Turkish M&A and beyond

According to Deloitte, Turkish M&A hit the $10.3bn mark in 2017 with nearly 300 transactions – a Y-o-Y increase of 41% by total value. Foreign investors accounted for a 53% market share in deals that were announced.

In the first half of 2018, the total value of new deals exceeded $8bn. This figure was dominated by three big ticket transactions: Emirates NBD’s acquisition of Denizbank for $3.2bn, DFDS’ $1.2bn acquisition of UN Ro-Ro and Demiroren’s $916m acquisition of Doğan Media. Sectors where most M&A deals were announced included energy, food, insurance, media and broadcasting.

While the overall figure for last year has yet to be published, it has been predicted to hit the $13bn mark. ‘Institutional and private equity investors completed some critical investments and more importantly, they laid the groundwork for future potential investments in 2019,’ says Seray Özsoy, partner at Kılınç Law & Consulting. Not that everything has been entirely plain sailing. Turkey experienced significant economic turmoil in the second half of 2018: a sharp decline in the value of the lira, which tumbled by more than 30% against the US dollar, while inflation and interest rates spiked above 20%. This has inevitably led to some caution among foreign investors.

Nevertheless, the country remains attractive for companies seeking good value acquisitions, particularly SMEs: the average M&A deal size for private transactions in Turkey is typically in the $50-70m bracket. ‘SMEs are generally more active in agriculture, tourism, manufacturing, IT software and development areas, largely because of the geopolitics of Turkey as well as the relevance of these areas to smaller scaled companies,’ says Özsoy.

Against a troubled economic background, she is remarkably phlegmatic: “In every country, political incidents have financial and economic repercussions in the markets, and last year the financial fluctuations in the Turkish economy were no different: the effects encountered in Turkey are perfectly natural. Investors who have previously done business in Turkey did not change course and the amount of investment stayed the same, although new investors that have not previously done business in the country opted to stay away – these investments did not generally materialise.’

To make the Turkish acquisition opportunities more attractive to potential investors, Özsoy points to the financial and tax breaks offered by some other countries: ‘Discounts in lease contracts, aid in the wages of the employees, and exemptions from some tax payments – these are generally directed towards decreasing the initial payments of an investor and are a useful tool in supporting investors early on,’ she suggests.

She also points to recent developments in Turkey: ‘Increases in the tax burden of foreign investors and as a result the cost of operation has increased. To strengthen the investment process, some aid from the government would be beneficial, especially in the form of exceptions and exemptions, or a decrease in percentage payments to the government. Providing such aid would be important because decreasing the risks for foreign investors will ultimately lead to more investors.’

While there is what she describes as a ‘steady flow’ from EU and US investors, Asian companies target specific sectors. She adds: ‘Neighbouring countries, ethnicity, commercial geopolitical proximity, globalisation and business opportunities in specific markets are different reasons for the increased number of investments.’

Kılınç Law & Consulting’s M&A practice focuses on energy, construction, financial capital investment and food industries. Judging from Turkey’s current status and the recently increased investments in energy, banking and finance, we await further potential investments in these sectors,’ says Özsoy. Energy has been the most active sector in Turkey for some time, fuelled by high value privatisations and government incentives for renewable energy. The firm has advised on joint venture and M&A agreements of “several leading energy companies and their subsidiaries especially the pre-contract process,” she says. Roughly 80 per cent of their clients are either foreign investors, or their Turkish subsidiaries, with the energy, construction and engineering sectors being particularly active.

So how does Özsoy envisage the Turkish market evolving? ‘Since 2012, Turkey has improved legislative regulation to adapt to the global standards and advancing technology. More recently, encouraging foreign investors and the facilitation of residence permits, work permits and citizenship have been introduced in the legal system.’ She predicts ‘parallel legal regulations aimed towards attracting more foreign investors to the country. Inward investment in Turkey will continue to increase due to the improvement of the legal regulations and information technology. Consequently, foreign investment is likely to end up being one of the leading factors in Turkish legal market as soon as this year.’