December 1, 2023

DealBook: In Turkey, Western Companies Find Stability and Growth

Yeni Raki, a brand of a traditional Turkish alcoholic beverage produced by Mey Içki, a spirits company that was bought by Diageo in August.Tolga Bozoglu/European Pressphoto Agency Yeni Raki, a brand of a traditional Turkish alcoholic beverage produced by Mey Içki, a spirits company that was bought by Diageo in August.

LONDON — Turkey’s split personality has often left it caught between two worlds. Some European nations have vocally opposed the country’s attempts to build closer ties with the West. And many of its Middle Eastern neighbors have been wary of the avidly secular state.

Now, the country’s identity is an advantage for deal makers. Turkey doesn’t have the economic baggage of its European neighbors, which are dealing with the sovereign debt crisis. With a relatively stable government, it has also angled for a more prominent role in the Middle East, as countries like Syria and Libya continue to face turmoil.

The combination of economic growth and political stability has attracted cash-rich companies looking to make acquisitions. So far this year, deal volume has totaled $10.6 billion, ahead of European countries like Austria, Portugal and the Czech Republic. In 2010, mergers and acquisitions reached $25.6 billion, up from $1.1 billion a decade ago.

“The economic backdrop in Turkey is better than in other European economies and has been rebounding faster,” Emre Yildirim, an executive director at JPMorgan Chase who focuses on Turkish mergers and acquisitions. “It’s a large country that’s growing quickly, so it makes strategic sense for companies to take a look.”

The country’s rapid growth has been a critical factor for foreign buyers. Turkey’s gross domestic product is on track to increase by 8 percent this year.

It also has a growing middle class, an attractive characteristic to Western consumer product companies. The local population totals more than 73 million, almost the same size as Europe’s largest economy, Germany. And the country’s G.D.P per capita has more than doubled to $10,094 in the last decade, according to the World Bank

Turkey is hardly immune from the usual growing pains associated with emerging markets. Inflation hovers near 10 percent, affecting the country’s overall competitiveness. Reliance on debt-ridden Europe may also start to pinch. Roughly 50 percent of Turkish exports are bought by countries in the European Union, according to the Organization for Economic Cooperation and Development, a policy research organization based in Paris.

Still, Turkey “remains one of the good performers,” said Rauf Gönenç, chief economist for Turkey at the O.E.C.D. While growth is expected to slip to 3 percent next year, the country outpaces its European counterparts, many of which are heading for recession in 2012.

From a deal-making perspective, the region’s troubles may help spur activity, notably in the financial services sector. Over the last decade, European banks, including the National Bank of Greece and UniCredit of Italy, acquired local institutions as part of their debt-fueled expansion. Now, many of Europe’s banks, which are facing losses linked to their sovereign bond exposure, want to sell assets outside their local markets to meet new capital requirements.

One target could be DenizBank, the Turkish subsidiary of Dexia, the Franco-Belgian bank that received a $5.4 billion government bailout in October. As part of Dexia’s nationalization, the European bank has agreed to be broken up. Analysts say a number of relatively strong international players, including HSBC, are circling the local operations in Turkey.

“International banks may look to make disposals and sell profitable Turkish assets as part of their global deleveraging,” said Mr. Yildirim of JPMorgan.

Foreign companies are also trying to capitalize on the growing consumer demand.

Earlier this year, Diageo started moving to expand into the emerging markets, aiming to increase its revenue from such economies to 50 percent by 2015. Turkey was at the top of the list. Each year, more than one million people reach the country’s legal drinking age. And despite the country’s large Muslim population, local authorities encouraged foreign investment, said Andrew Morgan, president of Diageo’s European operations.

“Turkey has attractive G.D.P growth, is politically stable and has a big population,” Mr. Morgan said. “It’s a very important market for us.”

In August, Diageo bought Mey Içki, Turkey’s largest spirits company, from the private equity firm TPG Capital for $2.1 billion. The local business has more than an 80 percent market share in the local spirit Raki. It also operates roughly 50,000 outlets across Turkey that Diageo now uses to sell its international brands, such as Johnnie Walker and Smirnoff.

Other Western firms also are tapping into the local consumer market. In November, the brewer SABMiller agreed to buy a 24 percent stake in the Turkish beverage company Anadolu Efes in a deal worth $1.9 billion. To take advantage of rising domestic and international energy prices, the British investment firm Vallares, founded by Tony Hayward, the former chief executive of BP, bought the Turkish oil and gas exploration company Genel Energy for $2.1 billion.

