energy deals turkish market

8/2/2019 Energy Deals Turkish Market

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www.pwc.com/tr/energy

2010 Annual Review

Energy DealsMergers and acquisitionsactivity within theTurkish energy market


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2 Energy Deals

Contents

Welcome

Report highlights

Oil and gas

Deal totals

Looking ahead

Utilities

Contact us

3

4

10

6

12

8

14

Methodology and terminology

Energy Deals 2010 includes the analysis of cross-border and domestic deal activity inoil, gas and electricity markets in Turkey. The analysis is based on publicly availableinformation and encompasses announced deals as of 31 December 2010, includingthose pending financial and legal closure. Deal values are the consideration valueannounced or reported and figures relate to actual stake purchase and are notmultiplied to 100%. All presented totals of deals are inclusive of estimates for deals

with no reported value. This document is also available at www.pwc.com/tr/energy.


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Welcometo the new format of our annualreview of the deals environment

in the Turkish energy sectorWe hope to see the ongoing regulatorychallenges and financial problemsironed out and translated into record-breaking deal values in 2010.

These were the closing commentsof our Energy Deals 2009 report.Our expectations were met, in that

the deal environment was distinctlybusy for the second half of 2010,mainly on the back of the rush to

wrap up the tenders for the long-awaited big tickets in the utilitiessector. Total deal number hit 53,amounting to US$17.2bn, mainlycomprising privatisations concludedin the electricity distribution andretail segments. This made a pleasantcontrast to the entirety of 2009, whenthe transaction machine halted forthe evident reasons. Not only that,it was also a better year than 2008,

which we had termed at the timea record year.

It seems things are getting back tonormal. But it is definitely anew normal, simply because whatthe markets went through over thepast two years has redefined the waydeals are engineered. Although thefinancial markets have recovered,debt financing is still harder to securethan it was before the crisis, andinvestments require more equity.

On the other hand, regulatorycertainty has strengthened itsposition among competitivenesscriteria, and its absence is reflectedin the lack of representation amonginternational players and privateequity investors, particularly in utilitytransactions within the Turkish deal

arena.Looking ahead, while it is hard toexpect 2011 to be a carbon copy of2010, the expected kick-off of thelong-awaited privatisation of thestate electricity generation assets andnatural gas distribution companyin Istanbul (GDA) will probablyconstitute the backbone of our nextEnergy Deals report. The legislativeand structural push towardsconsolidation and vertical integrationamong the growing discussion on the

margins in the petroleum market, onthe other hand, is likely to awake thedeal environment in this segment.

We hope you find this thirdissue of our Energy Deals seriesenlightening and that it assists youin understanding what drives thedeals and how this is reflected in theevolution of the energy businessin Turkey.

Faruk SabuncuEnergy, Utilities &Mining Leader

Engin AlioluPartner, Transactions

3Energy Deals


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4 Energy Deals

Report highlights

An almost unbreakablerecord yearDespite the effects of the global crisis,the Turkish deal markets post-crisis

recovery in 2010 was so strong that itsaw more than double the combineddeal value of 2007, 2008 and 2009.US$17.2bn was generated from atotal 53 deals. The average deal valuehit US$325mn, more than tripled the2009 average of US$87mn. In thesame vein, the share of public dealsby value improved to 86% in 2010.Utility transactions failed to attractforeign players, mainly due to theongoing regulatory uncertainty in

the Turkish market. By comparison,the oil and gas front attracted moreinternational interest.

It was all about utilityprivatisationsPrivatisation of power and gas

distribution companies made theutilities sector the transaction hubof 2010, with 12 tenders out of53 deals in total. Tenders for 11power distribution companies andBakentgaz raised US$13.5bn intotal, 79% of the total deal value in2010. Of this, US$6.7bn was froma single company, MMEKA, eitherby itself or via JVs. However, the

latest decision by the Competition

Authority blocking the way for thehighest bidders for Boazii, Gediz,Thrace and Dicle, moving to preventpotential dominance of the electricitydistribution market will change thisfigure, unless potential legal actionby the companies overturn thisdecision.

