YAPI KREDI DEAL WILL VAULT KOC INTO BIG LEAGUES OF

UNCLAS SECTION 01 OF 02 ISTANBUL 000218

SIPDIS

SENSITIVE

STATE FOR EUR/SE AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EFIN ECON EINV TU
SUBJECT: YAPI KREDI DEAL WILL VAULT KOC INTO BIG LEAGUES OF
HEALTHIER BANKING SECTOR

REF: A. ISTANBUL 97

B. 2004 ANKARA 1437

C. 2004 ISTANBUL 1558

Sensitive but unclassified. Not for internet distribution.
This message was coordinated with Embassy Ankara.


1. (SBU) Summary: The January 31 deal to purchase Yapi
Kredi Bank from the
embattled Cukurova Group will vault Koc Financial Services
into the front rank
of Turkish banking, fulfilling a long-standing goal of the
Koc Group. More critically, it will remove a major cloud
hanging over the Turkish banking sector stemming from
Cukurova,s continued ownership of one of Turkey,s largest
banks. Details remain to be worked out, pending final
completion of due diligence on the bank, but by reaching
preliminary agreement before the January 31 expiration of the
period when it alone had the right to sell the bank, the
Cukurova Group avoided
bringing the Savings Deposit Insurance Fund (SDIF) into the
sale process.
Istanbul markets and analysts have been generally bullish on
the deal, with
overall indexes rising and the two principal stocks
themselves also
appreciating handsomely. Less clear is the fate of Turkcell,
Turkey's leading
GSM operator and the chief remaining asset of the ukuroa
Group. After a
series of contradictory announcements from various partie,
Ko GroupCEO
ulent Ozaydinli made clear on Febuary 3that Koc is focused
on Yapi Kredi and
not on the Cukurova Group's telecommunications assets. He
confirmed that Koc
had given Cukurova a 12-month option to repurchase the shares
of Turkcell owned
by Yapi Kredi, leaving the GSM operator's future clouded.
End Summary.


2. (SBU) To the surprise of most analysts but the pleasure
of Istanbul stock
indexes, which took the opportunity to extend their rally,
the Koc and Cukurova
Groups met the January 31 deadline imposed by the SDIF for
sale of Yapi Kredi.
Under the agreement, Koc will buy the 44.53 percent of shares
held by the
Cukurova Group and its affiliated companies for just over USD
1.3 billion and
the 12.4 percent of shares held by the SDIF for USD 300
million. In addition,
Koc will issue a tender call for other minority shareholders.
The USD 1.6
billion sale price (EUR 1.157 billion) values the entire bank
at USD 2.7 billion.
The bulk of the purchase price is expected to be returned to
the bank to repay the
USD 2 billion the Cukurova Group owes the bank. Given that
final due diligence
is yet to be completed, depending on its outcome the final
purchase price may
be adjusted. Among the issues to be resolved are the
valuation of A-Tel
telecommunications (widely believed to be booked at an
unrealistic value on the
bank's balance sheet-- and the subject of a lawsuit brought
by the Capital
Markets Board (SPK) against the former Yapi Kredi Bank
board),Fiskobirlik (USD
400 million in overdue receivables from a hazelnut state farm
cooperative,
dating back to the 1980s, which few expect to be realized),
and potential
funding of the bank's pension plan.


3. (SBU) Given these issues, some of our banking contacts
expressed mild
surprise at the purchase price for the bank, judging it
higher than they
anticipated. (Indeed, rumors earlier in January pegged the
purchase price at
USD 900 million, well below the announced figure.) Though
details are still a
closely guarded secret (and we have not yet been successful
in meeting with Koc
Financial Services),they note that there are also
indications that the Koc
Group may write off some of the Cukurova Group's USD 2
billion debt to the
bank. Also unclear is the manner in which the 13.1 percent
of Turkcell held by
the bank is handled in the valuation.


4. (SBU) An additional uncertainty relating to Turkcell
surrounds the
simultaneous expiration of the Cukurova Group's share
repurchase option on
January 31. After a series of contradictory announcements
regarding the
option's status (Cukurova said it would run until October 31,
while the SDIF
and Banking Regulatory and Supervisory Agency (BRSA) said it
had expired),the
Koc Group announced that it would grant the Cukurova Group an
additional year
to purchase the shares, and would grant a slight discount
(some EUR 55 million)
if it exercised the option in the first six months.
Subsequently, the Yapi
Kredi Board (which was appointed by the BRSA in March 2004)
said that it had
final say over the shares' fate, and that it had not approved
any such
extension. Most analysts have concluded that while
technically true, the
latter announcement is essentially irrelevant, since Koc will
replace the board
when the purchase is finalized, and it is doubtful the board
would move on the
sale in the interim.


5. (U) The press has speculated that by purchasing the bank
Koc was "killing two birds with one stone." The move puts
Koc into the banking big leagues and also positions itself to
take over the Cukurova Group's telecommunications assets, Koc
CEO Bulent Ozaydinli officially denied that goal in a
February 3 press conference, however. The bank purchase, he
said, was simply aimed at raising the Koc Group's profile in
the financial world. While Koc is interested in
telecommunications (and is partnering with Sabanci for the
forthcoming Turk Telekom privatization),he said it does not
intend to get into the sector by profiting from another
group's misfortunes.


6. (SBU) Comment: Much detail apparently remains to be worked
out, and a number
of important issues are still unclear, but indications are
that the deal will
move forward. One senior executive in the bank told us that
the process has
been eased by the fact that four senior executives at Koc
Financial Services,
including the CEO, came up through the ranks at Yapi Kredi
Bank, and had
extensive familiarity with its operations up until the late
1990s. Most
analysts are bullish on the acquisition, seeing speedy
resolution of the Yapi
Kredi ownership issue as good for Turkish markets and for the
banking sector as
a whole. BRSA Chairman Tevfik Bilgin has several times told
emboffs that Yapi Kredi is BRSA,s biggest concern, hinting
that it was &too big to fail8. If the Koc deal is
finalized, it will be a major step forward in the long
process of cleaning up the legacy of the 2001 crisis in the
Turkish banking sector. With the purchase, Koc will jump
from 8th to 3rd in the ranks of Turkish banks, leap-frogging
industry leader Akbank and trailing only Isbank and Halkbank.
One senior banking contact, however, who formerly headed the
BRSA, warned us not to underestimate the challenge that Koc
is taking on. Up to now, he noted, Yapi Kredi has focused on
maximizing its market share and not its profits. (Kocbank, a
third the size of Yapi Kredi, nonetheless
outperformed it several fold in terms of profits in 2004).
The challenge now,
he said, will be to show that the bank can make money. End
comment.
ARNETT