Turkey’s renewed push to privatize state-owned industries has attracted international attention, too. As it has liberalized over the last 20 years, politicians have sold to the private sector stakes in much of Turkey’s energy and telecom industries. To further reduce the financial burden on state coffers, other government-backed businesses, like Turkish Airlines, which is 49 percent owned by the state, could soon be up for sale.

“Privatizations will include infrastructure, financial and energy assets,” said Richard Evans, a partner at the law firm Allen Overy, which opened an office in Istanbul in December to capitalize on the growing mergers and acquisitions activity.

“Right now, Turkey is a much more attractive place to do business than Greece or Spain,” Mr. Evans said.

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For European Union and the Euro, a Moment of Truth

On Saturday, the crisis swept away its second leader, when Prime Minister Silvio Berlusconi resigned after 17 years of dominance in Italian politics to the jeers and cheers of crowds in Rome.

Both there and in Greece, jumbled parliaments came together with urgency to install more technocratic governments that are committed to delivering the difficult reforms and austerity measures demanded by the European Union, the European Central Bank and the International Monetary Fund.

Despite those drastic and tangible steps, though, there is a host of problems that could quickly overwhelm Europe’s progress.

Looming over all the discussions of reform and financing mechanisms is the slowdown in the Continent’s already anemic growth rate, to 0.5 percent in 2012, and even the threat of a double-dip recession, the European Commission said in a forecast for the euro zone last week.

That calls into doubt the adequacy of the euro zone’s latest attempt to placate the markets, the lagging effort to bolster the $605 billion European Financial Stability Facility to $1.4 trillion or to find other funding. The task will become that much harder in a recessionary environment, especially as France’s credibility with investors begins to decline.

“I think we’re in very dangerous territory, and the euro zone has to act soon,” said Simon Tilford, chief economist for the Center for European Reform in London. “There isn’t really a muddle-through option right now. And those who argue that it’s possible for the south and Italy to default or deflate into competitiveness are fanciful and flying in the face of evidence.”

The damage that can result, he said, is potentially severe “to their economies, debt burdens, social and political stability, democratic accountability, and their belief in their European allies and in the European Union itself.”

At the center of it all sits Germany, leading the bloc of Northern European countries, which also includes the Netherlands and Finland, steadfastly maintaining that austerity and fiscal rectitude on the part of the debtors, no matter how painful, represent the only path to resolving the crisis. Any proposals to share the burden with the heavily indebted countries by collectivizing European debt — even though they may have contributed to the prosperity of the northern countries by consuming their exports — are rejected out of hand, largely for fear of a political backlash.

When Germany’s council of independent economic advisers proposed to Chancellor Angela Merkel last week a way to share European debt to protect Italy and Spain, she dismissed the idea as impossible without changes to European Union treaties. She has also opposed any expansion in the European Central Bank’s role in buying up the bonds of the indebted countries, which could hold down interest rates on their debts, let alone allowing the bank to guarantee Italian debt.

But critics say there is no time for the treaty changes Mrs. Merkel is talking about; those could take years to put in place.

“The crisis must be solved right now, and it simply will not wait for these instruments to fix it,” said Bernhard Rapkay, chairman of Germany’s Social Democrats in the European Parliament.

The vulnerability of Italy — the third-largest economy in the euro zone and the fourth-largest debtor nation in the world — brought the crisis into the core of the euro zone. For all the speculation over weaker countries eventually choosing to leave the euro, there is really no euro without Italy, certainly not a euro that can be considered a common European currency.

And if borrowing becomes so expensive for Italy that it is priced out of the markets, which seemed a real possibility last week, there is no so-called wall of money big enough to bail it out or to guarantee its $2.6 trillion debt.

“We’ve entered a make-or-break scenario,” said Thomas Klau, a German who heads the Paris office of the European Council on Foreign Relations. “The present situation with Italy now is sustainable for days, perhaps weeks, but not months. This new chapter either writes the endgame of the euro zone, or it precedes a much bigger leap into political and economic integration than all those made so far.”

With each bout of uncertainty, speculative attacks come closer to the core of the European Union. Greece teeters, Italy wobbles and France begins to tremble. The precariousness of the situation was on full view Thursday when a leading ratings agency, Standard Poor’s, mistakenly suggested on its Web site that it had downgraded France’s prized AAA rating, prompting a sell-off in French government bonds.

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Little Relief Seen From High Oil Prices

PARIS — Depending on your standpoint — industry, producer or consumer — the current elevated oil price might be caused by speculation, political instability or stronger demand for fossil fuels from improving growth.

