Transactions in focusCorporate Development Network

Spotlight on M&A in Turkey

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Our exclusive Corporate Development Network brings together senior corporate development leaders from market-leading multinationals across Europe. Our network members meet regularly to review recent deal activity and discuss the changes in the transaction climate.

As the M&A environment continues to evolve and become more specialized, members share their own recent deal experiences and perspectives on potential opportunities and M&A strategies.

In this issue of Transactions in focus we explore the Turkish M&A environment, I hope you find these insights useful.

Pär-Ola HanssonEMEIA TAS Deputy-Leader and Chairman of the European Corporate Development Network

The Capital Agenda

Refinancing or restructuring debt,

• Stress and distress — e.g., liquidity issues and turnaround plans

• Customer and supplier analysis• Preserving tax assets and

minimizing costs•

equity and other obligations• Dealing with stakeholder

relationships and pressure

Dispute resolution•

• Optimizing asset portfolio • Delivery of synergies and

effective integration• Improving working capital and

releasing cash• Optimizing capital structure• Optimizing tax and corporate

structure

Cost-and tax-efficient structures

• Acquisitions and alliances• Planning and structuring

transactions to optimize stakeholder return

• Focused due diligence to mitigate risk and drive value

• Asset valuations• Cost-and tax-efficient structures

• Fundraising (equity and debt): IPO readiness, rights issues, PE, private placement and capital markets

• Optimizing funding structures• Asset divestment• Infrastructure projects•

M&A in context: The Capital Agenda

1. Preserving: reshaping the operational and capital base

2. Optimizing: driving cash and working capital, managing the portfolio of assets

3. Raising: assessing future funding requirements and evaluating sources

4. Investing: strengthening investment appraisal and transaction execution

Capital is perhaps more important today than at any time in recent memory. M&A, and in particular investing through acquisitions, is but one element of the wider Capital Agenda that management should consider.

Leading businesses are adopting a range of disciplines around capital in four key areas to build competitive advantage:

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Spotlight on M&A in Turkey

TurkeyPopulation

74.6m (2012)

FDI

US$87.1b

(between 2007 and 2012)

Nominal GDP

US$790.5b (2012)

Sources: EY’s attractiveness survey, Turkey 2013, EY’s Rapid-Growth Markets Forecast, July 2013.

Approaching investment in TurkeyIn recent years, Turkey has enjoyed a significant increase in its attractiveness as a location for transactions, which has been driven by an improving regulatory and governance environment, as well as a technological infrastructure superior to many others of the rapid-growth-markets (RGMs). All in all, the country has the potential to become a real M&A player. These strengths are attracting a number of investors to Turkey. Indeed, the country is beginning to be thought of in the same bracket as Brazil, Russia, India and China. Turkey expects a GDP growth rate of 3.5% in 2013, moving up to 5% in the medium term.

Robin Jowitt, EY Partner and Head of Capital Transformation in Southeast Europe, and Inciser Olguner, EY Partner in Transaction Advisory Services in Istanbul, are both upbeat about the macroeconomic situation and investment climate in Turkey — despite the recent political unrest. Jowitt says he has the same feeling of excitement about the developing M&A

environment in Turkey that he felt while working on transactions in Central Europe during that region’s economic maturation in the 90’s. Olguner highlights the fact that Turkey offers a range of potential sectors for investment. Energy and infrastructure lead the field, but increasingly retail, health care and food and beverage are emerging as promising industries, with both foreign and domestic investors active in the economy.

Turkey also benefits from a comparably developed and diverse business environment. Nevertheless, some challenges remain. These include the mismatch between the price expectations of buyers and sellers and the complexity of corporate governance issues when dealing with family businesses. In addition, a lack of high-quality financial information is a problem in small and medium-sized private companies. Yet, with the introduction of a new commercial code and improvements to other areas expected in the near term, the Turkish investment climate is increasingly attractive.

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Experience: doing business in TurkeyThe following draws on the views of an experienced EY client who is Chairman of a leading company in the Turkish telecommunications sector. They talked to us about Turkey’s business environment, working with local partners, and various considerations businesses need to be aware of to be successful.

Potential investors in Turkey need to enlist specialty advice in a range of areas, including accounting, corporate governance, family companies and taxes. In return, investors are likely to benefit from a number of advantages to doing business in Turkey, including a skilled and well-educated workforce. Yet foreign companies looking to operate in Turkey, like those in other emerging markets, need to have a good understanding of key issues in the country, including regional differences and distinctions between manufacturing and exporting industries and between public and private companies.

Before investing in Turkey, they suggest that businesses should consider:

• Regional differences: Turkey can be thought of as three very different regions: the major cities, the rapidly developing southern tourist area and the lesser-developed eastern area. Those looking for a low-cost manufacturing base are advised to keep their money outside Istanbul, where wages are higher.