Private deals in the power generation

segment were mostly for assets at thenon-operational stage. In the totalcapacity of 2.7 GW that changedhands in 2010, the share of HPPs wasc. 45% and the rest was made up ofthermal PPs, with no share for otherrenewables, to some extent reflectingthe fading excitement about themamong the decision makers.


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5Energy Deals

Just the beginning foroil and gas

Welcome to the worldof the new normal

Deals in the oil and gas arena tripledtheir share of total deal value to

10% in 2010. The OMV-Petrol Ofisideal was particularly significant,as it represented a shift in marketleadership from a local player to aninternational one.

The Competition Authoritys decisionto limit the duration of the usufructsand rental contracts betweendistributors and dealers to five yearscame to remodel market scenarios;minimising upfront payments and

investments by distributors whilereducing their margins. With therecent open call by the government tomarket players, asking them to alignmargins with the European average,the result is now much closer toconsolidation necessary for survivalin this segment.

Our predictions last year fared well,and we started to see transactionsin the storage segment increase innumber, mainly due to NationalStock Requirements coupled with thescarcity in available land.

The upswing in the Turkish energymarket is confirmed within thenew normal: steady growth indemand versus ongoing uncertainty,coupled with scarcer creditcreation. Accordingly, the closingof the recent utility tenders must beclosely tracked, and it would not besurprising to see this leading to newtransactions as part of the search forrequired finance.

The calendar for the privatisationof the state electricity generation

portfolios is to span 2011 and 2012.The GDA tender is anothermega deal in the pipeline. Higherforeign interest is the marketexpectation, despite regulatoryuncertainty.

We anticipate positive signalsregarding WPP licensing to lead to a

lively deal environment. Nonetheless,we do not expect that the ratificationof the amendments to the RenewableEnergy Law will boost investmentsand as such the deal activity in thisarea.

The recent shake up in contracting,and growing discussion about theabove-EU average profitabilitymargins will push furtherconsolidation among fuel

distributors, as well as verticalintegration along the value chain.

It will be hard to match 2010.Nevertheless, on the back ofthe upcoming generation assetsprivatisations, it is still realistic toexpect strong deal prospects in 2011.

US$17.2 billionof energy deals in 2010; more than double ofcombined 2007, 2008 and 2009 value


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6 Energy Deals

Deal totals: an almostunbreakable record year

Despite being affected by the globalcrisis, the Turkish deal marketspost-crisis recovery in 2010 was sostrong that it saw more than double

the combined deal value of 2007,2008 and 2009.

In 2010, the Turkish energy markethosted a total of 53 publicly discloseddeals, versus 19 in 2009. The overallcombined deal value hit US$17.2bn,

with an average deal value ofUS$325mn, more than triplingthe 2009 average of US$87mn.

Transactions in the utilities segmentcontinued to make up the majorityof activity, comprising 48 of 53 dealsin total number and 90% of the

total deal value. Compared to 2009,mostly as a result of full compliancewith the privatisation calendar, thetotal number of utility deals and theaverage deal value both tripled in2010; the total utility deal value grewtenfold.

The total deal value in 2010 rocketed toUS$17.2bn, higher than ever, mainly thanksto a firm commitment to finalising utilitytenders

Activity in the Turkish oil andgas market also picked up, withthe completion of a long-awaitedtransaction in the fuel retail market.

Stricter regulatory enforcement inthe storage segment, on the otherhand, proved right our predictionsin last years report and ended in amajority stake acquisition. Together

with other deals in the E&P andLPG markets, the total deal valuein this market increased from onlyUS$55mn in 2009 to US$1.7bn in2010, with an average deal value ofUS$340mn higher than that forutility deals.

