Turk Telekom Wrestles With Privatization, Eyes Caucasus and Central Asian Expansion

Turkey's newly appointed economy boss is trying to sell his economic reform ideas to foreign lenders during a visit to Washington which began March 26. Tucked away in the details of Kemal Dervis's revival program is a bold commitment to completely privatize Turk Telekom, the country's monopoly fixed line operator. If it works, the plan could put an end to the eight-year saga of failed attempts to sell off the telephone company, and fuel the company's growth in the Caucasus and Central Asia.

"My beautiful marriageable daughter" is how Enis Oksuz, Turkey's colorful Minister of Communications, is fond of characterizing Turk Telekom. For a long time, his excuse for opposing the sell-off of the state-owned utility was that unscrupulous foreign suitors would steal the girl without paying her dowry.

But the demands of the (now defunct) IMF-inspired disinflation program meant that last December, Mr Oksuz had to swallow his objections and go along with a plan to raise $3.5 billion by selling a 33.5 percent stake in Turk Telekom to a strategic partner, who would inject management expertise and new technology into the company.

He need not have worried. The tender has failed to attract a single bid from the already debt-ridden international telecom operators, and this despite the promise of substantial management rights, a sticking point in earlier failed attempts to privatize the company. "We are not interested in Turk Telekom," Telecom Italia's Roberto Coloninno said March 21. Ironically, he was speaking at the launch of Turkey's third GSM network, a joint venture between Telecom Italia Mobile and Turkey's Isbank.

Now, as part of his plan for structural reforms in the wake of February's financial meltdown, the new economy minister, Mr. Dervis, is proposing to sell off 51 percent of Turk Telekom to a strategic investor and the remaining 49 percent in stages to the public.

"A sale on these terms is possible," says Yavuz Uzay, senior telecoms analyst with the leading Istanbul financial house, Global Securities, "providing the government doesn't insist on setting a minimum price." That could be problematic, as Telekom's valuation has been dropping like a rock. Analysts say the company, worth an estimated $20 billion just two years ago, would be lucky to fetch $8 billion at the moment. They also point out that its value will continue to fall as the January 2004 deadline approaches for Turk Telekom losing its monopoly on fixed-line business and infrastructure.

And yet, Turk Telekom looks highly eligible on paper. It is the 13th biggest telecom in the world by subscriber numbers (18.5 million). There is substantial potential for growth: the government plans to boost penetration from the current 28 percent to 40 percent of the population by 2005. The company's infrastructure is relatively up-to-date, and it has ambitions to expand into regional markets, particularly in the Caucasus and in Central Asia.

But Telekom is hamstrung by a bloated workforce of nearly 74,000, and by blatant political interference. "What Turk Telekom needs is for someone to run it like a proper commercial enterprise," says Global's Uzay.

That description pretty much applies to Turk Telekom's rivals in the mobile telephone sector, which has been deregulated since 1994. The market leader, Turkcell (NYSE: TKC) has built up a subscriber base of 10 million in just seven years. Turkcell is aggressively pursuing acquisitions in the region, with participations in Romania, Azerbaijan, Georgia, Northern Cyprus and the Middle East, and is scouting opportunities in the Ukraine, Albania, Kyrgyzstan, Moldova and Turkmenistan. In Kazakhstan it has a 49 percent stake in Kcell, the country's second GSM operator. Turkey's second biggest mobile operator, Telsim, is also active in Kazakhstan, through K-Mobile.

Meanwhile a new threat to Turk Telekom's revenue stream is looming in the shape of the Internet. Although, strictly speaking, Turk Telekom still has a stranglehold on all voice services, that won't count for much if past experience is anything to go by. In other areas like satellite TV, and more recently digital TV platforms, where technology moved beyond the scope of existing legislation, enterprising private operators openly flouted the restrictive legislation and waited for policymakers to catch up.

The danger is that if Dervis' plan doesn't work this time around, Enis Oksuz's marriageable daughter could end up a spinster aunt -- unable to find a buyer at any price. "That would be a shame," says an investment banker who has first hand experience of Turkey's privatization problems, "but Turkey could learn to live without the money. The damage to investor confidence and the government's credibility in terms of pushing through structural reforms would, however, be fatal."