Mismatch of price expectations between buyers and sellers:• Different risk perception of buyers and sellers

• Aggressive business plans of sellers

• Buyers reluctant to pay high premium compared with their own multiples

Corporate governance issues and dealing with family businesses:• Limited corporate governance (small to

medium companies)

• Limited transaction experience

• Dependency of the business on family members

Regulatory issues, legislation and permits:• Changing or volatile regulations

• Bureaucracy

• Difficulty in enforcement of M&A-related contracts

Lack of high-quality financial information (in small to medium-size entities):• Lack of high-quality financial data, unless the target

is publicly traded or listed

• Unrecorded transactions in certain sectors

• Limited use of management reports and other KPI monitoring systems to manage the existing business

Macroeconomics risks, albeit diminishing:• Currency risk

• Dependency on imports (mainly energy and commodities)

• Exposure to cyclical sectors in exports, e.g., automotive, machinery

1 4

52

3

Key issues in the Turkish transaction environment

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• Geography: investors should also remember Turkey’s location means that it is a great potential platform for launching investment in the Balkans and Central Asia.

• Accounting: there is not a significant difference between local Turkish accounting and IFRS, and investors are less likely to find multiple sets of financial books.

• Workforce and wages: many workers have spent time in the US or Europe and are highly qualified. Wages are surprisingly high, especially at executive levels, where the market is particularly competitive. Meanwhile, memories of hyperinflation still resonate in the salaries paid by many joint ventures companies, which tend to quote them on a net basis and in US$, rather than in gross local figures. The labor market is also highly regulated and not particularly flexible, making it especially important for companies to identify experienced local advisors with knowledge of contract law. English language skills tend to be strongest in bigger companies and in Istanbul and Ankara.

• Legal issues: Turkish law is based on different principles to the American and European law and the interpretation of the law can be quite different. Hiring a local lawyer should be one of the first steps of any foreign investor.

• Lobbying: especially in highly regulated industries, Turkey’s Board of Trade in Ankara can be quite challenging. This underscores the need for a good relationship with the Board as well as lobbyists in Ankara who understand how to convey investors’ interests in these industries.

• Family firms: the majority of Turkish companies are still essentially family businesses. It is likely you will need to work with them if you want to instigate a deal of any size in Turkey. With strong competition between the family groups, a foreign investor can’t hedge their bets by choosing more than one.

• Tax: the tax situation in Turkey is more complicated than in some other countries, and a good tax advisor is a necessity.

Political landscapeAlthough there has been some recent political unrest involving Prime Minister Recep Tayyip Erdoğan’s Government, the ruling Justice and Development Party have been able to reach a consensus on a number of measurements that have improved Turkey’s attractiveness to investors and foreign businesses. Erdogan’s Government has reformed the banking sector, streamlined the tax code, created incentives to bring energy costs down in more remote regions and instituted policies to attract foreign investment. The results have been a real growth rate that is expected to exceed 5% annually over the next three years, and inflation rates that are forecast to hover around similar levels in the same period.

Practical guidelines

1 Do hire a local CFO and a local CEO.

2 Do hire a lawyer with Board of Trade know-how.

3 Do lobby in Ankara, especially in highly regulated industries.

4 Do go into a JV as a safe entrance strategy.

5 Do take a middle- to long-term view — you may not get a quick return.

6 Don’t drop in expats and expect them to understand Turkish markets; if you do, let them start at a lower level and give them the opportunity to build their role.

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Turkey at a glance

2011 2012 2013e 2014f 2015f 2016f

Real GDP growth (% per year) 8.8 2.2 3.5 5.4 5.2 5.2CPI inflation (% per year) 6.5 8.9 6.6 5.4 5.0 4.6Current account balance (% of GDP) -9.7 -6.1 -7.0 -7.2 -6.9 -6.7External debt total (% of GDP) 39.2 41.5 40.8 39.8 39.0 37.1Short-term interest rate (%) 8.6 8.7 5.6 7.4 9.4 9.5Exchange per US$ (year average) 1.7 1.8 1.8 1.9 2.0 2.0Government balance (% of GDP) -1.4 -2.1 -2.1 -1.7 -1.4 -1.3Population (millions) 73.7 74.6 75.5 76.3 77.1 77.9Nominal GDP (US$b) 777.2 790.5 855.2 905.1 954.2 1,034.4GDP per capita (US$ current prices) 10,539.4 10,595.2 11,332.9 11,863.4 12,375.5 13,280.4

Source: Data provided by Oxford Economics, published in EY’s Rapid-Growth Markets Forecast, July 2013.

Turkey in numbers

Regional classification as per new investment incentive scheme and percentage share of FDI projects in Turkey % share 2007–12 . By destination city/province.