Figure 1: Total Energy Deals in 2009 and 2010

FY09 FY10 YoY change

NumberValue

(US$mn)Average

ValueNumber

Value(US$mn)

AverageValue

% number % value

Utilities 17 1,600 94 48 15,500 323 182% 869%

Oil and Gas 2 55 27 5 1,700 340 150% 3002%

Total 19 1,655 87 53 17,200 325 179% 939%


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7Energy Deals

The rule did not change in the public-private deals split, thanks to thecompletion of 11 tenders for utilities.Despite making up just 21% of thetotal deal number, the share of public

deals by value increased from 72% inthe previous year to 82% in 2010.

An analysis of deal actors originsdisplays a striking differencebetween the utilities and oil and

gas markets. Despite the resilientdemand prospect for powerand gas, the transactions andin particular the privatisationtenders failed to attract foreignplayers, including private equityinvestors. This was mainly due tothe ongoing regulatory uncertaintyin the Turkish market. On the otherhand, international names from

Austria and the US found the oiland gas front more investment-

worthy and were involved in threeof the five deals. Ultimately foreignparticipation by number decreasedfrom 25% in 2009 to 12%in 2010.

2,000

2007

2008

2009

Utilities Oil & Gas

2010 90%

97%

87%

86%

13%

14%

3%

10%

- 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000

Figure 2: Total deals between 2007 and 2010 by value (US$mn) and number of deals

Total 17,200 (53 deals)




value generation forpublic deals

18%for private deals

82%

versus

88%local involvement

12%foreign

versus


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8 Energy Deals

Utilities: transaction hubfor 2010

Electricity distributioncompany deals rocketed

to US$12.3bn

Deals remaining tobe completed

Privatisation of power and gasdistribution companies, i.e., thetransfer of operational rights fordistribution and retail services until2036, made the utilities sector thetransaction hub of 2010. Of 20 powerdistribution regions that had beenput on shelf back in 2004, 11 were

tendered this year on the back of thededication to comply with the alreadydelayed schedule. These regions wereFrat, Vangl, amlbel, Uluda,Trakya, Dicle, Toroslar, Akdeniz,Boazii, Gediz and stanbul AsianSide (AYEDA) with an aggregatesupply of 86.4 TWh to 18 millionconsumers in 2009.

The bid for five of them, namelyToroslar, Akdeniz, Boazii,Gediz and AYEDA, exceeded thepsychological bid threshold ofUS$1bn; the total raised by these11 tenders for the power utilitiesreached US$12.3bn, 72% of the totaldeal value in 2010. And US$6.7bn,

or 54%, of this figure was from asingle company, MMEKA. However,the latest decision by the Competition

Authority, blocking the way for thehighest bidders for Boazii, Gediz,Thrace and Dicle and moving toprevent potential dominance of theelectricity distribution market willchange this figure, unless potential

legal action by the companiesoverturns this decision.

The current figures pushed theaverage bid value per MWh fromUS$101.4 in 2009 up to US$143 in2010. This can be explained by thefacts that the big tickets were kept to

the end, that distribution and retailis the key to vertical integrationdown the value chain and, last butnot least, this will not happen before2036, excluding the small probabilityof the licences changing hands inthe meantime.

Despite high expectations, 2010was not the kick-off year for theprivatisation of the state powergeneration portfolios, excluding thetender for the operational rights to asmall hydropower portfolio totalling162MW. The private deals in thissegment were mostly for assets at

the non-operational stage. Given thelong licensing period and scarcity ofopportunities for promising green-field start-ups, the interest in HPPsintensified, making up c. 45% of thetotal capacity of 2.7 GW. Subject tothese transactions, the rest whollycomprised thermal PPs.

The absence of WPPs in this pictureis hardly surprising, largely due tothe licensing process, which has beendelayed since 2007, and fading hopesregarding the upward amendment inthe feed-in tariff levels for renewablepower generation.


