PETKIM: PA GOES ON THE ROAD TO PROMOTE TURKEY'S

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SUBJECT: PETKIM: PA GOES ON THE ROAD TO PROMOTE TURKEY'S
PETROCHEMICAL COMPANY



1. (SBU) Summary. PETKIM (Petrokimya Holding A.S.),Turkey's
state petrochemical company, is preparing for an IPO of 30
percent of its shares in late April. Turkey,s
privatization officials, together with privatization
consulting companies, left for the U.S. last week to attend
an investor,s conference in NYC and Boston. Petkim's
"Road-Show" is also headed to London, Frankfurt, Vienna, and
Stockholm. Petkim is the youngest petrochemical facility in
Europe and its operations reportedly conform to EU standards.
Though Turkey's privatization track record is dismal, the
Petkim deal has a reasonable chance of success because it is
a minority share IPO rather than a block sale. End Summary.


2. (SBU) Petkim is considered a bellwether privatization for
the Privatization Administration (PA) particularly since it
recently failed in its second attempt to sell the tobacco
operations of its state company TEKEL last week (Post will
report on TEKEL septel). Last week, the PA started its
road-show for an IPO of 30 percent of Petkim's shares, aiming
for share trading on April 21. The PA currently holds 88.86
percent of Petkim's shares; the balance is held by a pension
fund, and 4.14 percent is traded on the Istanbul Stock
Exchange. Since January 2003, the PA launched successive
unsuccessful block sales of Petkim in amounts of 51 percent
and 88.86 percent. The winner of the first bid, the Uzan
Group's Standart Kimya Oil and Gas Company, was unable to
fulfill its obligations under its bid in 2003, in an early
indication that the Uzans were running into financial
trouble.


3. (U) The road-show team is composed of Privatization
Administration (PA) President Metin Kilci, his deputy Osman
Ilter, Petkim General Manager Kenan Yavuz, and his assistant
Hayrettin Ozturk. Representatives of the privatization
consulting companies will also participate: Finans Invest
Ass GM Ismail Erdem (he could be reached at 90 533 261 53 96
GSM),Ahmet Okcular (Finans Invest),and Kayihan Korkmaz
(CAIB, Istanbul office). The team was in NYC on April 7, and
in Boston on April 8. Petkim's road-show is also headed to
London, Frankfurt, Vienna, and Stockholm this week. PA
Petkim Department head Mustafa Ozel said that due to the
strict rules, the team planned to meet only qualified
investors to disclose company details, but that interested
parties could contact Ismail Erdem from the domestic
consulting company &Finans Invest8 on his mobile.


4. (U) Petkim is Turkey's exclusive producer of basic
petrochemicals and major producer of derivatives and
thermoplastics. Petkim anticipates strong growth potential
in the petrochemical sector in Turkey. The company's main
complex is located at Aliaga, near Izmir, where it has
separate facilities for production of ethylene, low and high
density polyethylene, polypropylene, and other aromatic and
petrochemical products.


5. (U) Petkim has generally been profitable, but posted a
loss of $57 million in 2003 (most current financial report),
primarily due to high upstream and energy prices (without a
commensurate increase in downstream product prices) and weak
global demand. The company has announced a net profit of
$46 million on net sales of $1,056 million in 2004. The
company has reduced its employee levels to 3,967 in 2004,
compared to 6,779 in 1999, partly through sales of paper
factories.


6. (U) Petkim increased revenues by 42 percent and cut
expenses by 17 percent in 2004, despite the sharp increase in
oil prices. The fall in expenses was mainly due to the
company,s decision to downsize; 13 departments were closed
and 350 employees left their jobs (retired or laid-off).
Petkim,s capacity investments in the 2001- 2004 period
amounts to $330 million, $100 million of which was made in

2004. Petkim financed all these investments internally.
Petkim works at 100 percent capacity and is able to sell all
of its production. Petkim currently accounts for 30 percent
of the Turkish petrochemicals market and plans to increase
its share to 50 percent. Petkim's exports amounted to $182
million as of 2004 and the company has targeted $220 million
in exports in 2005.

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Potential Hurdles
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7. (U) The "Petrol-Is" labor union's report on Petkim claims
that the petrochemical industry needs new investments to
increase the quality of production. According to the report
PETKIM's total assets reached $1.2 billion in 2004 and the
company has a $500 billion production capacity. The same
report says that Petkim should not be privatized. Petrol-Is
Labor Union is against PETKIM's privatization and is expected
to challenge the privatization process again.


8. (U) The same report points out that PETKIM used to meet 85
percent of the domestic demand in its early years. However,
being part of the privatization portfolio since 1987, the
company did not invest in any new capacity expansion and this
in turn has caused its market share to decrease to 30
percent, as of 2004. Petrol-Is leader Mustafa Oztaskin was
reported saying that, from their perspective, a public
offering of the shares was no different from a block-sale and
the union would continue challenging the decision.


9. (U) After repeated delays and few successes, the GOT and
the PA have identified 2005 as a critical year for
privatization in Turkey. Market analysts comment that the
sectoral growth potential and the recent increase in
Petkim,s profit performance makes Petkim, along with
steelmaker Erdemir and telecom provider Turk Telecom,
particularly attractive to foreign investors. Privatizations
have faced resistance from the judicial system and labor.
Several large privatizations have been blocked by Turkish
court rulings in recent years. Labor unions oppose
privatization because employees fear they will no longer
benefit from public sector employee status. However,
Petkim's employees' status as public sector employees will
not change in Petkim's minority share IPO.


10. (SBU) Minority share IPO's like Petkim's seem to be
easier for the PA to pull off for two reasons. First, the
state retains effective control. And second, by allowing the
stock market to value the shares, the PA is less open to
charges of selling state assets too cheaply, since Turkish
courts and prosecutors have tended to doubt that block sales
with small numbers of bidders reflect the true value of the
state companies.


11. (U) Detailed information is available in English at the
PA/Petkim web sites:

http://www.oib.gov.tr/ index eng.htm
http://www.petkim.com.tr/petkimweb/main.aspx

EDELMAN