[Intl-tobacco] Japan Tobacco Wins Tekel Auction -Or Does It?

[Robert Weissman]

November 6, 2003
Japan Tobacco Wins Tekel Auction -Or Does It?
Brian Truscott
DOW JONES NEWSWIRES

LONDON -- Turkey's privatization administration said Wednesday that
Japan Tobacco
(2914.to) had submitted the highest bid in the auction for the tobacco
division of
state-owned Tekel, but it's still unclear if the government will sell
the asset.
The $1.15 billion bid for a company that controls 58% of the world's sixth-largest
tobacco market is well below market expectations. Some analysts had
expected bids
as high as EUR3 billion, in part because Turkish cigarette volumes are
on the rise.
Japan Tobacco , which is controlled by Japan's Finance Ministry, already controls
about 12% of Turkey's domestic market.
J.P. Morgan analyst Martin Steinik, who is surprised by the low bid, said
international tobacco companies must have decided the price should
"reflect the
major management headache for whoever takes it over," given the high
social costs
related to buying the asset.
He also said valuing the operation ahead of the auction had been
difficult, because
the due diligence process had been so opaque.
Turkey's privatization chief, Metin Kilci, also expressed his
dissatisfaction with
the final bids, calling them low and saying the government wasn't
obliged to sell
the tobacco operation.
"The tobacco bids aren't at a level that matches the expectations,"
Kilci said.
"The company deserves a much higher value."
Kilci said the government was under no obligation to accept those bids,
and that if
the decision were left to him, the tobacco bid would be canceled.
But Kilci said that it's up to the bidding committee to make that
decision, which
can be expected in a few days.
Roy Tsuji, Japan Tobacco's Tokyo-based general manager of media and embassy
relations, told Dow Jones Newswires that there are still several steps
left in the
bidding process, but wouldn't be drawn on further details, except to say the
Turkish authorities will "continue to carry out due diligence of JT."
He wouldn't comment on Kilci's comments about the government's option to
not sell
the asset, because he had no further details about the comment.
Originally, there were seven bidders in an auction seen key to Turkey's
privatization program designed to raise $4 billion this year and meet International
Monetary Fund demands related to a $16 billion economic bailout earlier
in the
decade.
"The lack of privatization will also dash the expectations of a new era for
additional foreign direct investment into Turkey," said an Istanbul trader.
Many investors had been taking positions in the market based on a successful
privatization program and a hoped-for positive signal regarding
admission into the
European Union, he said.
"This conversion story looks to have come to an end so markets should be volatile
going forward, the trader said.
British American Tobacco was the other finalist in the bidding process, Turkish
officials said. BAT, which wouldn't comment on the auction, apparently
submitted a
bid that was well below $1.2 billion, according to a source close to the U.K.
tobacco company.
Altria's (MO) Philip Morris, which already controls 28% of the Turkish market,
didn't bid in the auction, according to a press release from the company's
Lausanne, Switzerland office.
"A bid by Philip Morris International for the entire Tekel tobacco
enterprise was
complicated by competition issues which would require our company to
dispose of at
least one major Tekel brand in the event we were the successful bidder, the
statement said.
"(We) could not secure arrangements that would satisfy both competition concerns
and improve its position in the market."
Company website: http://www.bat.com
www.jti.com
-By Brian Truscott, Dow Jones Newswires; +44 207 842 9289;
brian.truscott@dowjones.com
(Selim Atalay in Istanbul also contributed to this article.)