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9Energy Deals

n.d.: not disclosed*: Includes estimated deal value for undisclosed deals

Figure 3: Utilities deals in 2010

Date Announced Target Stakes in % Acquirer Acquirer Nationality Deal Value

US$mn

BiS Enerji SGM Enerji Turkey

Two local hydro projects EnerjiSA Turkey

Firat Elektrik Aksa Elektrik Turkey

Vangolu Elektrik Aksa Elektrik Turkey

Camlibel Elektrik Kolin Insaat Turkey

Uludag Elektrik Limak Insaat Turkey

Ickale Enerji Akenerji Turkey

Six local hydro projects Reservoir Capital Canada

Five local hydro projects Energo-Pro Czech Republic

Energaz STFA Turkey

EUAS power plants (18 groups) Various companies Turkey

Anel Enerji Ralos New Energies Germany

Idil Iki Enerji Aksa Elektrik Turkey

Bogazici Elektrik Is-Kaya & MMKEA Turkey

Gediz Elektrik Is-Kaya & MMKEA Turkey

Trakya Elektrik Aksa Elektrik Turkey

Dicle Elektrik Karavil-Ceylan JV Turkey

Nisan Enerji Boydak Enerji Turkey

Baskentgaz MMKEA Turkey

Dogal Elektrik Hamza Dogan Turkey

Muradiye Elektrik Boydak Enerji Turkey

Enbati Elektrik Kardemir Turkey

Altek Alarko Alsim Alarko Turkey

Ayas Enerji Oyak Group Turkey

Entek Elektrik AES United States

Damla Su Enerji Ergun Bal Turkey

Kudret Enerji Nuh Enerji Turkey

Pamuk Elektrik Nuh Enerji Turkey

Anadolu Yakasi Elektrik MMKEA Turkey

Toroslar Elektrik Yildizlar SSS Holding Turkey

Akdeniz Elektrik Park Holding Turkey

Total

8-Jan-10

19-Jan-10

18-Feb-10

18-Feb-10

18-Feb-10

18-Feb-10

11-Mar-10

24-Mar-10

30-Apr-10

10-May-10

3-Jun-10

3-Jun-10

17-Jun-10

9-Aug-10

9-Aug-10

9-Aug-10

9-Aug-10

10-Aug-10

16-Aug-10

10-Sep-10

21-Sep-10

29-Sep-10

4-Oct-10

8-Oct-10

1-Dec-10

6-Dec-10

6-Dec-10

6-Dec-10

7-Dec-10

7-Dec-10

7-Dec-10

50%

100%

100%

100%

100%

100%

100%

75%

100%

47%

100%

5%

100%

100%

100%

100%

100%

50%

80%

80%

70%

100%

50%

51%

50%

85%

90%

100%

100%

100%

100%

250

n.d.

230

100

259

940

n.d.

23

404

n.d.

440

11

n.d.

2,990

1,920

622

228

n.d.

1,211

n.d.

n.d.

13

n.d.

n.d.

136

n.d.

n.d.

n.d.

1,813

2,075

1,165

15,500*

The mega deal on the gas distributionfront was the privatisation ofBakentgaz, which supplied 2.1bnm gas (2009 statistics) to1.2 million consumers in Ankara in2009. The highest bid of US$1.2bn

was again submitted by MMEKA,which undersigned a total value ofUS$7.9bn together with its winningbids in power distribution tenders.

These significant bid values andfierce competition during tenderscan be considered a signal for themarket to return to normal. But itis definitely a new normal, simplybecause what the markets went

through over the past two yearshas redefined the way deals areengineered. Although the financialmarkets have recovered, debtfinancing is still harder to secure

than it was before the crisis, andinvestments require more equity. Inaddition, the recent decision by theCompetition Authority is alreadygiving signs that the process forsecuring financing will be insufficient

for the closing.

3


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10 Energy Deals

Oil and Gas: back to life

Renewal of c. 7,500

dealership contracts hasalready caused a stir

In contrast to the silence in 2009,activity in the oil and gas arena waslouder in 2010; raising the share ofrelated deals in total deal value from3% in 2009 to 10% in 2010. Thelargest contribution to this came fromthe finalisation of the long-awaitedPetrol Ofisi-OMV deal, in whichOMV increased its share in PetrolOfisi to 95.75%. The deal value ofUS$1.4bn has re-energised the fuelretail segment, which had until thenbeen in virtual hibernation. Thistransaction also derives significancefrom the shift of market leadership

from the hands of a local group tothose of a global one.

