Going public
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Istanbul the capital of Turkey, eastern tourist city.

Paksoy and Cleary Gottlieb consider key developments in the Turkish IPO market'





At the start of 2018, Turkish corporates were looking forward to a record year for initial public offerings (IPOs), with a pipeline of approximately a dozen issuers aiming to raise as much as $4 billion collectively and promising to surpass the previous high of 2007. This wave was supported by the Capital Markets Board of Turkey (CMB), which developed a series of welcome new rules at the end of 2017. Two deals in February – for utility company Enerjisa Enerji and health care provider MLP Saglik – were completed, although MLP Saglik had to cut its asking price by 21%.

However, the fate and success of Turkish IPOs remain inextricably linked to broader macroeconomic conditions, timing and investor sentiment. At a time of increased outflows from emerging markets and a strengthening US dollar, two IPOs in Turkey's fashion retail sector, namely Beymen and DeFacto were cancelled, and one technology company, Penta Teknoloji (Turkish McVities and Godiva owner Yıldız Holding's technology distributor), was postponed in early May, weeks after the announcement of snap elections in Turkey.

While the market remains volatile, Yıldız Holding completed the IPO of its discount grocery chain Şok Marketler in May 2018, only one week after the abovementioned IPOs were postponed, raising a total of TRY2.3 billion (circa $530 million), after reducing its asking price and adding a direct participation (by way of private placement) in the offering by Yıldız Holding. Furthermore, Aselsan successfully completed a secondary public offering in June 2018, raising a total of TRY2.9 billion.

This chapter outlines some of the key international and Turkish legal issues and recent developments arising in IPOs by Turkish companies, specifically those involving a Borsa Istanbul listing in the context of a global equity offering.

Offering structure: easing domestic allocation rules

The offering of shares by Turkish companies in Turkey is not permitted without a public offering to Turkish retail investors, which triggers the requirement for a Borsa Istanbul listing.

Under new rules effective from December 1 2017, the size of minimum allocations to domestic investors in such transactions (the minimum domestic allocation) has been reduced to 20% (divided equally between Turkish retail and Turkish institutional investors) from 30%. Moreover, it is possible for the issuer (whether the offering is primary or secondary in nature) to apply to the CMB for a reduction of the minimum domestic allocation (potentially to zero) before the start of bookbuilding. To justify this, the issuer may cite numerous factors, including the limited size of the domestic investor base, the number of IPOs coming to market at a similar time and the pressure on book-building created by such minimum thresholds.

Once bookbuilding commences, should there be under-subscription in the domestic market, an amount up to and including the size of the minimum domestic allocation can be re-allocated and sold to international investors. However, such a re-allocation has the potential to unsettle international investors and ultimately disrupt demand. As such, applying for such reduction before the start of the bookbuilding process is preferable, for practical considerations.

Market practice in underwriting

For a number of reasons, including Turkish financial intermediary licensing requirements and market practice, there are two separate syndicates of banks in a typical dual-tranche offering in Turkey: international and domestic. Domestic syndicates consist of one or several lead managers who coordinate the activities of a broader consortium. In larger IPOs, it is typical for domestic banks to provide intermediary services on a best efforts basis, without any actual underwriting commitment, under an 'intermediation agreement,' signed just before the CMB's approval of the izahname (Turkish prospectus). The international syndicate typically underwrites the international tranche on a firm commitment basis under a separate underwriting agreement signed at pricing.

As used to be the case in global equity offerings structured in this way (with a number of distinct underwriting syndicates), underwriters should consider entering into an intersyndicate agreement to coordinate the offering of the domestic and international tranches. This should address selling restrictions, settlement procedures, the allocation of commissions, stabilisation of the shares offered in each tranche, the re-allocation of shares from one offering to the other and, most importantly, the inter-conditionality of both offerings.

Beating the clock

When considering the timetable for the offering, particular attention should be paid to the filing process for the izahname used for the domestic offering. An English language international offering circular (IOC), prepared to an international standard in terms of disclosure, is typically produced alongside the Turkish prospectus. The first filing of the izahname should be made at least eight weeks before the anticipated final approval date to provide sufficient time for regulatory review. It is important to note that this first filing (but not the issuer's subsequent draft submissions) is public.

