CITIGROUP TO PURCHASE STRATEGIC STAKE IN TURKEY'S

UNCLAS SECTION 01 OF 02 ISTANBUL 001917

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/SE AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - J.ROSE

E.O. 12958: N/A
TAGS: ECON EFIN TU
SUBJECT: CITIGROUP TO PURCHASE STRATEGIC STAKE IN TURKEY'S
THIRD LARGEST BANK


This cable was coordinated with Embassy Ankara.


1. (SBU) Summary. Citigroup's October 17 announcement that
it intends to purchase a 20% share of Turkey's most
profitable retail/commercial bank heralds the largest direct
foreign investment in Turkey's financial sector. Valued at
$3.1 billion, the deal pairs Citigroup with Akbank, Turkey's
third largest bank. According to Citigroup Turkey Managing
Director Steve Bideshi the decision to take a strategic stake
in a large bank rather than take over a smaller, weaker bank
was influenced by Turkey's history of extreme market
volatility. Bideshi expects the deal to be final by the end
of the calendar year. End Summary.


2. (U) On October 17, Citigroup announced its intention to
purchase a 20 percent equity share in Akbank. Valued at $3.1
billion this is the biggest FDI deal thus far in Turkey's
financial sector. Akbank, a full-service retail/commercial
bank controlled by the Sabanci family and Sabanci Holding, is
Turkey's third largest bank in terms of assets ($35.8
billion) and the country's most profitable banking
institution. Sabanci Holding owns 34 percent of Akbank
shares and will retain a controlling interest. Citigroup is
paying a 16.5% premium over the market value of the Akbank
shares. The deal brings the percentage of foreign ownership
in Turkey's banking sector to 21.9%, following a wave of
foreign purchases of stakes in Turkish banks.


3. (SBU) Citigroup has been planning to expand in retail
banking in Turkey for over a decade. In the mid-nineties
Citibank showed interest in Osmanli Bank but lost the deal to
Garanti Bank. In the intervening years, Citibank was widely
believed to be interested in acquiring several small or
medium sized Turkish banks however these rumors were never
confirmed publicly. Citibank officers have discussed
unsuccessful takeover plans with us in the past without
mentioning specific takeover targets. During a meeting three
years ago the then Citibank country manager told us that
takeover plans had been frozen by corporate headquarters as a
result of investigations into the Arthur Anderson scandal
thus stalling expansion plans in Turkey. More recently,
Citigroup lost out to National Bank of Greece in a bidding
battle over Finansbank.


4. (SBU) Citigroup's Turkey Managing Director Steve Bideshi
has been bullish on Turkey, noting to us that Turkey compares
favorably to the BRIC countries (Brazil, Russia, India,
China) in terms openness of the financial sector and
investment opportunities. Bideshi told us that Citigroup
agreed to acquire 20% of Akbank in a negotiated deal that
will enable both Akbank and Citigroup Turkey to exploit the
strengths and best practices of the other side. For
instance, Citibank has a fairly small branch network in
Turkey with only 54 branches while Akbank has over 600
branches. Although noting that many details had not been
negotiated, Bideshi opined that through this partnership
Citigroup would be able to market international-type products
through the Akbank branch network. Citigroup intends to
retain its branch network in Turkey and will compete with
Akbank "when we have to" according to Bideshi but will
collaborate whenever possible.


5. (SBU) Bideshi noted that there had been some degree of
surprise when Citigroup announced that it would take a 20%
share of one of Turkey's largest banks rather than making a
complete takeover of a smaller bank. Although there is a
mechanism for Citigroup to increase its ownership share built
into the deal, Bideshi explained that he believed that the
days of the 100% takeover were over. Without absolute
certainty with regards to returns 100% takeovers are too
risky, particularly of a structure the size of Akbank. Plus,
given Turkey's history of extreme volatility taking a
strategic stake in a bank that had withstood volatility well
in the past was a better bet, he explained.


6. (SBU) Despite an official estimate of 60-90 days of review
by regulatory agencies in both the U.S. and Turkey, Bideshi
does not expect the review by regulatory agencies to delay
the finalization of the deal beyond the end of the year. His
October 17 discussions with the Banking Regulatory and
Supervision Agency (BRSA) and Central Bank in Ankara were
quite positive. Furthermore, Sabanci Holding, which must
register the sale of shares, has assured him that the Capital
Markets Board is unlikely to object to the sale.


7. (SBU) Comment: The sale is striking in several respects:
it demonstrates the continued interest in financial sector

ISTANBUL 00001917 002 OF 002


acquisitions by foreign direct investors and will help keep
FDI numbers for 2006 (or perhaps 2007) high by historical
standards. It is also the third large direct investment by a
U.S.-based group in the past year. On the other hand,
Citigroup's concerns about Turkish volatility and therefore
its willingness to accept less than a controlling stake are
indicative that despite the recent wave of FDI, risks and
concerns remain for foreign direct investors, particularly
for those without a local partner.
JONES