The long-term contraction in the bulkand cylinder LPG segments led to atransaction between an LPG retailerand fuel retailer, with Milangaz, thethird-largest LPG retailer, acquiring

70% shares in M Oil, a mid-sizedfuel retailer. With probably similarmotivation, an intra-LPG marketdeal occurred in the form of the totalacquisition of Exengaz by pragaz.

More important than thetransactions, however has been theCompetition Authoritys decision tolimit the duration of the usufructsand rental contracts betweendistributors and dealers to five years,on the grounds that these long-termcontracts forced the dealers intoexclusive supply contract extension,

thereby having a foreclosure effecton the market. The retroactivecharacter of this decision andtherefore its provisions relating tocontracts enacted prior to this date have already engraved 2010 on themarkets mind.

Despite widespread expectationsthe existing regulatory measures,such as the minimum sale amountor financial requirements, which donot positively discriminate againstsmall players have not yet resultedin consolidation of the market.However, the reshuffling caused bythis change in dealership contractterms is rewriting the marketscenarios: The significant decrease inupfront payments and investments bydistributors is coupled with reducingmargins, used as a negotiation toolin contract renewals with dealers.

With the recent open call by thegovernment to market players, askingthem to align their margins with theEuropean average, the result is nowmuch closer to consolidation forsurvival in this segment.


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11Energy Deals

Last year we predicted that thestrict EMRA enforcement related tothe National Stock Requirementsand scarcity of land for greenfieldinvestments would end intransactions in the storage market.The acquisition of 75% shares in

Aves Soil J.V. by American logistics

company NuStar confirmed thisprediction, setting an example forfuture transactions in this strategicsegment.

Albeit not yet reflected to reserve orproduction growth, there has been asignificant increase in the number offoreign E&P companies operating inTurkey over recent years. There wereonly four domestic and 17 foreignlicensees in 2002, but these figuresreached 24 and 24 respectively

in 2009. Meanwhile, the share ofprivate capital expenditure in totalE&P investment hit 49% in 2009, atUS$350mn. The acquisition of Amity

Oil and Zorlu Petrogas in 2010 bythe American company TransatlanticPetroleum, which was alreadyoperating in the Turkish E&P market,contributed to this picture.

n.d.: not disclosed*: Includes estimated deal value for undisclosed deals

Date Announced Target Stakes in % AcquirerAcquirerNationality

Deal ValueUS$mn

ExenGaz Ipragaz Turkey

Amity Oil and Zorlu Petrogas TransAtlantic United States

M Oil Milangaz Petrol Turkey

Aves - S-Oil JV NuStar United States

Petrol Ofsi OMV Austria

Total

Figure 4: Oil and Gas Deals in 2010

21-Apr-10

5-May-10

18-Jun-10

2-Aug-10

23-Oct-10

100%

100%

70%

75%

54%

67

97

n.d.

n.d.

1,390

1,700*


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12 Energy Deals

Looking ahead

The upcoming year will featureseveral different themes that echothe key motifs of previous yearsin the Turkish energy market, but

within the rules of the new normal:steady growth in demand versusthe extended break in uncertainty,coupled with more scarce creditcreation. Within this framework, theclosing of recent utility tenders, i.e.the seamless payment of US$13.5bn,

will be at the top of our watch list.

At the same time, we will be eyeingthe long-awaited privatisation of

the state electricity generationportfolios. As to the public insight sofar, the four thermal PPs (Hamitabat,Soma, an and Seyitmer) are tobe tendered first, to be followed bynine portfolios before the end of2012. These transactions will meanan additional 16 GW to privateportfolios, pushing their currentshare in the installed capacity ofc. 20% to c. 50% in two years.Higher foreign interest is expected,despite the recent picture in thedistribution tenders; however theopaque regulatory scene representsa major caveat for educated and risk-averse investors.

