VODAFONE WINS TURKISH MOBILE OPERATOR TELSIM

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TAGS: ECPS EINV BEXP TU
SUBJECT: VODAFONE WINS TURKISH MOBILE OPERATOR TELSIM


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This cable was coordinated with Congen Istanbul.


1. (SBU) Summary: In another demonstration of Turkey's
growing attractiveness to foreign investors and a welcome
injection of competition into the mobile phone market,
British giant Vodafone won the competition for Turkey's
second largest GSM operator Telsim with a $4.55 billion
bid. The sale also closed the books on the longstanding
dispute between Telsim and Motorola and Nokia, which had
been defrauded by Telsim's former owners to the tune of
$2.8 billion. The sale to a world class operator should
improve standards in Turkey's underdeveloped telecom
sector, benefiting Turkish users and creating
opportunities for foreign and domestic investors. End
Summary.

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Telsim Auction: GOT and Vodafone Get What They Want
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2. (SBU) In a televised December 13 auction conducted by
the Savings and Deposit Insurance Fund (SDIF),Vodafone's
$4.55 billion bid beat out Kuwaiti MTC Telecom to take
100% control of Telsim, Turkey's second largest mobile
provider. The two other bidders, Egypt's Orascom and
Dubai's Etisalat, withdrew from the fiercely competitive
action early on. Telsim was seized by the SDIF in
February 2004 from its former owners, the notorious Uzan
family, following discovery of a massive fraud at the
family's Imar Bank. Telsim and the Uzans had previously
been sued by Motorola and Nokia for a fraud involving non-
payment of $2.8 billion the companies had lent to Telsim
in the form of cash and equipment.


3. (SBU) Per its prior settlement agreement with the two
companies, SDIF will pay Motorola 20 percent of the sale
proceeds in excess of USD 2.5 billion, on top of an
earlier cash payment of $500 million. Similarly, Nokia
will receive 7.5 percent of the excess. Thus, the two
companies will receive a total of $1.25 billion on their
$2.8 billion claim (not including interest),a far better
result than appeared likely several years ago. SDIF will
bear the risk of any subsequent legal challenge by the
Uzans. As part of the deal, the companies agreed to drop
the legal proceedings, including a case brought to the
World Bank's ICSID dispute resolution body, that have
long soured Turkey's investment climate.

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Welcome Competition in Telecom Sector
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4. (SBU) After the auction, Vodafone Group Director for
Mergers and Acquisitions Andre Sokol said Vodafone plans
to rename the company and invest an additional $1.2
billion over the next three years to introduce new relay
stations, upgrade the existing network and elevate Telsim
to Vodafone standards. With a mobile penetration rate of
only 53%, there is considerable room for improved service
in Turkey. Istanbul analysts also welcomed the sale for
the additional competition Vodafone will provide to the
dominant mobile company Turkcell, whose share price
declined by 6.4% on the news. Transport and Telecom
Minister Binali Yildirim said the positive tide in the
telecommunications sector launched by Turk Telekom's
recent partial privatization continued. Responding to
nationalist fears of foreign domination of the sector,
Yildirim said mechanisms to control the functioning of
all companies in Turkey, domestic and foreign, were in
place.


5. (SBU) Formal transfer of Telsim to Vodafone will
take place after the SDIF Board, the Council of State
(Danistay),the Telecommunications Authority and the
Competition Authority approve the sale. Telsim CEO
Ferruh Tunc said he expected the transfer to be finalized
before March 2006.

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Comment
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6. (SBU) In addition to resolving the longstanding
dispute with Motorola and Nokia, lower-cost and higher
quality telecom services brought about by more
competition should help create other new investment
opportunities in Turkey, including for U.S. companies.
Still, some analysts, like EFG Securities Osman
Memisoglu, raised raised concerns with CONGEN that
investors may have overpaid for Telsim, as some also
think they did in the recent privatizations of refinery
company Tupras and Ergeli Steel. The sale proceeds will,
however, provide a boost to the SDIF's efforts to recover
the huge costs of cleaning up Turkey's banking sector
following the 2001 crisis. From a balance of payments
perspective, the net inflow of $4.2 billion (including
the $400 million VAT Vodafone will pay on the purchase)
will provide a welcome stream of long-term stable
financing for the current account deficit.
Wilson