TURKEY'S REFINERY PRIVATIZATION: ANOTHER CROWN

UNCLAS SECTION 01 OF 03 ANKARA 005352

SIPDIS

TREASURY FOR CPLANTIER AND MNUGENT
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK
DOE FOR CHUCK WASHINGTON

SENSITIVE

E.O. 12958: N/A
TAGS: EPET ENRG EINV KTDB TU
SUBJECT: TURKEY'S REFINERY PRIVATIZATION: ANOTHER CROWN
JEWEL IS SOLD AT A GOOD PRICE, BUT THE FAT LADY HASN'T SUNG

REF: a) Ankara 269, b)Ankara 3258

This cable has been coordinated with Congen Istanbul.


1. (SBU) Summary: Turkey's Privatization Authority seems to
have taken another important step forward, with a Koc
Holding - Shell consortium committing to pay a higher-than-
expected $4.14 billion for a 51 percent stake in TUPRAS,
Turkey's state-owned monopoly refiner. Given past court
rulings against privatization decisions, and in light of
current challenges to the recent Turk Telekom tender, it is
early to call the TUPRAS privatization a done deal.
However, the GOT is showing it is pushing ahead--despite
controversy--on major privatizations and has a reasonable
chance of consummating one or both of these large
transactions. End Summary.


2. (SBU) In a remarkably transparent televised process,
reminiscent of that for Turk Telekom three months ago, a
consortium of domestic giant Koc Holding and Shell won the
privatization tender for TUPRAS, committing to pay USD 4.14
billion for a 51% share of the refiner. Surpassing all
expectations, the winning tender represented a $8.2 billion
valuation of the company, a 79% premium over current market
capitalization. There was broad domestic and foreign
representation in the nine consortia bidding in the auction.
Losing bidders included Turkey's military pension fund and
industrial group OYAK, Italian ENI, Hungarian MOL, Austrian
OMV, Indian Oil/Calik Enerji, Polish PKN Orlen/Zorlu, a
Petrol Ofisi-led group, and Anadolu/Cukurova. The auction
price commenced at USD 2.78 billion, increasing in bidding
rounds up to USD 4.14 billion. Traded TUPRAS shares
increased 9.18 percent at the opening of the equity market
September 13 (Note: 49 percent of TUPRAS shares are traded
on the stock exchange. The state's share in the company
decreased to 51 percent through small IPO's since 1991. End
Note).


3. (SBU) The TUPRAS privatization gained a record level of
international interest (however without any U.S. interest),
and was the second in pricing following the Turk Telekom
tender in July this year. The wining consortium consists of
Koc Holding (80 percent) and Koc related energy companies
(Aygaz 7 percent, Opet 3 percent); Shell Overseas INV BV
(9.9 percent); and the Shell company of Turkey Ltd (0.1
percent). Following the auction, Koc Holding Energy Group
head Erol Memiogli said Koc Holding would aim at becoming a
regional energy player. He said they would establish a big
retail distribution chain together with TUPRAS,
Opet(domestic retail gasoline company and Aygaz (household
type liquid gas). Memisoglu said the consortium had not yet
decided on how to make the payment as the process had not
been finalized.


4. (SBU) A previous attempt to privatize TUPRAS via sale of
a 65 percent stake in 2004 was annulled when Turkey's top
administrative court, Danistay (Council of State),ruled that
the Privatization Administration (PA) failed to adhere to
the privatization process requirements. A joint venture
between Russian Tatneft and local group Zorlu had won the
tender for a $1.3 billion sale price. The court ruling
responded to a case brought by the Petroleum Labor Union
representing TUPRAS employees.

Market Analysts of Two Minds:
--------------


5. (SBU) Market analysts we queried are of two minds about
the result. Given the heavy foreign interest in Tupras,
Turk Telekom, and the forthcoming Erdemir privatizations, on
the one hand they view the price as indicative of a paradigm
shift for Turkish assets, in that both local and
international players have made the "strategic decision" to
invest in Turkey and are "ready to pay the price" to do so,
even when it involves a significant premium. The Tupras
outcome already has led one brokerage, EFG Istanbul
Securities, to upgrade its target valuations for other
Turkish assets, and to predict that the enthusiasm is
"unlikely to subside."

6. (SBU) Analysts are not sure, however, whether the Tupras
deal itself makes economic sense. Murat Gulkan of Bender
Securities noted to us that it is "hard to justify" the
auction outcome in comparison to pre-auction market cap, and
that the "scope for error is huge" in proportion both to
Koc's funding resources and its own market cap. He conceded
that money is cheap and funding is readily available, but
stressed that the size of the financing requirement is such
that it will require Koc to provide greater collateral and
stricter covenants than it traditionally has for other
financing. These concerns were reflected on the Istanbul
Stock Exchange on September 13, as Koc shares closed down
nearly 10 percent, and led Bender to downgrade Koc to a
target 5 percent below even that closing level. Even
analysts who see a natural fit between Shell and Koc's
distribution network for petroleum products and Tupras, such
as EFG, note that the "high price paid may be hard to
justify in the short term."

Privatization Process - Next Steps
--------------


7. (SBU) The Tender Committee will send the tender result
first to the Competition Authority for its view (30 day
limit),and then to the Privatization Supreme Council for
its approval. The consortium would then establish a company
to put in place the share transfer agreement, and TUPRAS
privatization process would be finalized. Despite Shell's
retail presence in the Turkish market, the general view is
that the sale would not be in conflict with the competition
rules. Arzu Atik from the PA told econ specialist that,
assuming the Shell share stayed at 10 percent, the PA
expected a positive view from the Competition Authority
(Note: Following the decision to sell the all public stake
in TUPRAS in March 2005, the PA established a C-type
privileged "Golden Share" belonging to the Privatization
Authority, which can be exercised at the discretion of the
Turkish Military. The Golden share will remain unless
annulled by the Privatization Supreme Council, and the PA
will appoint a board member to represent the share. End
Note).


8. (SBU) The PA believes newly-crafted legislation
supporting the privatization process will reduce the
potential for a legal challenge like that which led to the
cancellation of the 2004 privatization of TUPRAS. On the
other hand, the Petrol-Is labor union immediately announced
that the union would apply to the Danistay for cancellation
of the TUPRAS sale.


9. (SBU) TUPRAS dominates the petroleum refining and
downstream operations sector in Turkey. The company has
four main refining complexes: Batman in the Southeast,
Aliaga near Izmir, Izmit near Istanbul (the country's
largest refinery),and the Central Anatolian Refinery at
Kirikkale near Ankara. In 2002, TUPRAS' share of the
Turkish fuels and lubricants market was around 78 %, with
other major retailers including BP, ExxonMobil,
TotalFinaElf, Agip, and ConocoPhillips. TUPRAS is Turkey's
largest company in terms of revenues.


10. (SBU) Comment: A favorable economic environment in
Turkey, the EU process, global tight refinery capacity, and
lively domestic and foreign interest in Turkey in general
and in this particular deal in particular generated a hefty
auction price. The Privatization Authority has achieved a
banner year, holding-but not finalizing-- tenders totaling
$13.9 billion, and striving to make its privatization
transactions less subject to judicial attack, but it still
must bring to closure the big Turk Telekom and TUPRAS deals.
The apparent success of the privatization efforts are
indicative of steady improvement in investors' perception of
Turkey's investment environment. Turkish economic
nationalists, who feared delivering the TUPRAS "crown jewel"
to foreigners, may be more comfortable with majority control
by an important domestic interest, the Koc Group. On the
other hand, the very small foreign share in the winning
consortium will mean only a small increase in Foreign Direct
Investment.


McEldowney