M&A – Turkish Market News

Sahibinden: On the Cusp of Becoming Turkey’s First Unicorn

Sahibinden.com is an online shopping in platform in which people and businesses buy and sell real estate, cars and broad variety of goods and services, headquartered in Istanbul and owned by Aksoy Group. Sahibinden’s e-commerce business relies solely on third-party sales in Turkey, in other words, a model similar to Alibaba is being followed. We’ll covering the details about the company for the remainder of this article, but let’s take a look what see in Turkey’s demographics and how capable it is when it comes to fueling growth in e-commerce business.

Turkey’s Demographics

As summarized on the figure above, Turkey’s young and fast-growing population and internet accessibility will be the key driver of the growth and deliver favorable conditions for companies that want to tap into a dynamic market of eager new consumers. Thus, it is not hard to imagine the country in the coming years with half of its population shopping online.

Turkey’s e-commerce business volume is expected to be around $10.2 billion, however, representing only 1.8% of total volume in retail sector. Considering the fact that online shopping accounts for +4% of total business across the emerging markets, Turkey still has a huge room for growth. In 2015 multi-channel online retailing business saw an increase of 45% on annual basis, also building a supportive case for our investment thesis for Sahibinden.

Turkish Online Marketplaces

Turkish ecommerce market is dominated by online marketplaces and multi-category retailers. Turkey some online retail heavyweights whose business include first-party sales (like HepsiBurada, Trendyol, Markafoni) while some others solely rely on third-party sales (like Sahibinden, GittiGidiyor, N11, Letgo). HepsiBurada is a typical multi-category retailer while Trendyol and Markafoni stand for online fashion stores. The distinguished feature of Sahibinden that it is also involved in real-estate and vehicle sales.

Turkish internet companies have received remarkable investments to date. The following is a list of the biggest deals ever made in Turkish tech space.

About Sahibinden

Sahibinden differs from other e-retailers owing to its exposure to intermediary of real property trades. As its name, which means “by owner” in Turkish, suggests that Sahibinden is well-developed positioning in its market. When search engines and social media sites excluded, Sahibinden tops the most popular keywords league table.

Its solid position in property sales over the internet provides significant advantages to Sahibinden. As well known, the core business of online marketplaces is mediating the trade where they charge traders with fees establishing the main source of revenue for themselves. Some other businesses have different streams such as ad sales, real estate listings, motors listings, financing fees, off-platform payment fees etc. These so-called non-marketplace revenues should be expected to be high in Sahibinden given its concentration on property trade.

In a nutshell, Sahibinden is well-positioned business with diversified revenue streams in a fast-growing environment.

Valuation

This is where we feel like we are the end of our rope, since lack of data remains as a pretty straightforward issue for valuing the company. At this stage, we will be applying some peers’ (Ebay, Alibaba and MercadoLibre) data gathered from Statista and the US SEC (Note that shares of all the peers mentioned is traded in Nasdaq, with quotes of EBAY, BABA and MELI, respectively).

There are several metrics to look for when valuing a marketplace, but Gross Merchandise Volume (GMV) appears to be the most important metric. We have gathered data on publicly traded comps (MELI, EBAY) and found the valuation multiple is 0.8x the run rate GMV. However, note that there have been transactions that took the metric up to 2x.

Another important input is that Turkey’s e-commerce represent only 1.6% of total traded which is remarkably low, even compared to the emerging markets, like Brazil, where 3.2% of total shopping is done online. With that being said, e-commerce volume growth in Turkey as almost doubled that of global, which builds a supportive case for a premium valuation.

According to the official statistics, total e-commerce volume is expected to be $10.2 billion in 2016 in Turkey. Sahibinden’s market share is not higher than 5% but remember that Sahibinden’s non-marketplace revenue base is stronger than those of its competitors. So, the market share should not be what is driving the valuation strategy.

Due to similarities between two companies we chose to use MercadoLibre for valuation comparison purposes. Both companies operate in developing economies (MercadoLibre operates in Latin America countries, Argentina and Brazil represent 80% of the revenues) with middle-income populations. We think the valuation would be a function of number of Internet users and nominal GDP per capita. MercadoLibre operates in a region with number of internet users of 340 million whose income averages $6.900 per annum while 40 million users averagely earn $8.700 in Turkey. Given MercadosLibre’s average stock market valuation of $5.8 billion last year, Sahibinden could worth $860 million.

