M&A Encumbered Risks Damping Hot Money Bond Party: Turkey CreditErcan Ersoy
Turkish company valuations at double those of peers augur another challenging year for mergers and acquisitions, leaving the country more dependent on so-called hot money to finance its current-account shortfall.
M&A deals, which last year fell to 30 percent of their pre-financial crisis average, may struggle to overcome an increase in prices, according to Istanbul-based buyout firms Unlu & Co. and Turkven Private Equity. The enterprise value of listed Turkish companies is 9.5 times earnings before interest, tax, depreciation and amortization, more than double Russia and Poland, according to data compiled by Bloomberg. The MSCI Emerging Markets Index multiple is 7.4.
A dearth of takeovers is contributing to a drop in foreign-direct investment that’s leaving Turkey dependent on other capital flows to balance its current-account deficit. The gap will probably widen to $60.8 billion this year from $48.9 billion last year, according to a central bank survey published Feb. 15. Outflows from Turkey’s bond market were $1.1 billion in the week ended Feb. 8, the most in eight months and a signal the biggest rally among major emerging markets may be at risk.
“The M&A drop has to do with the valuation of Turkish companies,” Isik Okte, a strategist at the investment unit of state-run lender Turkiye Halk Bankasi AS, said in e-mailed comments from Istanbul on Feb. 15. “Turkish companies compared to European counterparts are simply not that cheap anymore.”
Mergers and acquisitions in Turkey totaled $7 billion in 2012, with half of that coming from a single deal when Russia’s OAO Sberbank bought lender Denizbank AS for $3.54 billion in June, according to data compiled by Bloomberg. That made it the worst year for M&A since the global financial crisis of 2009, and compares with an annual average of $23.4 billion in M&A in the three years preceding the crisis, the data show.
Turkey may get about $15 billion in foreign-direct investment this year “provided we don’t make any political or other kinds of mistakes,” Adnan Nas, deputy chief of the International Capital Association of Turkey, or Yased, which monitors foreign direct investment inflows, said by phone from Istanbul on Feb. 15. “Our current-account balance still needs large amounts of short-term portfolio investments and borrowings against the deficit.”
The current-account deficit was $77.1 billion in 2011, the biggest in the world behind the U.S. Investor concern about the widening gap led to a sell-off in Turkish assets that year, sending yields on two-year benchmark debt as high as 11.5 percent and the lira plunging 18 percent against the dollar, the biggest drop worldwide.
Yields on Turkey’s benchmark two-year notes fell 483 basis points last year, the most among 19 major emerging markets tracked by Bloomberg, as the current-account deficit narrowed to $48.9 billion. The yield rose one point to 5.78 percent today, below the rates on debt issued by higher-rated Russia, India and Brazil.
“Only about 25 percent of Turkey’s current-account deficit is financed through FDI and the remainder should come from borrowings, which means the country is more open to external shocks,” Yarkin Cebeci, an Istanbul-based economist for JPMorgan Chase & Co., said by e-mail on Feb. 15. “But even at the peak of the crisis Turkish firms could borrow from international markets,” he said, predicting “a smaller probability of running into trouble” this year as the global economic outlook improves.
Turkey’s ratio of enterprise value to Ebitda at 9.5 compares with a multiple of 4.2 for Russia and 4.4 for Poland. Stocks in the U.S. Standard & Poor’s 500 Index are valued at 9.6 and 8.3 for the Stoxx Europe 600 Index.
“The multiples on Turkish assets are higher than their European and U.S. peers, which may be a concern, but most investors are ready to pay the price because they believe in the Turkish growth story,” Mahmut Unlu, chairman of Unlu & Co., an investment banking and asset management firm in Istanbul, said by phone on Feb. 15. Foreign direct investment may rise to more than $10 billion this year from $8.3 billion last year, he said.
CarrefourSa, a supermarket joint venture between Carrefour SA and Haci Omer Sabanci Holding AS, Migros Ticaret AS, another retailer owned by BC Partners Ltd., and Finansbank AS, a lender owned by National Bank of Greece, are among potential targets for whole or partial acquisitions this year, Unlu said.
“Ebitda multiples on some assets in Turkey are 50 percent higher than those in other emerging countries,” Seymur Tari, managing director and co-founder of Turkven Private Equity, said by phone on Feb. 15. “But because Turkey grows faster than many other markets investors are attracted.” Turkven is an Istanbul-based buyout firm that has about $1.5 billion of assets under management, including a minority stake in Migros.
Turkish growth may accelerate to 4 percent this year, according to the median of 23 estimates in a Bloomberg survey. The economy probably expanded about 2.5 percent last year, Economy Minister Zafer Caglayan was quoted as saying by the state-run Anatolia news agency on Feb. 13. That’s the slowest pace since a contraction in 2009, as the central bank tightened monetary policy to try and rein in the current account.
The U.S. economy will probably grow 1.9 percent in 2013 year while the euro area shrinks 0.1 percent, Bloomberg surveys show.
The extra yield investors demand to hold Turkey’s dollar debt over U.S. Treasuries was unchanged at 195, according to JPMorgan Chase & Co.’s EMBI Global Index. Turkey’s spread is 80 basis points below the average for emerging markets, compared with a discount of 89 basis points at the end of last year.
The lira was little changed at 1.7671 per dollar at 4:46 p.m. in Istanbul, extending this year’s gain to one percent.
Net foreign direct investment fell to $8.3 billion last year from $13.7 billion in 2011 while “portfolio investments,” including stock and bond inflows, reached a record $40.8 billion, according to central bank data.
“The reduction in FDI leaves Turkey much more vulnerable on hot money inflows, with these now covering 80% of the current account deficit, a record high,” Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd., said by e-mail on Feb. 15. “The risk is that if global risk appetite changes, if the market begins to price out quantitative easing, the move out of lira assets will be brutal.”