Behind the scenes of Türk Telekom’s $6 billion loss
Illegal sales and bankruptcy in the past couple years have rocked Türk Telekom, Turkey's largest fixed-line operator, raising questions about the company's leadership.
An article published in Turkey's pro-government daily Sabah on March 12, 2013, hinted at one of the biggest corporate scandals in Turkish history. The article that ran in the newspaper – which has close government ties – spun the story in a positive light.
It revealed that the board of directors who were appointed by Turk Telecom’s foreign partners had secretly and illegally put copper cables belonging to the company up for sale.
At the time, Türk Telekom had replaced its copper cables with cheaper fibre cables, and the company attempted to sell thousands of tons of scrapped copper cables without notifying the stock market’s Public Disclosure Platform. It was estimated that the value of the copper was between $2 million and $10 million.
The news story contained information about the tender for the scrapped copper, including where it would be sold in provinces throughout Turkey. After word of the sale reached international markets, the amount of copper scrap to be sold was enough to make waves on the London Metal Exchange, one of the biggest stock markets in the world.
However, the State Council reached two court decisions that banned the Lebanese Hariri Group – who owned 55 per cent of Türk Telekom – from going through with this sale, since the company had failed to get the necessary permission from the Turkish Treasury.
At the time, Türk Telekom was the most profitable company in the country after the banks. It had a record advertising budget and was hailed as a great success story. As the state, Arab investors, and shareholders benefited from the high dividends, no one wanted to hear a negative word uttered about the company.
So a case of corruption continued without attracting anyone’s attention, with many more like it to come to light.
Because no one in the media jumped on the story in time, Türk Telekom was not audited aside from the Council of State decisions, and the Capital Markets Board did not carry out the necessary investigation. Was the scrapped copper sold? If so, to which firm and at what price? All of this remains unknown.
Three-and-a-half years later, Reuters broke another Türk Telekom story that revealed the firm’s major stakeholder Oger Telekom and the Saudi Telecom Company, which owns 35 per cent of Oger, could not make their first $290 million repayment for a $4.75 billion syndicated loan.
The loan had been given to Otaş, which was a company set up by Oger Telecom to buy a 55% stake in Türk Telekom. The majority of the loan was financed by Turkish banks: Akbank ($1.7 billion), Garanti ($1 billion), and İşbank ($500 million). The 10-year loan was initially taken out in 2013 with a three-year grace period, so when the first payment was not made, the Turkish banking sector went into a panic. It became the most problematic loan in the country's banking history.
To collect on the debt, the banks appealed to the Treasury – or really the government, which still had a 25 per cent share in Türk Telekom. The Hariri family, who owned Otaş, and Saudi Telekom asked if they could declare "force majeure" – exemption from fulfilling a contract due to unforeseeable circumstances – as they weren't able to repay their loan due to an increase in the exchange rate. The dollar was at 1.99 Turkish lira when the Arab partners first took out the loan and 3 lira to the dollar in September 2016.
The Turkish authorities rejected the “force majeure” suggestion on the grounds that other companies would also attempt to benefit from it, which would then, in turn, create economic chaos.
Instead, the Turkish Banking Regulatory and Supervision Agency told creditors in November 2017 who had backed the loan that they would not have to classify it as a non-performing loan and that the loan would not go into default.
But then news from abroad shook the banks and Turkish authorities into action. Prince Abdulaziz bin Fahd, until then the patron of Saudi Telecom and partner of Otaş, died in a palace coup. His property, including Otaş, was seized.
The Arabs were not able to pay their loan back, and the banks started legal proceedings. The partners quietly withdrew. So after only 13 of Oger’s 21-year lease to operate Turkey’s largest fixed-line operator before Türk Telekom was passed onto the banks.
On August 29, the transfer of 55 per cent of Türk Telekom’s shares was approved to a joint venture of the banks that loaned the initial $4.75bn as collateral.
The banks might sell the shares before their concessionary period runs out in 2026. However, the market value of Türk Telekom has recently decreased to $2 billion, while the value of the shares held by the bankers - which amounts to 55 per cent of the company - is only $1.1bn.
Türk Telekom’s Arab partners received about $6 billion in dividends in 10 years. In return, they only paid $1.3 billion out of pocket on the company and left Turkey’s banks to deal with the fallout.
Nor did they invest in their loan repayments. It was as if they had foreseen that things would change. Until the end of 2015, Türk Telekom was one of the most profitable companies in Turkey, and at the end of 2016, it announced a record loss of 1.4 billion TL.
As a result, the Arab partners no longer have a lucrative billion-dollar business to profit from. They took the approach of “you can keep the company, including the debt” and distanced themselves from management, without even trying to salvage the situation.
The example at the beginning of this article shows that at least the company's Arab partners might have ulterior motives. In other words, paying $1.3bn and then pocketing more than $6bn and not thinking about the future.
Also, as is evident from the case of illegal cable sales, the company is outright disregarding decisions from the courts, poking holes in Turkish law, and engaging in illicit activities.
What further complicates matters is that the state is actively involved in the management of the company while this privatization scandal has been ongoing.
The names of people working in the government involved in the scandal became evident after 2013. And those names are familiar ones in the Turkish political arena, including former prime ministry undersecretary Kemal Madenoğlu and Fuat Oktay, also a former prime ministry undersecretary who now serves as Turkey’s first vice president.