One critical point is that MercodoLibre generated a GMV of $7.1 billion last year, which means that the company is valued at 0.8 times GMV. Our estimated worth for Sahibinden would possible signal a considerably premium valuation on this multiple, which is, in our view, justified given Turkey’s e-commerce business’ potential growth. Also, increasing risk appetite in global funding market could lead a significant markup for Sahibinden, and then, we might able to see it among so-called unicorns, a term being used for tech companies whose valuation exceed $1 billion. Though there is not enough data making it hard to fully assess, Turkey’s strong demographic profile and its strong positive relative to other prominent e-commerce companies make Sahibinden a good play for venture capitalists looking for multi-million investments in emerging markets.

Guest Post: Turkey M&A Outlook

An Overall view of Turkish M&A activities

M&A transactions along with other corporate finance actions such as divestitures, spin-offs, IPOs, corporate bond issuances and seasoned offerings are nowadays as much a talking point among finance professionals in Turkey as in Western economies though this was not the case just some 20 odd years ago when Turkey started to liberalize its markets and started to develop its capital markets. It is an undeniable fact that without a well-developed and structured capital markets one cannot talk about the existence of an effective M&A market so we should start our understanding of Turkish M&A scene with this caveat. For Turkish businesses while the concept of M&A might still be a fairly new idea cross-border partnerships and joint venture business models with a foreign strategic partners has always been at the forefront for Turkish businessmen. Those who started these partnerships early in the 1960’s are now considered biggest conglomerates in Turkey such as Koc Holding (BIST:KCHOL), Sabanci Holding (BIST:SAHOL). So while there has always been a tendency for merging with strong foreign partners in order to grow, the inner dynamics of Turkey stood in the way of a more developed and sustainable M&A market until the last decade or so. And while there is still much more to be done to establish and develop M&A market in Turkey, attitudes are shifting which promotes more globally oriented business models where cross-border fund raising and merging with foreign partners becomes more appealing. Turkish businessmen are now much more aware of the global fund raising capabilities and they see the optionality out there available to them. One could observe this awareness by looking at the M&A deal count of last five years. M&A deals that happened in the past five years also reflect that two common patterns emerge. On one hand we see a handful of big government institutions are being acquired via multibillion dollar privatization deals in sectors such as energy, services, and infrastructure. On the other hand we see numerous transactions ranging anywhere from $10-20 million to an upwards of a $100-300 million range. The number of transactions are considerably higher for the small to mid-market companies, which tells us that SME players are much more active source for M&A activity in Turkey. According to the data gathered from Deloitte’s Annual Turkish M&A Review 2014 average size for the deals completed in the past five years amounts to $82.2 million without excluding big government privatizations. This picture of course should not come as a surprise to people who are familiar with Turkish economy. As an emerging market Turkish companies attractiveness to investors fall largely into somewhere between mid-market to development stage funding both for the domestic and foreign capital providers. Accordingly the M&A transactions are likely to follow this paradigm into the foreseeable future in which venture capital and private equity ecosystems will also grow and help boost M&A activities as well as other corporate finance and investment banking activities.

Expectations for 2015 and Onwards

According to the Deloitte’s Annual Turkish M&A Review 2014 highest number of deals for 2014 was in manufacturing sector with 31 deals with a total disclosed value of $825 million. This gives us an average deal size of $26.6 million for manufacturing. Third most active sector in M&A in 2014 was food & beverage which saw 22 deals with an average deal size of $25.40 million. These figures are reflective of aforementioned facts that Turkish SMEs and middle market players are sought after and they are the main cause for increased activity. One possible explanation for this increased activity is that companies in Turkey are in great need of capital and the M&A market started to offer shareholders an alternative method to public listing as a way to increase capital base and offer an exit strategy for the shareholders. Thus it is expected to have deals continue with slight variations in total numbers yet the total size of these deals might diminish as big government privatizations would not be able to carry on with same impetus. In addition to this foreign and domestic investor appetite for mid-sized companies there is also one other factor that might be attributed to the increased M&A activity. This factor is the demographical change in the ownership structure of Turkish companies. One can expect the bulk of M&A activity to take place among the companies listed in ISO 1000 and generally speaking these companies were founded in 70’s and 80’s which by now matured and established themselves as either public companies or increased their corporate governance via second and third generation family shareholders. And as these mostly family held company’s shareholder’s views started to diverge and differences emerge, M&A activity started to offer an alternative exit strategy for these shareholders. It is reasonable to assume that this tendency would also continue which would add a further momentum to the M&A activities for the upcoming years. In light of the above mentioned assertions we could expect that advisory businesses would also continue to flourish. One important aspect worthy of mentioning is that attitudes will have to adjust to accommodate more delegation of strategic financial planning to the professional M&A advisors whether they are outside advisors or internal advisors.

