http://www.stratfor.com/home/giu/archive/032201

Turkey's Telecom Fire Sale
22 March 2001

Summary

Turkey has redoubled efforts to privatize its
landline monopoly, Turk Telekom. After failing to sell off a minority stake
last year,
Ankara sweetened the deal by granting the company a mobile (GSM) license and
increasing the share to be privatized. But because of the ongoing financial
crisis
and a slowdown in the global telecom industry, Turkey will probably have
difficulty
attracting investors. With the IMF demanding progress in privatization,
Turkey will
likely be forced to part with Turk Telekom for less than its market value.

Analysis

Ankara is moving aggressively to privatize state-owned telecommunications
giant
Turk Telekom. New Economy Minister Kemal Dervis announced March 14 Ankara
will increase a planned privatization stake from 33.5 percent to a
controlling 51
percent. From the seller's perspective, the privatization couldn't come at a
worse
time. Turkey is in turmoil, international telecommunications companies are
loaded
down with debt and the global economy is slowing.

Turk Telekom, valued at $10 billion by Goldman Sachs two years ago, would be
Turkey's largest privatization. With 18 million customers and a fixed-line
capacity
of 20 million, TT posted sales of $3.3 billion and profits of $745 million
in 2000. TT
has a monopoly on fixed-line service, which it must surrender in 2004, and
also
controls the fiber-optic cable network used by all mobile operators in
Turkey.

The country's telecommunications market is growing rapidly. The U.S.
Department
of Commerce (DOC) valued Turkish telecom services at $3.1 billion in 1998
and
projected a 12 percent annual increase. In cellular usage alone, Turkey has
far
exceeded growth estimates. Turkcell, Turkey's leading global system for
mobiles
(GSM) operator, boasted 10 million subscribers in December 2000. Turkcell
has a
65 percent market share, meaning Turkey's total wireless market now
approaches
15 million, far surpassing 1998 DOC estimates of 12 million subscribers by
2005.

Despite its size, the market is underdeveloped. Turkey's 25 percent basic
telephone density in 1997 was far below the European average, as was its 2.5
percent cellular density. The sector's lack of development demonstrates its
potential for growth, given the country's large, youthful population and
future
technological needs as it integrates, presumably, with the EU.

[Table Here]

To sweeten the pot for potential investors, Ankara awarded Turkey's fourth
GSM
license to Turk Telekom last September. TT contracted with Siemens and
Ericsson in February to build a new GSM network infrastructure for an
estimated
$100 million. With new infrastructure and its existing market share in
traditional
service, TT should be well positioned to compete with the country's other
three
cellular providers. And, considering its monopoly position and Turkey's
market
potential, Turk Telekom seems like an easy sell.

But obstacles exist. The global telecommunications sector woke up with a
nasty
hangover a few months ago, resulting primarily from a spending spree on
third-generation mobile licenses. Shroder Salomon Smith Barney reported in
January that indebtedness drove down share prices for the average European
telecommunications company by 40 percent last year. The merger mania that
swept the industry for the past few years is over.

Political and economic uncertainty further compound a pessimistic outlook.
Financial crises in November and again last month led to steep drops in the
Turkish stock market and the lira, which dropped 30 percent against the
dollar in
three weeks. Turkey's banking and financial systems are shaky, as is
Ankara's
ability to service an estimated $15 billion in foreign debt. The United
States and
the EU have yet to offer much more than moral support, and, after 17 failed
financial rescue programs in Turkey, the IMF is balking at supporting a
bailout
without serious structural reform.

One such reform is the privatization of Turk Telekom, which Ankara agreed to
last
year as part of a three-year disinflation program. In order to get back into
the IMF's
good graces - and to access $6.25 billion dollars in outstanding loans -
Turkey
may be willing to sacrifice Turk Telekom. A successful sale would send a
much-needed positive signal to global capital markets. Such a sale would
also
generate billions of desperately needed dollars for the treasury.

Turkey failed to receive bids last September for a 20 percent stake in the
company, in large part due to concerns over management control. The Middle
East Economic Digest reported the Turkish Privatization Administration had
not
received a suitable bidder for the 33.5 percent stake as of March 2. With
bids due
by March's end, officials apparently decided to deal directly with the
control issue
by offering a majority stake.

This does nothing to address concerns over Turkey's stability or the
depressed
state of the global telecom market. Nevertheless, pressure on Ankara is
intense
and should lead to generous selling terms. Ankara may be forced to part with
Turk
Telekom for far below its market value. So there may be a good deal out
there, if
anyone is feeling lucky.

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