.



Prime Minister Recip Tayyip Erodgan was first to break the news May12 that the Aria and Aycell mobile phone networks were ready to merge. The first is jointly owned by Turkey’s Is Bank and Italy’s Telecom Italia Mobile SpA (TIM), while Aycell is owned by the state run landline monopoly, Turk Telekom.



“The shareholders of the companies have reached an understanding and work on the plan is underway,” a statement from Is Bank said the following day, quoted in most Turkish newspapers.



If the merger goes through, it will signify the end of a period of over-optimism in Turkey’s GSM sector, which saw the country try to hold four different networks. The two main players in the mobile field have long been Turkcell, owned by the Cukurova Group and with some 16.3m subscribers, and Telsim, owned by the controversial Uzan family, with around 6m subscribers.



Into this market, Aria had entered with something of a splash, following a successful Is Bank-TIM (Is-TIM) bid for the country’s third GSM license back in 2000. In what many analysts described as a textbook case of how not to auction a license, the Turkish-Italian duo bid USD2.9bn, a figure far ahead of any rivals. However, given that this price was to be taken as the basis for the next license auction, the high figure effectively prevented anyone from bidding when the government attempted to sell off a fourth license. As a result, the license was given to Turk Telekom as a sweetener for its prospective privatisation.



Yet that sell off never came, as the global telecom market found itself over extended and over leveraged. The sell off is still awaited, but meanwhile, Turk Telekom established Aycell, which notably failed to attract much consumer interest.



The two networks combined should have around 1.7m subscribers, with a total of around 5,500 base stations. The deal would also give Is-TIM access to national roaming. “The number one mobile operator has 6,000 base stations,” TIM CEO Marco de Benedetti told the daily financial paper Dunya. “By having a network equal to the size of that of the leading operator, we will immediately achieve the same level of quality.”
It will also immediately halt the potentially expensive legal action Is-TIM had been pursuing - a USD3bn case for damages against the Turkish communications authority underway at an international arbitration tribunal in Paris. They had alleged that the state regulator had not enforced roaming agreements.



However, on May 12, Benedetti told the Turkish press that the merger deal had invalidated the court case.



Yet the business has undoubtedly done some damage to Turkey’s image among international investors, with the English language Turkish Daily News dubbing it a “disgrace” in its May 14 edition.



This was a particularly apt time to be raising this issue too, as a new law designed to encourage Foreign Direct Investment (FDI) is currently making its way through the corridors of parliamentary commissions towards the assembly floor. On May 14 it passed the Parliamentary Budget Commission.



The bill is one of the IMF’s requirements for structural change and, if enacted, would mean foreign investors being treated in exactly the same way as Turkish investors. Foreign companies would also be able to transfer profits, dividends, and other revenues via banks or special finance institutions, while there is also a provision that will allow foreign currency capital, company equities, machinery and equipment and industrial and intellectual property rights to be treated as FDI.



If passed, it seems it will receive a generally warm welcome, particularly at a time when foreign investment in Turkey is desperately sought by the government. Privatisation will also most likely be crucially dependent on foreign investors, with the government aiming to raise USD4bn from this year.



The first state industry of any weight up for sell off is the alcohol and tobacco giant, TEKEL. A date for this had been set for end of this month, though now it will be beginning of June.



“Technical issues are being tackled at this stage,” Metin Kilci, acting chairman of the Privatisation Administration (OIB), told the Anatolia news agency May 13, by way of explanation for the slight delay.



The company looks set to draw a considerable amount of interest, with the tobacco section - being sold off separately - already the subject of interested enquiries from multinational giants such as BAT, Imperial and Philip Morris.



The government has its fingers crossed though, that this interest will turn into hard investment on the day.

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