The CMB review process may take notably longer than in other jurisdictions. This factor, when combined with the timing/availability of financial statements and practical deadlines for launching and closing an international offering, can put significant pressure on the transaction timetable. To ensure that the CMB has sufficient time to review the izahname in advance of the desired date of final approval, the possibility of filing a partially complete version should be raised with the regulator. This version could contain, for example, a full discussion of the earliest two (of three) years' financials, with a subsequent filing containing the analysis of the most recent period.

Recent experience suggests that the CMB is amenable to such an approach, although each transaction is reviewed on a case-by-case basis.

Setting price and valuation

It is important to distinguish between international and domestic offerings in this context – the former being a placement to institutional investors only and the latter including a public offer to Turkish retail and institutional investors.

Marketing for the domestic offering/book-building takes place using the final izahname, which is printed and circulated (with a price range) after CMB approval. Domestic book-building typically coincides with the end of the international offering bookbuilding period and must be conducted over two to three business days under Turkish law. The marketing/bookbuilding for the international offering may start before final CMB approval if the preliminary IOC includes appropriate disclaimers that indicate, among other matters, that the Turkish izahname has not yet been approved by the CMB and no formal orders will be taken until this has been obtained.

One of the domestic lead managers is required to prepare a valuation report for the offering, the purpose of which is to provide a fair market value estimate of the shares. The valuation methodology of the report – but not the valuation itself – is reviewed by the CMB, which may require several versions to be submitted. The first draft of the report contains a valuation range that is, in most cases, wider than the final IPO price range. The CMB-approved version of the valuation report contains the narrower price range included in the preliminary IOC and izahname and used during international and domestic book-building. As such, the transaction timetable should be structured to ensure that approval of the final valuation report containing the price range (coinciding with the approval of the izahname, which also includes such range) is received before the launch of the international offering, although that is not always possible, so that the final price range can be included in the preliminary IOC for use in the international roadshow.

Loosening price amendment rules

The CMB has recently modified the requirement relating to the announcement of the price range initially disclosed in the izahname, the revision of which was not permitted under prior rules unless included in a new izahname filing with the CMB. With effect from December 1 2017, the price range disclosed in the izahname can be decreased through simple and brief public disclosure and need not require a formal amendment to the izahname itself. Any revised price range remains subject to the limitation that the top of the range be no more than 20% above the bottom.

It is advisable to explicitly disclose this new regulatory flexibility and the possibility of a future decrease of the price range in the preliminary IOC and the izahname. Such a decrease may occur either before or after commencement of the domestic bookbuilding period. We believe that this will give market participants greater flexibility in initially setting the price range for the bookbuilding period and in decreasing such price range, should market conditions demand it. Any such amendment will require an extension of the bookbuilding period by two calendar days.

A Turkish 'brownshoe'

In the international context, pricing typically occurs on the day books of demand are closed. At such time, the price is set, the pricing term sheet is circulated to investors (and time-of-sale occurs for US securities law purposes) and the underwriting agreement among the issuer, selling shareholder and underwriters is signed.

In the Turkish context, an additional layer of complexity is added by Turkish practice in deal upsizing; this refers to any selling shareholder's option to increase the size of the offering by up to 20% of the originally intended size (including primary and secondary components). All descriptions relating to the offering (for example, in public announcements made in respect of launch) should reflect the possibility of this occurring. Bookbuilding is typically scheduled to finish (and the final offering price to be determined) on a Friday. The allocation list is circulated to the issuer (and selling shareholder(s)) on the morning of the following Monday, and the sale contract with domestic investors is formed on that day under Turkish law, following the approval of such list by the issuer and selling shareholder(s). Only at this later time is the pricing term sheet circulated to international investors and the underwriting agreement signed in such offerings. The intervening weekend is used to consider any upsize and finalise allocations.

This practice is sometimes referred to in the Turkish market as an 'over-allotment,' whereas in international practice, this term refers to the creation of a short position, typically settled using a share borrowing, intended to support stabilisation activities, with the short position being closed out through market repurchases or the exercise of a greenshoe option.

The better view, in our opinion, is to consider the Turkish structure substantially equivalent to a 'brownshoe' (or 'reverse greenshoe'), which is common in certain Central and Eastern European jurisdictions. In such structures, a portion of the proceeds from the offering is withheld at closing and used to effect stabilising purchases in the aftermarket, with any shares purchased in the course of stabilisation (together with any unused proceeds) being transferred back to the issuer/selling shareholder at the end of the stabilisation period. The same approach is taken in Turkey, the only difference being that it is primarily the proceeds of the optional upsize that are used to fund the stabilisation activities.

