TURK TELECOM FINALLY TO BE PRIVATIZED?

UNCLAS SECTION 01 OF 02 ANKARA 006673

SIPDIS

SENSITIVE

USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO
TREASURY FOR RADKINS AND MMILLS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EINV ECPS PGOV TU
SUBJECT: TURK TELECOM FINALLY TO BE PRIVATIZED?

REF: A. ANKARA 6491


B. ANKARA 6480


1. (SBU) SUMMARY. The long-awaited opening of the tender
process for the privatization of Turkey's fixed line telecom
monopoly, Turk Telecom (TT),was announced on November 25,
with the Privatization Administration (PA) seeking bids
through the end of next May for a 55 percent block sale to a
"strategic investor." The road toward privatizing TT has
since the 1990's been fraught not only with repeated delays,
but also with legal obstacles, political sensitivities,
internal wrangling over tender specifications, and outright
cancellations of sales. The GOT's dubious track record on
efforts to privatize TT as well as its other major
state-economic-enterprises (SEEs) (ref A) casts doubt on the
likelihood of a successful outcome.

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GOT Opens the Tender Process
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2. (U) According to the PA's November 25 tender announcement,
the GOT will accept bids for a 55 percent block sale of TT
until May 31, 2005. Interested parties must submit
preliminary bids by January 11, 2005 with due diligence
beginning on February 1. The GOT plans to hold a closed
bidding process and will require bidders to sign
confidentiality contracts. Pre-qualification criteria for

SIPDIS
applicants require that the aggregate of the total assets of
an applicant should be no less than $500 million with an
aggregate shareholder's equity of at least $250 million. An
applicant or a joint-venture (JV) member having not less than
a 5 percent interest in the JV should have at least three
years experience in managing or operating a fixed line or
mobile telecommunications company with at least two million
lines or have controlled, for a minimum of three years, a
fixed line or a mobile telecom company with at least two
million lines. A $30 million bid bond is also required. The
two largest holding groups in Turkey, Sabanci group and Koc
group, have reportedly purchased a tender document and are
expected to make a joint bid for TT.


3. (U) TT's cable TV unit, "Kablonet," will remain outside
the scope of the tender. TT's Internet service provider
(ISP) unit, however, will remain within the scope of the
tender. There had been disagreement between the Competition
Authority (CA)--the independent competition regulator--and
the PA, and between the Telecom Authority (TA) and the CA
during the drafting stage of the tender specification process
over whether or not these units should be sold separately.
Whereas the CA recommended that TT be broken up and its cable
and ISP units be sold separately, the PA wanted to put a
divestment requirement in the bidding document and require
the purchasing company to sell the cable unit after one year.
For its part, the Telecom Authority advised against separate
sales of the cable and ISP units. Before the launch of the
tender, the Transport Minister, who is also responsible for
telecoms, sought to mitigate the potential worry the internal
conflict could cause investors by announcing that the
differences between the CA and TA had been resolved.

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Turk Telecom: The Road to Privatization
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4. (SBU) The long process for the privatization of TT, has
been the prime example of Turkey's underperforming
privatization program (reftel). Following two failed
attempts to sell 20 percent of TT in September 2000 and 33.5
percent in May 2001, the GOT first targeted a new tender for
May 2004. Though the tender process was finally opened in
November, it was preceded by a long period of inaction and
then numerous delays. In September, the GOT had announced
its plans to open tenders for the privatization of TT in the
first week of October. By mid-October, the GOT retracted its
plans and said that they would invite tenders for a
fifty-five percent block sale of TT by the beginning of
November.


5. (SBU) After the failed attempts to sell shares of TT, the
GOT made some improvements to help make the framework for
privatization more favorable. For example, the GOT passed a
law in July 2004 which made it possible for foreign investors
to purchase 100 percent of a state-owned company, which is
significant since many foreign companies have shown an
interest in TT and because the TT privatization is
widely-considered among the most politically-sensitive. The
scope of the GOT-retained "golden share" was also narrowed so
as to only be active in cases where majority shareholders
sought to change the articles and ownership of the company.
PA experts admit that the cash flow generated by TT--reported
to be well in excess of $1 billion per year--is an important
contributor to the GOT's treasury, however, the GOT has
reportedly remained very enthusiastic and supportive of
privatizing TT.


6. (SBU) In a meeting with EconOff, Avea General Manager,
Cahit Paksay, was bullish on a Turk telecom privatization.
Paksay noted that the GOT is serious about privatizing TT and
that they had not created unrealistic expectations for the
sale this time around. Paksay said the potential buyer would
enjoy the extensive, brand-new copper line infrastructure and
monopoly position of TT and claimed that for the latter
reason in particular, company's like Telekom Italia were very
interested in TT. Noting that his bullishness depended on TT
retaining its fixed lined monopoly, he saw Turkey following
the European model where the entrenched monopoly would
maintain a dominant position.

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Comment
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6. (SBU) The GOT's announcement of the opening of the TT
tender process is only the first step in a long road ahead.
Sales of SEE's have historically been stalled in the courts
because of labor grievances and TT privatization has been no
exception. The PA must undertake an aggressive public
relations campaign to allay the concerns of the 61,000 TT
employees who would be affected by the company's
privatization. In addition, some analysts believe that the
price for TT could end up being as low as $2 billion given
the current state of the global telecom industry. Though the
PA says the GOT remains enthusiastic about the sale, a
perceived low price for one of the state's "crown jewels" may
still pose as an obstacle to TT's privatization, as it did in
the GOT's decision last year to cancel the tender of Tekel's
tobacco operations. Even if the price is right, the GOT may
also encounter resistance from elements in the Turkish
establishment who consider Turk telecom to be of strategic
importance. Another privatization challenge is the lack of
clarity on the GOT's plans for liberalizing Turkey's telecom
sector (ref B),creating potential uncertainty for how
investors can value TT. These concerns and a long history of
unsuccessful attempts to privatize TT dating back to the
early 90's do not inspire confidence this time around. If,
on the other hand, the GOT succeeds, it will be a watershed
event, giving credibility to the privatization program and
opening the way for badly-needed modernization of the Turkish
telecommunications sector.





EDELMAN