7.0%Others

1.4%1.0%

8.4%

Istanbul

Yalova

Bursa

Balikesir

Manisa Uşak

Bilecik

Burdur

DüzceEdirne

Tekirdağ

Çanakkale

Aydın Denizli

Kütahya

Afyonkarahisar

Çorum

Kırıkkale

Kırşehir

Nevşehir

Amasya

Samsun

Sivas

Malatya Elazığ

IspartaKonya

Adana

Hatay

Kayseri

Ankara

Ardahan

Kars

Çankırı

Yozgat

Aksaray

Niğde Kahramanmaraş

Osmaniye

Kilis

ŞanlıurfaMardin Şırnak Hakkari

Van

Iğdır

Ağrı

Adıyaman

Tunceli Bingöl

Batman

Muş

Bitlis

SiirtDiyarbakır

Erzurum

BayburtTokat

OrduGiresun

Gümüşhane

SinopKastamonu

Trabzon Rize Artvin

ErzincanEskişehir

SakaryaBolu

Izmir

Muğla Antalaya

Mersin

KaramanGaziantep

1

Regional classification/ percentage share of FDI projects

2

3 4

5 6

4.1%4.1%

8.9%54.7% 2.8%

5.3%

2.3%

Kocaeli

Kırklareli

KarabükZonguldak

Bartın

Source: EY’s Attractiveness Survey, Turkey 2013. The shift, the growth and the promise, 2013.

Driving investment to Turkey’s regionsTurkey introduced a new investment incentive scheme in April 2012 to reduce its current account deficit, boost investment in lesser developed regions and promote cluster activities. The scheme has four elements: general, regional, large-scale and strategic investment. The regional incentive scheme, in particular, aims to balance regional development by encouraging investment in the disadvantaged eastern region. It divides Turkey into six regions based on potential and the development of the local economy, and offers generous subsidies and tax breaks to companies investing in lesser developed regions. While region 1 consists of the developed provinces of Istanbul, Bursa, Ankara and Izmir, region 6 comprises eastern Turkey, covering provinces such as Diyarbakir, Van and Ardahan. Investors vying for region 6 are entitled to income tax withholding allowance and Social Security Premium Support for 10 years. Value-added tax (VAT) and custom duty exemption, are offered to encourage investment in all six regions (see map with regional classification and FDI projects).

Source: EY’s Attractiveness Survey, Turkey 2013. The shift, the growth and the promise, 2013.

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EY Corporate Development Network

Our exclusive Corporate Development Network brings together senior corporate development leaders from market-leading multinationals across Europe. Joining the network gives you the opportunity to build personal and professional relationships with other corporate transaction leaders. Together, you will share insights on transaction practices and challenges that will help your organization to achieve its growth potential.

We are committed to building and connecting the global transaction community. We hope that you can be a part of the network.

For details on joining the Corporate Development Network, please contact your local network leader or: Franziska Suessmilch + 49 619 6996 27620 franziska.suessmilch@de.ey.com

Musfik CantekinlerPartner — Head of Transaction Advisory Services at EY TurkeyIstanbul, Turkey+ 90 212 368 5570musfik.cantekinler@tr.ey.com

Robin JowittPartner — Leader of Capital Transformation in Central & Southeast EuropeIstanbul, Turkey+ 44 20 7951 3057rjowitt@uk.ey.com

Pär-Ola HanssonEMEIA TAS Deputy-Leader and Chairman of the European Corporate Development Network

Stockholm, Sweden+ 46 8 5205 9677par-ola.hansson@se.ey.com

Jon ClarkLead Partner of the European Corporate Development NetworkLondon, UK+ 44 20 7951 7352 jclark5@uk.ey.com

Corporate Development Network contacts

Turkey Transaction contacts

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About EY

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About EY’s Transaction Advisory Services

How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY’s Transaction Advisory Services combine a unique set of skills, insight and experience to deliver focused advice. We help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

EY | Assurance | Tax | Transactions | AdvisoryFurther insights

Turkey attractiveness surveyTurkey is enjoying stable economic growth and has great untapped potential, but tackling some barriers to investment will further facilitate its growth.

Mergers and acquisitions report TurkeyThis report is a thorough compilation of the facts and trends in mergers and acquisitions that were realized in Turkey in 2012, as compared with previous years.

Rapid-growth markets forecastEmerging markets are the new engines of growth. Before venturing into brave new worlds, beat the pack with July’s EY forecast. Find out about Turkey on page 49.

Eurozone forecastHow is the Eurozone performing? Which of the 17 nations should corporates be looking to invest in? Find out in the latest EY forecast.

Exceptional magazineThe latest edition of our award-winning Exceptional magazine, July–December 2013, provides exclusive interviews with a selection of the finest market leaders, CEOs and entrepreneurs from around the world; capturing their success story in their words, and sharing their insight into fast-growth success whatever the market conditions.

European real estate assets investment trend indicatorAlthough the future may remain uncertain for many asset classes, the climate is looking more favorable for real estate investment. But what is driving this confidence? Find out in our new report with a special on Turkey on page 38.

Capital InsightsHow do top dealmakers set the right strategy, recognize the right target and achieve the best synergies through a merger? Find out in Capital Insights.

Multiple: European buyouts watchDespite challenging market conditions, confidence is growing and the European deal pipeline continues to strengthen. Is the private equity market set for more activity? Read more about Turkey on page 28.

WINNER 2012

EY — recognized by mergermarket as top of the European league tables for accountancy advice on transactions in calendar year 2012