Record IPO


Economic News

22 Jul 2010
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While a number of IPOs have been postponed in the wake of the Istanbul Stock Exchange's steady slide this year, the record-breaking sale of a 15% stake in Turk Telekom will act as a boon for the bourse despite reservations surrounding the low pricing of the shares.

On May 13 shares in the IPO, which were allocated on a 60:40 ratio to local and foreign investors respectively, were priced at 4.6 YTL each, close to the top of the 3.9-4.7 price range set by the Turkish privatisation agency. Demand for shares among Turkish investors was 4.7 times higher than the amount on offer, and 4.3 times higher from international investors. The IPO fetched a total of YTL2.42bn ($1.9bn), a record figure for the ISE, giving Turk Telekom a market value of $12.95bn.

Some analysts welcomed the deal as Turkey needs foreign investment to finance a current deficit estimated at $45bn this year.

However, the fact that the company will trade at 6.4 times its 2007 profits - well below the average of 9.9 times earnings for shares in the 50 top ISE listed companies - has led some economist to argue that the offering was underpriced. The government had budgeted a YTL3.9bn ($3.1bn) income from the sale but considering the current financial situation, many have deemed the IPO a relative success.

"Compared to previous ones, it could have been better, but under current market conditions it was a success for the Privatisation Administration," Yurdal Yalman, head of research at Oyak Securities, told international media.

The IPO represents the second stage of the privatisation process of Turk Telekom. In 2005 the government sold 55% of its stake in the company for $6.65bn to Oger Telecom. Dubai-based Oger Telecom is 35% owned by Saudi Oger, a Saudi Arabian comglomerate that is controlled by relatives of Rafiq Hariri, the late Lebanese prime minister.

Despite the liberalisation of the long-distance fixed line market, which began in May 2004 with the allocation of over 40 licenses to potential competitors, Turk Telekom remains the unchallenged market leader in the fixed line segment.

Turk Telekom also maintains a 81% stake in Avea, Turkey's third largest mobile phone operator. With around 10m customers at the end of 2007, Avea is the smallest operator behind Vodafone (16.2m) and Turkcell (35.4m). However, Turkcell's market share has fallen from 65% at the end of 2004 to 57.5% today as its rivals have proved successful in attracting an increasing proportion of subscribers. Moreover, the solid financial backing Avea receives from Turk Telekom is a major advantage in its endeavour to increase its current 17% market share.

Turkcell stock slid 6% in the lead up to the Turk Telekom IPO, as investors sold the stock to buy into the IPO, before rallying 3.4% on 13 May. Turkcell's share price also dropped at the beginning of May after the company reported a lower than expected rise in profits. However, the company continues to trade at 13.2 times last year's earnings.

Competition within the mobile sector is set to become increasingly intense following the recent confirmation by the Turkish Telecommunications Board that mobile number portability will be introduced on November 13.

The effect of increased competition bodes well for consumers as mobile operators are increasing the services and technology available to their subscribers. On May 13 Turkcell announced a partnership with US-based Bubble Motion to introduce voice SMS services in Turkey. On May 5 Vodafone unveiled that it will bring Apple's iPhone to no less than 10 markets around the world, including Turkey. No details were given about when exactly the iPhone will be released in Turkey but it is expected to reach Europe by the end of the year.

In the long-term competition in the Turkish GSM market could be further complicated by the arrival of of Mobile Network Virtual Operators (MNVOs), the first of which are expected to be launched in June. Virtual operators will be able to use the infrastructure of the existing mobile operators to introduce their own brands and build a customer base.

Whether increased competition will lead to a significant fall in call costs in Turkey is another matter. Turkey has some of the highest mobile telephony taxation rates in the world, around 45% of the total cost of mobile ownership. Cüneyt Türktan, CEO of Avea, told OBG that though Prime Minister Recep Erdogan had previously suggested a 5-10% reduction in mobile taxation, no progress had been made. "I don't see a window of opportunity [for reductions] in the near-term," he said. "It is a major problem for users and operators [and] if left unaltered it could bar the introduction of new services in this area," he added.

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