We predict to see a sustainedshare for thermal PPs in privatedeals looking forward. Our fadingexpectations for a higher andmore diversified feed-in tariffstructure for renewables have beenreshuffled with the ratification ofthe amendments to the RenewableEnergy Law just before the year end,

although the new tariff levels arefar from pleasing the investors. Thepositive signals regarding the

finalisation of the delayed process inWPP licensing, on the other hand,sows hopes for a more lively dealenvironment; the licences will begranted via tenders among existingapplicants and no new licences willbe issued until EMRA opens a newround, which is a very improbable.

On the gas distribution front, theupside of the coming privatisation ofGDA is illustrated by the predictedhigher foreign interest, in additionto fierce domestic competition forthis company, which serves c. 4.5mncustomers in Istanbul.

Our 2011 market tracking listputs special emphasis on theoil and gas market. Despite thepending amendments to PetroleumLaw No. 6326, we have becomeaccustomed to seeing deals in theE&P segment, largely from foreigncompanies on the back of the factthat 80% of onshore and almost alloffshore reserves remain untapped.

Accordingly, it would not be undulyoptimistic to expect new dealsin 2011.

Going down through the oil valuechain, we feel comfortable reiteratingour prediction last year about the

heating up of the deal environmentin the storage segment, in responseto strict enforcement of the nationalstorage requirements and the landscarcity for greenfield investments.


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13Energy Deals

The usufructs issue on everyoneslips is inevitably transforming the

way of doing business in the fueldistribution and retail segments.The astronomical upfront paymentsfor long-term contracts are alreadya thing of the past, and dealers endup with higher leverage duringnegotiations, meaning lower marginsfor distributors. Consolidation amongthe mid and small-size distributorsto create the necessary economiesof scale for survival would be adeal base in 2011. One questionis why distributors are not going

for COCOs. Although the apparentreason is the 15% limitation forself-owned stations, the underlyingfactor is high investment need dueto scarcity and high cost of availableland. Nevertheless, even exhaustingthis small space will become moreappealing and constitute another

justification for consolidation.

All in all, we admit that it will behard to match 2010 in terms of bothdeal number and value, since thetender schedule for the electricitygeneration assets already spans thecoming two years. Nevertheless, onthe back of the stated expectationsit is still realistic to anticipate strongdeal prospects in 2011.

2010 was certainly a hard act to follow,but the upcoming privatisation ofelectricity generation assets meansexpectations for a strong deal marketremain high


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14 Energy Deals

Contact us

Ediz Gnsel

Partner, Assurance ServicesTel: +90 (212) 326 6090E-mail: [email protected]

Faruk SabuncuEnergy, Utilities and Mining LeaderTel: +90 (212) 326 6082E-mail: [email protected]

Orhan Cem

Partner, Advisory LeaderTel: +90 (212) 376 5302E-mail: [email protected]

Engin Aliolu

Partner, TransactionsTel: +90 (212) 376 5304E-mail: [email protected]

Murat olakoluPartner, Tax ServicesTel: +90 (212) 326 6086E-mail: [email protected]

Our core energy deals team

About this report

The main authors of and editorial team for thisreport were Engin Aliolu, Fulya lbey and MinaMelik, PwC Turkey. Contributions were made byHelen Southcott, Murat Silahtarolu and

Anja Leppchen of PwC Turkey.


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15Energy Deals

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[2011] PwC Turkey. All rights reserved. In this document, PwC refers to PwC Turkey, which is a member firm ofPricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC Turkey refers toBaaran Nas Bamsz Denetim ve Serbest Muhasebeci Mali Mavirlik A.., Baaran Nas Yeminli Mali Mavirlik A.. andPricewaterhouseCoopers Danmanlk Hizmetleri Ltd ti. which are separate legal entities incorporated in Turkey within thePwC Turkey organisation.

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