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25 Sep 2019, Stella Zlatareva, EMIS M&A Team

Debt of Turkish businesses to drive deal-making in the country

In the May 2018 Emerging Markets M&A Insider, we focused on the IPO pursuits that numerous Turkish companies had abandoned due to the plunge of the lira. We also predicted at the time that M&A activity was unlikely to pick up in the near-term and alas this is precisely what we observed afterward. Transaction volume involving Turkish targets dropped by nearly 25% between May 2018 and April 2019 compared to the prior equivalent LTM period. 

More than a year later, many Turkish corporations are still struggling to repay their foreign exchange loans borrowed cheaply on the international markets, while Turkey remains mired in economic troubles. Companies are mulling various options to resolve the debt crisis even after an important agreement from September 2018 was signed by Turkish banks to help businesses restructure their loans. Under its terms, lenders and other financial institutions decided to regulate the framework for debt overhauls in order to aid companies in need of a temporary reprieve. Months after the agreement took effect, however, it is widely reported that the efforts have stalled because of the lack of will to take drastic measures. In order to comply with their restructuring deals signed with banks, companies are forced to sell assets and business lines, as well as undergo capital increases. 

A worthy example is one of Turkey’s largest conglomerates, Dogus Holding. The mighty group, known even in popular culture thanks to the Salt Bae meme, has recently divested various hotels, as well as stakes in restaurants, a car dealership, and a marina operator, in order to pare down its hefty debt, which as of 2018 stood at USD 5.2bn. In a related story from this August, Dogus Holding’s controlling owner Ferit Sahenk told Bloomberg that the group was also considering the sale of assets worth as much as USD 900mn in addition to a potential IPO of its hospitality unit. In a similar example, well-known industrial group Yildiz Holding (Ulker Group) sold the Asia-Pacific business of gourmet chocolatier Godiva for up to USD 1.5bn. Meanwhile, smaller Turkish firms are left with no other option but to raise additional equity funding, some of them going as far as doubling their current share capital in order to repay outstanding debts.

A hoped-for recovery of the Turkish economy would bring more clarity on what to expect from the local deal scene, yet as of now, it seems that servicing debt will be a main driver for M&A in the near future. Especially considering the favorably low prices in light of the cheap lira.

Original source: EMIS - DealWatch