ISTANBUL BUSINESS BULLISH, BUT SEES INFLATD ASSET

UNCLAS SECTION 01 OF 02 ISTANBUL 001870

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SUBJECT: ISTANBUL BUSINESS BULLISH, BUT SEES INFLATD ASSET
PRICES


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1. (SBU) Summary: In Istanbul meetings October 20,visiting
Special Representative for Commercial ad Business Affairs
Frank Mermoud found both Turksh and international business
executives optimistc about the Turkish economy. They
concurred, hoever, that there is something of a bubble in
Turish asset prices, as local holdings compete with oe
another and with interested international invetors.
Nonetheless, they predicted that the trend or higher
valuations will continue. Executives t the American
Business Forum in Turkey (ABFT) otlined their work program
for the year, noting tat they are collecting business input
for Decembr's Trade and Investment (TIFA) meeting with
Turkey. End Summary.


2. (SBU) In Istanbul, Mermoud et with Cahit Paksoy, CEO of
cell phone operatorAVEA, board members from the American
Business Frum in Turkey, and Haluk Dincer, Sabanci Group
Vce President for Retail Operations. In addition, Mermoud
addressed business students at Koc Universty, answering
questions on subjects ranging fromU.S. business practices to
foreign policy issues


3. (SBU) Mermoud's business interlocutors weregenerally
bullish on the Turkish economy. Paksoy, who outlined the
history of AVEA, which was fored from the companies that
secured (and overpaid for Turkey's third and fourth GSM
licenses, hadaimed for profitability as of 2006, but
achievedthat goal six months early in June 2005. He noted
that market penetration in the sector is currentl 57
percent, and predicted that it should reach 5 to 90 percent
in five years. Paksoy, like Dincer, caveated only the high
valuations that investors are currently placing on Turkish
assets. He suggested that the price paid for assets ranging
from Turk Telecom (to the Oger Group) to Tupras (to Koc
Holding) had been excessive, and might cause problems in the
future. He ascribed the overvaluation to the interest of
foreigners, together with the desire of Turkish holdings to
outdo their rivals.


4. (SBU) In the telecom sector, Paksoy noted that problems
continue as a result of weak government regulation. With the
continued failure of the government to honor its promises to
provide for national roaming and number portability, he
argued that there is no fair competition in the sector, and
that companies like AVEA, which has increased its market
share to 17 percent (right on the heels of second place
Telsim, which was seized from the infamous Uzan clan and will
soon be sold at auction, but well behind market leader
Turkcell's 65 percent) are at a disadvantage. An additional
problem is Turkey's high communications taxes. At 66
percent, they are the highest in Europe. Originally
temporarily imposed after the 1999 earthquake, they have
since become permanent. Paksoy noted the dramatic impact
they have had on cell phone usage in Turkey: whereas average
monthly charges in 1999 were for 2.5 hours per user, by 2005
that total had fallen to 67 minutes. Paksoy and Mermoud
agreed that exposing Turkish regulators to the U.S.
regulatory system for telecommunications might be useful, and
Paksoy immediately arranged an appointment for Mermoud the
following day with the head of Turkey's Telecommunications
Authority to explore the possibility. Turkish telecom
operators, and AVEA in particular, he said, would be happy to
help defray the costs of any such visit. As for AVEA, Paksoy
said that in future the company should be more open to
cooperation with American suppliers, as its Italian partner
(which has previously blocked such a step) is in the process
of selling its shares to Turk Telekom (which will thus double
its stake to 80 percent).


5. (SBU) ABFT executives briefed Mermoud on their current
work program, noting their efforts to develop a partnership
program with New York businesses, and asking for assistance
in identifying a speaker who could headline a fundraising
event for the initiative. They noted that their membership
is up to 63 companies, and said they are now making a
significant push in the defense sector. Pfizer's Alp
Sevindik outlined the research-based pharmaceutical
industry's mobilization to combat intellectual property
rights issues in Turkey, noting the recent negative news that
"ghost applications" currently exist at the Ministry of
Health for many of the molecules that the industry has held
back from the Turkish market until new data exclusivity
regulations come into force. Halim Neyzi, ABFT President,
outlined his company's fear that the GOT may cancel an energy
contract on which it has expended considerable resources.
SUBJECT: ISTANBUL BUSINESS BULLISH, BUT SEES INFLATED ASSET
"We will want to be compensated" if that occurs, he said.
Neyzi added that the association is gathering input from its
members for the upcoming Trade and Investment (TIFA) talks,
and hopes to forward it to the U.S. and Turkish governments
by mid-November. He noted that ABFT has attempted to address
one key concern, rule of law, with the Turkish government,
but has found resistance in the Ministry of Justice to
engaging in a dialog with foreign companies on the issue.
More generally, Neyzi said, implementation of GOT commitments
is the key sticking point, and the key area where they wish
to see progress.


6. (SBU) In a separate meeting with Sabanci's Haluk Dincer,
Dincer outlined the Group's response to the bird flu
emergency. He noted that poultry sales had fallen
immediately and dramatically in Turkey, notwithstanding the
fact that chicken is the country's most affordable source of
protein. The group has cut production 50 percent and prices
have fallen by a similar amount, increasing the price
differential with red meat twofold (typically meat is three
times as expensive as poultry in Turkey; that differential is
now six). Dincer expects the reaction to diminish within
several months, if the outbreak is contained. More
generally, he was bullish on the economy, while concurring
that asset prices have become inflated. He noted that
Sabanci intends to expand its operations in the energy
sector, and expressed hope U.S. companies would join in that
effort. He said the group's flagship Akbank is open to
foreign cooperation, but that it is unlikely to sell more
than a 15-20 percent stake to a foreign investor.
JONES