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

UNCLAS SECTION 01 OF 02 ANKARA 002078 SIPDIS SENSITIVE TREASURY FOR RADKINS AND MMILLS NSC FOR BRYZA AND MCKIBBEN USDOC/ITA/MAC FOR DAVID DEFALCO E.O.12958: N/A TAGS: EFIN EINV PGOV TU 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. -------------- Potential Hurdles -------------- ¶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