Conclusions

Ever since Turkey’s economic policies adapted to increase the private sectors weight, along with its capital markets and overall economy the M&A market has also been steadily growing and expanding. And although there still many structural reforms needed to be done for improvement of capital movement between those who seek capital and those who provide it, the M&A market will be playing a crucial role for the intermediation of these movements. Majority of companies in Turkey are still run by sole owners with little access to capital markets or mechanisms such as venture capital and private equity. And the surge of investor activities in the past decade in M&A sector for small to mid-sized companies started to fill the gap for underinvested businesses. These businesses used to rely on traditional commercial banking for many decades. However, the near term future for Turkey’s M&A market looks attractive with many potential cross-border transactions to come, both for Turkish companies to grow internationally and new international entrants to the Turkish markets whether they are pure financial players or strategic investors. The point to be taken here is that many opportunities for M&A deals lay bare in the industrial towns of Turkey where companies strive to export to all corners of the Globe but they cannot have the financial resources as quickly as their Western counterparts. M&A activities along with other investment banking services, to provide necessary financing and capital, are going to be crucial for these companies. The increasing number of activity would most likely to continue in food & beverage, IT, retail, manufacturing ,logistics and transportation sectors and more capital intensive industries such as energy, finance, infrastructure will also experience bigger movements but with limited number of deals.

The Outlook of Foreign Direct Investment

Turkey is running a large current account deficit and is a big borrower from abroad as the deficit roughly accounts for 6% of the country’s total GDP and short-term foreign debt stock hits $130 billion. Under such circumstances foreign capital would suppress the rising concerns around the country’s debt. However, Turkey seems to be less attractive to consistently high foreign direct investments leaving the country less able to deal with the stress on its financial system.

The sharp decline in oil prices will ultimately help Turkey to narrow its deficit but in the long-term Turkey needs sustainable tools to finance it, and that sustainability requires the financing quality. What is more lower oil prices could lead the deficit above 5% of GDP which means the country may still have some substantial headwinds to face arising out of its deficit.

As it is well known, foreign direct investments is the solution to this monstrous problem. The question then arises as to how successful Turkey is to attract these investments (see the chart below). At first glance, it may appear unsuccessful to do so, but looking again, the main reason that causes such huge differences in inflows to country is the weakness in Europe. Many European countries have had their own problems since the financial crisis and many businesses as well as banks in the region are struggling with the slowdown. Therefore the current economic situation in the continent is not conducing Europeans to look at investing in emerging countries.

When it comes to make a peer comparison, Turkey cumulatively is the worst performer with regard to attract foreign direct investment inflows alongside with Indonesia among major emerging countries since 2005. According to the data compiled by the OECD, a total amount of $131 billion is invested in Turkey by foreigners, while the foreign direct inflows to other member of BIITS is averagely $275 billion during the same period.

Despite the above-mentioned gloomy developments, Turkey still has the ability to offer important value to many investors across the globe. For instance, Turkish ministry of energy recently started offering healthy incentives for power generation from renewables which is an area with high potential. Additionally, the near future hold some remarkable privatizations in store, including Borsa Istanbul, Halk Sigorta and Halk Emeklilik, the insurance and private pensions companies; Igdas, the natural gas distribution company; Botas, the petroleum and natural gas pipeline and trading company; toll roads and bridges; horseracing and Spor Toto, a lotto company.

Turkey needs to tip the scales in its favor in foreign investments to be able to overcome the financing issue. Turkey has valuable resources to ease the problem, but also is facing headwinds mostly due to rising global risk aversion.