Irrespective of any upsize, it is important to note that stabilisation activity may still be carried out under Turkish law within 30 days of closing. The number of shares that are repurchased in stabilisation activities should not, at any one time, constitute more than 20% of the total number of offered shares in aggregate.

About the author



Ömer Çollak

Partner, Paksoy

Istanbul, Turkey

T: +90 212 366 4732

E: ocollak@paksoy.av.tr

W: www.paksoy.av.tr

Ömer Çollak heads the capital markets practice at Paksoy. He has specific expertise in equity, debt and equity-linked transactions, representing underwriters and issuers in initial pulblic offerings, debt offerings, Islamic finance transactions and private placements. Ömer also acts in regulatory capital issuances under Basel III, and represents clients in structured finance transactions, including but not limited to securitisations. He further has significant experience in listed company M&As in addition to various high-ticket and cross-border M&As in various sectors, including financial institutions and retail, acting for private equity firms and strategic investors.

Prior to joining to Paksoy, Ömer worked as a foreign associate at a US firm in California, where he acted for biotech and high-tech multinational clients.

Ömer is a graduate of Marmara University School of Law and holds an LLM degree from Golden Gate University School of Law, San Francisco. He is admitted to the Istanbul Bar and is a member of the American Bar Association and International Bar Association.

About the author



Ökkeş Şahan

Counsel, Paksoy

Istanbul, Turkey

T: +90 212 366 4790

E: osahan@paksoy.av.tr

W: www.paksoy.av.tr

Ökkeş Şahan is a counsel at Paksoy, specialising in securities law, capital market transactions, corporate governance and public company law. He practises in capital markets, acting for issuers and underwriters in initial public offerings, Eurobond offerings and private placements. He also has experience in M&A transactions of listed companies in various sectors.

Prior to joining Paksoy, Ökkeş worked for almost 15 years at the Capital Markets Board of Turkey as legal counsel.

Ökkeş is a graduate of Ankara University School of Law and holds an LLM degree from the University of California, Davis. He is a member of the Istanbul Bar and holds the following licences: capital market activities (advanced level), derivative instruments, real estate appraiser, credit rating specialist, corporate governance rating specialist and independent auditing in capital markets.

About the author



Pierre-Marie Boury

Partner, Cleary Gottlieb Steen & Hamilton

London, UK

T: +44 20 7614 2380

E: pboury@cgsh.com

W: www.clearygottlieb.com/professionals/pierre-marie-boury

Pierre-Marie Boury's practice focuses on international capital markets transactions, with a particular concentration on US securities law matters. He has repeatedly been recognised by legal and business directories as one of the leading practitioners in his field.

Pierre-Marie has advised on a broad range of equity and debt capital markets transactions, for issuers including Tallinna Sadam (the Port of Tallinn), Evry, Digi, Europris, CMA CGM, Tokmanni, EFG International, Santander UK, Entra and Alba. His Turkish experience includes the initial public offering and London listing of Global Ports Holding (as well as a prior high yield notes offering by its wholly owned subsidiary).

Pierre-Marie is a graduate of Ecole Normale Supérieure (Paris), University of London (Queen Mary), Université de Paris I – Panthéon-Sorbonne and New York University School of Law. He joined the firm in 1992 and became a partner in 2002. Prior to Cleary, he worked in corporate finance at BNP in New York, Paris and London from 1989 to 1992.

About the author



Chrishan Raja

Associate, Cleary Gottlieb Steen & Hamilton

London, UK

T: +44 20 7614 2224

E: craja@cgsh.com

W: www.clearygottlieb.com/professionals/chrishan-raja

Chrishan Raja's practice focuses on international capital markets matters (equity, equity-linked and debt), for issuers including Tallinna Sadam (the Port of Tallinn), Telenor (multiple dispositions of stakes in VEON), Qiagen, EFG International, Thule, WH Group, MegaFon and Santander UK. Chrishan has significant experience of IPOs by Turkish issuers and Borsa İstanbul listings, including the initial public offering and London listing of Global Ports Holding (as well as a prior high yield notes offering by its wholly owned subsidiary).

Chrishan is a graduate of the University of Oxford (Magdalen College) and Harvard Law School. He joined the firm in 2012 and has previously been resident in its offices in New York and Washington, DC.

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