Contributed By Hergüner Bilgen Özeke Attorney Partnership
2018 was no different from the previous couple of years in terms of the global and domestic economic and political challenges that Turkey faced. As such, it was a moderate year in terms of M&A deal activity, leaving investors hopeful for 2019. According to Deloitte, foreign and domestic investors completed more than 250 deals with a total value of around USD12 billion. Although this marked an increase of nearly 20% on 2017 and was the highest amount reached in the last three years, the Turkish M&A market's USD15-20 billion performance each year between 2010 and 2015 indicates that it has far greater potential.
Over the past year, the impact of the major political issues surrounding Turkey’s economy has been undeniable. In particular, the tension between Turkey and the US due to divergent interests in Syria, Turkey’s potential acquisition of missile defence systems from Russia, the detention of US pastor Andrew Brunson by Turkish authorities for espionage and terrorism, and the diplomatic tension surrounding the possible extradition from the US of Fethullah Gülen, the founder of the Fethullah Terrorist Organisation who was behind the coup attempt in 2016, have had a negative impact on the economic indicators and led to tension in economic relations. The US government doubled the tariffs on steel and aluminium imported from Turkey, while Turkey mirrored these tariffs on a number of US-origin products including vehicles, alcoholic drinks and tobacco. Also, due to FED’s tight monetary policy, the Turkish lira depreciated in value against the US dollar by nearly 40% in 2018. This ultimately led to high inflation rates and a slow growth rate. Significant increase in borrowing costs is another major economic struggle affecting Turkish businesses.
A closer look at the specifics of M&A activity in Turkey over the past year reveals that foreign investors have again dominated the market, taking part in transactions accounting for almost 60% of the total deal value. As expected, privatisation activity was limited in 2018 and amounted to only USD1 billion in total, with notable transactions involving the highly debated privatisation of sugar factories across Turkey. While internet and mobile services were the market leader in terms of the deal volume thanks to the many considerably smaller deals concluded by financial investors, the manufacturing, services and energy sectors remained the top sectors for M&A deals in terms of both deal value and deal volume. There were also significant deals in the food and beverages and e-commerce sectors.
As a developing country seeking capital, it is vital for Turkey to attract foreign investors to make direct investments. Although foreign investors were cautious in 2018 due to the political and economic issues mentioned above, several significant deals were made.
Foreign investors concluded the majority of M&A deals in 2018. Consistent with the recent trend in the Turkish M&A market, European and Gulf-based investors led the M&A deals in terms of deal value. However, Asian-based investors also concluded many notable transactions. Taiwan Cement Corporation purchased 40% of the shares in Oyak Cimento (a leading Turkish cement firm fully owned by the pension fund of the Turkish Armed Forces) and ultimately the indirect shares in Oyak Cimento’s subsidiaries, including five companies listed on the Istanbul Stock Exchange, for USD640 million. Alibaba Group acquired shares in Trendyol, one of the leading e-commerce platforms in Turkey, for USD728 million. These deals are expected to draw further attention from Asian investors to the Turkish market in the coming years. Other major acquisitions involving foreign investors include the acquisition of Denizbank, a privately held bank, by UAE-based Emirates NBD Bank PJSC, and of Turkey’s largest operator of Ro-Ro freight ships, U.N. Ro-Ro, by Danish DFD A/S.
In 2018, 19 projects were granted newly introduced enhanced project-specific government incentives, mainly tax exemptions. These projects include the production of solar power panels, medical equipment, vehicle engines, railway vehicles, certain metal and petrochemical products, etc. Incentive schemes available in Turkey are expected to attract foreign investors to make investments in Turkey by way of acquiring shares in project companies that have been granted these incentives.
A Landmark Year for E-Commerce
The Turkish e-commerce market has boomed in recent years. According to the Informatics Industry Association of Turkey (IIAT), the annual growth rate of the Turkish e-commerce market averaged 37% from 2013 to 2017 and its total size was estimated to be USD11.6 billion in 2017. The retail sector had the highest market share in e-commerce in 2017. The rapid growth of the Turkish e-commerce market is expected to continue in the coming years since online shopping rates in Turkey are still relatively low. According to IIAT’s data, online retail’s portion of total retail in Turkey was only 4.1% in 2017 while generally it averaged 4.8% in developing countries and 9.8% in developed countries.
2018 was a landmark year for the Turkish e-commerce sector since e-commerce giant Amazon finally entered the Turkish market and Alibaba Group acquired a stake in Trendyol. The Trendyol transaction accounts for the highest transaction value in this sector since the 2015 acquisition of Yemeksepeti, an online food-ordering platform acquired by Delivery Hero for a total of USD589 million.
Turkey’s Dilemma in the Food Sector
M&A activities were also notable in the food and beverage sector in 2018, due to the privatisation of sugar factories across Turkey. The total value for these privatisations was nearly USD750 million. However, they have faced strong opposition from factory employees and their trade unions, local communities, sugar beet producers, opposing parties and consumers across the nation, mainly due to concerns related to possible effects on the chain of production if the new owners close the sugar factories due to profitability concerns. Furthermore, the opposition has stressed the current high inflation rate in food prices and referred to the earlier privatisations, especially in meat and milk enterprises, which have led to serious food supply problems.
Turkey faced very high inflation rates throughout 2018, due in particular to the Turkish lira’s performance against foreign currencies. Turkey’s annual inflation rate for 2018 was 20.3% for consumer prices and 33.64% for producer prices. The inflation in food prices was highly debated considering Turkey’s past performance in agricultural and livestock production. In fact, it is currently undergoing intense discussion before the municipal elections to be held on 31 March 2019. The government has recently made a great effort to reduce food prices; however, these prices are not likely to decrease in the long term due to systematic problems. Increasing costs in agricultural and livestock production, inefficient supply chain and a sharp increase in population due to Syrian refugees have caused inevitable price increases in food products. It has been reported that the Turkish government has prepared certain reforms for the food sector; however, its details are not yet mature. There is also the possibility that the government may not revisit its privatisation policy in the food sector in the near future.
In addition to these privatisation activities, the most significant deal in the food and beverage sector was the joint venture concluded between Ofçay, a national tea and sugar producer, and Jacobs Douwe Egberts Group, active in the coffee market both globally and in Turkey. This trend of concluding partnerships with foreign investors is likely to continue in the near future considering the current economic parameters in Turkey, such as corporate indebtedness and high borrowing costs.
Expectations in 2019
Although 2018 was a turbulent year for Turkey, the Turkish M&A market was able to grow. This may be promising for the future. Furthermore, FED’s recently announced 'patience' regarding interest rates, a potential increase in Turkish exporters’ competitiveness due to the weak Turkish Lira, and Turkey’s current constructive diplomatic dialogue with the US and some EU countries encourages us to think optimistically about the future of Turkey’s economy and its M&A market.
However, global and domestic challenges including trade wars started by Trump’s administration that have caused borrowing costs to rise and Turkey’s high corporate debt, which may lead the Turkish M&A market to have another moderate year in 2019.