Pragma Expects CVCI, BC Capital, Argus Exits in Turkey in 2013

Private equity firms may choose this year to exit their investments in Turkey’s grocer Migros Ticaret AS, clothing retailer Boyner Buyuk Magazacilik AS and Memorial hospital group, said Kerim Kotan, managing director of investment adviser Pragma Corporate Finance in Istanbul.

Kotan cited “the M&A market conditions along with potential investor interest” as reasons for the expected exits. Last year, Pragma completed 8 deals that it says were valued at about $650 million including selling 30 percent of Turkish hosiery maker Penti Corap Sanayi & Ticaret AS to The Carlyle Group.

Citi Venture Capital International, or CVCI, a buyout fund owned by Citigroup Inc., bought 30 percent of Boyner Buyuk for $48 million as well as half of Beymen Magazacilik AS, a unit of Boyner Buyuk, for $143 million in 2007 through Fennella Sarl. CVCI’s partner Boyner Holding AS is a likely buyer, Haberturk reported Feb. 22. CVCI may also decide to sell Istanbul-based generic drugmaker Biofarma Ilac Sanayi & Ticaret AS this year, said Kotan.

“I expect Turkey’s healthcare, branded food, restaurant operations, media and entertainment as well as finance industries to see increased level of M&A activity this year,” Kotan said. “An increase in the middle-income group’s disposable income and net wealth directly benefit these industries.”

Canceled Auction

The government canceled the sale of operational rights of Turkey’s toll roads and two Bosporus bridges on Friday, citing lower than expected prices submitted during their auction. A group including Koc Holding AS, Turkey’s biggest group of companies, Istanbul-based private equity firm Gozde Girisim Sermayesi Yatirim Ortakligi AS, and Malaysia’s UEM Group Bhd bid $5.7 billion in Ankara on Dec. 17. The government may have an initial public offering of shares instead of a sale, Milliyet reported, citing Prime Minister Recep Tayyip Erdogan on Sunday.

Kotan said he expected “M&A deal volume this year to be around $24 billion, lower than the 2012 levels, which was about $30 billion, after the cancellation of the highways privatization deal.”

Turkey’s economy, which expanded 2.5 percent last year, according to Economy Minister Zafer Caglayan, is forecast to grow 4 percent this year to $858 billion. Turkish mergers and acquisitions will probably amount to 3 percent of gross domestic product this year, compared with 3.5 percent in 2012, with the slowing deals sustained by privatizations, Deloitte & Touche LLP said Jan. 3.

Finance Deficits

At a minimum, M&A transactions will reach $15 billion as the government is expected to sell state assets to help finance budget and current account deficits, said Mehmet Sami, Deloitte’s partner for financial services in Turkey.

Celikler Taahhut Insaat & Sanayi AS, an Ankara-based builder and miner, bid $2.25 billion to buy the 600-megawatt Seyitomer power plant and operate the coal mine that feeds it in a government auction on Dec 28. A group consisting of local builders Cengiz Insaat, Kolin Insaat, Limak Insaat won an auction to operate the electricity grid on Istanbul’s European side for $1.96 billion Dec. 14.

Providence Equity Partners Inc., a Rhode Island-based buyout firm that holds 46 percent at Digiturk, Turkey’s biggest digital TV platform, may also sell the stake, Kotan said.

Possible Sales

Medical Park Saglik Hizmetleri AS, partly owned by Carlyle Group LP, is also up for sale, he said. TPG Capital and CVC Capital Partners Ltd. are competing to acquire as much as 70 percent of the Turkish hospital chain, people with knowledge of the matter said Nov. 21.

In 2010, Argus Capital Ltd., a European buyout fund, and Qatar First Investment Bank purchased 40 percent of hospital chain Memorial Health Group.

An attempt by CVCI to sell Biofarma failed in 2011, when the owners, which also include Partners in Life Sciences and the Greek private-equity firm Global Finance, hired JPMorgan Chase & Co. to manage the sale at a value of as much as $700 million for the entire company, people familiar with the sale then said.

BC Partners Ltd. leads a group of buyout firms that formed MH Perakendecilik & Ticaret AS, which bought the entire Migros stake from Koc Holding AS and smaller shareholders for $3.25 billion in 2008 in the biggest private equity deal in the country’s history. The firm cut its stake to 80 percent after a secondary share sale at Migros in 2011.

Deal Sizes

Average deal sizes in Turkish mergers and acquisitions won’t probably change in the next two to three years from the 2012 average of as much as $110 million, Kotan said.

“In the next 3 years, the transaction size in most of the M&A deals will continue to be below $250 million in Turkey, which will continue to be a mid-cap market,” Kotan said.

Turkish investors are increasing their share in the total M&A volume with almost half of the deals auctioned last year won by locals, Kotan said. “If you exclude privatizations, foreign investors had as much as 80 percent of share in the volume.”

Completed deals, which last year fell to $7 billion, or 30 percent of their pre-financial crisis average in Turkey, 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 9.4 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.

Higher Multiples

“It’s only natural to have higher multiples in Turkish assets than those in Western countries as investors want to benefit from higher growth in the country, and they are paying exactly for this in terms of higher multiples,” Kotan said.

At 9.4, Turkey’s ratio of enterprise value to Ebitda compares with a multiple of 4.1 for Russia and 4.4 for Poland. Stocks in the U.S. Standard & Poor’s 500 Index are valued at 9.4 and 8.3 for the Stoxx Europe 600 Index.

CarrefourSa, a supermarket joint venture between Carrefour SA and Haci Omer Sabanci Holding AS; and Yapi Kredi Sigorta AS, a non-life insurer that also has a life unit both owned by Yapi Kredi Bankasi AS, are among other assets that may be sold this year, Kotan said.

Before it's here, it's on the Bloomberg Terminal.