But as the speakers at an oil conference in Paris demonstrated Wednesday, few people are willing to bet that the price of crude will fall drastically in the near term, given the confluence of factors supporting prices.

“Demand plus costs are increasing — tell me how you could see a reduction in oil prices?” said Christophe de Margerie, the chief executive of the French oil company Total. “We’d be very happy to see an oil price going back to $80, but I don’t believe it.”

In London, Brent crude oil from the North Sea for May delivery was trading at $121.70 a barrel late Wednesday, up 28 percent since the end of last year and higher in particular since the conflict in Libya removed a large portion of that country’s 1.6 million barrels of crude production a day of the market.

That fact that Saudi Arabia and the Organization of the Petroleum Exporting Countries have committed to make up the difference has failed to cool prices.

Mr. de Margerie said oil prices were being buoyed by the concerns about political stability in the Middle East and worries about the future of nuclear power as a result of the effects of the earthquake and tsunami in Japan last month. “Short term, there’s enough capacity available,” he said. “But for the long term the best way we can avoid rising prices is investment in projects, nonconventional energy and reducing consumption in all countries.”

His group plans to invest €5 billion, or $7.2 billion, by 2020 to develop new energy sources, including solar power and biomass.

Baseline forecasts suggest that global demand for oil will rise to 106 million barrels a day by 2030 from 86 million in 2010, about one million barrels a day each year.

Hussain al-Shahristani, Iraq’s deputy prime minister for energy, said his country would help to feed the demand. “Much of the country remains unexplored,” he said. “There’s a very high probability of new discoveries in the near future.”

Iraq will soon announce its plan to auction of oil and gas exploration licenses for 12 blocks, he said, its fourth since the new government was installed after the demise of the regime of Saddam Hussein.

Iraq currently has 143 billion barrels of proven reserves, excluding the semiautonomous Kurdistan region, and a goal of increasing production several times, to 11 million barrels a day over the next decade, which should be seen as “an assuring buffer for world oil supply in the coming decades,” Mr. al-Shahristani said. He attributed the recent “gigantic price movements” on “the underlying global economy rather than the pure fundamentals of the crude oil market.”

“Oil prices have been surprisingly insensitive to supply and demand,” he added. “Volatility in oil prices have been more due to speculation in futures market and political instability, as in the case of Libya.”

The price of oil should be above the lowest level that allows for profitable new investment and below a level that is so high that it impedes growth, he said, adding that oil companies tend to believe that anything under $60 or $70 a barrel would dissuade new projects.

“So far we have not really seen any serious impact on world growth” from current oil prices rates, he said.

Mohamed bin Dhaen al-Hamli, the energy minister of the United Arab Emirates, said, “Financial oil markets are choosing to ignore market fundamentals preferring to bet on a worst-case scenario, leading to an increase in oil prices.” OPEC members will provide “the necessary crude and committing the required investments” to support growth, he said, adding “there is little we can do in terms of price control which is set by the international market.”

He said that the U.A.E. remained committed to investing in nuclear power despite events in Japan and would proceed with plans to build four nuclear reactors to generate power in coming years.

He pointed to “speculation” as playing an important role in bidding up prices recently.

Rilwanu Lukman, a former president of OPEC and a former oil minister from Nigeria, said oil was still “a cheap source of energy” in historical terms. “The crude price is not responsible for the problems we have in the world economy,” he said. “The real cause of the problem is heavy taxation, which some of the consumer countries impose on their nationals.”

European countries refuse to examine this issue because of the revenue its brings them, he said.

In the meantime, investors appear to be assuming that elevated prices are here to stay. Serene Lim and Mark Pervan, analysts at the bank Australia New Zealand Group, on Wednesday pushed up their forecast for Brent crude prices to $128 a barrel by the end of the first half. “We believe that the geopolitical risk premium is here to stay, at least the rest of this year,” they wrote in a research note.

The French industry minister, Éric Besson, said his country’s presidency of the Group of 20 leading economies, which runs through 2011, would work to improve transparency of oil supply data and strengthen market regulation to “prevent potential manipulation.”

He said that the development of derivatives had gone beyond simply covering risk, which had been their raison d’être.

Didier Houssain, director of energy markets and security at the International Energy Agency, which primarily represents industrialized nations, emphasized there was no “fundamental” reason for prices to rise as high as they did in 2008, when they neared $150 a barrel.

“It’s not a repetition of 2008 because there is some slack in the market,” he said. In 2008, there was a real problem of supply and demand given an unforeseen surge in demand from China. “This year everyone sees demand at a lower level and growth in demand is lower,” he added. “We are not too worried — if we strip out the geopolitical factors.”

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