Thursday, December 01, 2016

Mergers and Acquisitions in Turkish Energy Markets

There is a specialization in the energy markets which is defined as "Mergers and Acquisitions" (or M&A in short). The company founders who set up a company that makes good profits are aging over time. They can not catch up with every job. They become technologically lagging behind in computer age. Deciding on every issue is getting tougher in the developing international markets.
If the company is working properly, if it is managed well, it makes money, it makes profit, its market value rises. But younger generations who should take over the company, are sometimes indifferent to the property. They want to do other things. Foreigners may get interested and are desirous to purchase this valuable company. The company is evaluated by the independent rating agencies and finally the company is sold. Former owners take their share of the sale price and then are drawn to their corners. Some former owners may remain professionally employed for a while because they know how the company works. When this transition period is over and the new professional staff members replace the responsibility, former owners work is over.
Local branch of Deloitte has issued the most comprehensive work on domestic company sales, titled "Annual Turkish M&A Review 2015", an important report published in January 2016 which explains very important details. The privatizations in the energy market are evaluated within the same scope. In 2015, 2/3 of all purchases were foreign capital, primarily Qatar, USA and Chinese capital.
In the past few years, we have witnessed a lot of ownership transfers in the energy companies. In 478 MWe output capacity Trakya Elektrik, US partner's share is transferred to domestic partners and then the domestic partners sold all their majority shares to the new Russian investor. Some of other combined cycle thermal power plant majority share sales are on the agenda.
There are serious discounts on sales prices. Iskenderun Sugözü 1360 Mwe imported coal power plant majority shares were sold. The new owners are put the third unit investment "on hold".
Expert investors who carry out M&A jobs earn good money. During the period we are in, there is a rise in foreign exchange prices and a decrease in company selling prices. It is not good time to sell company since it is too cheap, however it is good time to buy a good profitable company for the same reason. Company and real estate prices have fallen, there are no buyers, no investors who will put money.
Once there was a successful company which was producing high capacity steam boilers under local design in Istanbul. The second generation children wanted to do other works, company was sold, and new owners were not so successful. Istanbul based Demirdöküm casting plant is sold.
Izmir based boiler company Desa was sold. It is always a source of sadness for me to sell Desa to newcomers, which was an important factory of İzmir region. Desa company had a great accumulation of technological experience.
An experienced local engineering company, is purchased by GazantiKoza group.
German Steag energy company bought a local engineering firm with a very experienced engineering team on the Turkish market.
Another Istanbul engineering firm is negotiating sales with Traktabel.
Local engineering companies are getting sold to foreign investors at very reasonable even sometimes at cheap prices.
Old-established big contractors leave the domestic market, they work abroad, they earn more money in their overseas business. Enka Power, Gama Power, Tekfen Engineering have been strengthened their market share by experienced staff, they became group locomotive companies.
On the other hand, the domestic market has fallen into the scope of medium-sized companies that have close relations with politics. These mid-sized companies do not have the engineering capacity. They depend on the cheap vendors of Far East and their unreliable designs. Their purchase contracts, project execution contracts, are very simple, there are no applicable guarantees, no sanctions, no delay or performance penalties. Projects are going in Chinese direction. Some of them are paying the North American consulting engineering firms as their owners engineers.
However, it is too absurd to me to build a new thermal power plant in Turkey, which will use domestic fuel and take equipment from China based on North American engineering company's ready-made contract documents. People from the other end of the world will most likely write emails, at best they will have conference calls without any face to face human contact. If there would occur any disagreement, everyone will take the blame on each other. The job of managing this business with oversees contractors and owners engineers is very difficult.
However, by hiring a local consultant company, placing order to a local contractor, working with a domestic assembly team, a local financier can handle all these tasks much easier. Everyone can gather around a table at any moment if necessary, problems are solved fast, much earlier without getting too serious, without wasting time in blaming each other.
Some investors consider to purchase second hand power plants with life time is already completed. These are not power plants but complete scrap. They plan to disassemble at original site, transport to new site, then reassemble them to run. This decision is more absurd. It does not make sense to buy old plants with old designs.
With new tenders which were planed soon, Cayirhan-2, Eskisehir, Konya, Bursa, Trakya coal fields will be delivered to new investors at discounted domestic electricity prices auctioned to reduce prices less than 7 US cents per kW-hour. These new investors will look for ultra cheap Chinese suppliers to reduce their initial cost. However the off-the- shelf designs of Chinese thermal power plants do not meet our expectations at our indigenous coal fields, as we have witnessed at the current local projects. Their design are not comparable, they do not meet our environmental norms, their spare parts are missing, their dust collecting filters are small, their flue gas desulphurisation equipment are not satisfactory. They can not operate 60-days non stop, as our public norm to pass temporary acceptance.
We read the names of the same companies in each new tender result. The tender is canceled if it is not received by the expected firm. So the message goes to the markets. The conditions of fair competition for free market were not enough. The market is in this situation and desperately accepted the all parties.
In private thermal power plants, if cost of electricity generation is more than the prevailing market price, especially between 23:00 and 10:00 at night, we simply do not produce electricity. Since the cost of electricity produced is higher than the market selling price, the electricity generation is temporarily and voluntarily cut off under reasoning of "commercial victimization" or "force majeure".
Debt delaying was a special case in the past. Now it's almost like the general situation. Credit card installment was still a postponement. Where will this unusual debt deferral go? Company sales have been in the financial banking industry for some time. Now it has started in the pharmaceutical, healthcare, hospital sectors as well. Company sale prices have dropped, but there is still no appetite for buying at the markets. There is no new investor arrivals, no fresh money entry.
Nowadays we hear people who sell their valuable company, take their money to Miami Florida banks, buy a small 50m2 condominium there and build a new life. In a narrower scope, we encounter friends who are buying a local holiday space in popular sea resorts at Datca, Seferihisar, Ayvalık, Antalya. They leave their houses and leave the big city. This is another procedure, for M&A application.

Haluk Direskeneli, is a graduate of METU Mechanical Engineering department (1973). He worked in public, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as freelance consultant/ energy analyst with thermal power plants basic/ detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of ODTÜ Alumni and Chamber of Turkish Mechanical Engineers Energy Working Group.
This article is written for the "EurasiaReview" news web site.

Prinkipo, November 23, 2016


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