by Charles Sizemore | April 25, 2012 8:00 am
The Economist ran a story on Turkcell’s (NYSE:TKC) ongoing board crisis this week, describing and updating the company’s status as follows:
“By many measures, Turkcell is thriving. It is Turkey’s biggest mobile operator, serving 35 million subscribers there and another 30 million through subsidiaries and minority stakes in other countries. It boasts $5.6 billion in annual revenues and a market capitalisation of $10.7 billion. And all these numbers are likely to grow. In the past year alone Turkey added more than 3.5 million mobile subscribers, yet mobile penetration is only 89%, well short of the EU average of 126% (i.e., there are more phones in Europe than people).”
“But Turkcell is also paralysed by a shareholder dispute … As a result, important decisions are blocked. Turkcell’s shareholders still have not seen a dividend for 2010. Two extraordinary shareholder meetings ended in fiasco last year.”
In a story melodramatic enough to be the plotline of a Mexican telenovela, Turkey’s second-richest man, Mehmet Karamehmet, is fighting to retain control over the company he founded against a group of minority shareholders led by the Nordic TeliaSonera and the Russian Altimo. In a truly bizarre international court battle that spans from the Eastern Mediterranean to the British Virgin Islands, the case now rests with Britain’s Privy Council.
Yes, you read that correctly. Due to complex legal relationships dating back to colonial times, the case has now been appealed to the royal Privy Council of the United Kingdom. The fate of one of the most important companies in Turkey and of all emerging markets will be decided by an institution originally formed during the Middle Ages to advise the monarch of England.
Truth is stranger than fiction.
Barring additional delays, the Privy Council is supposed to hold a hearing on May 8 that should determine whether Mr. Karamehmet will need to surrender his controlling interest in the company to pay a debt allegedly owed to TeliaSonera and Altimo.
And if the May hearing proves to be inconclusive, new Turkish corporate governance rules set to go into effect in June should end this dispute once and for all. All listed Turkish companies will be required to have one-third of their board members be independent. Independent board members will (presumably) break the tie that prevents either investor group from effectively controlling the company.
Whenever the dispute is finally settled, it certainly won’t be soon enough. It has dragged on far too long, and the common shareholders have paid the price in lost dividends and capital losses.
Turkcell is my entry in InvestorPlace’s “10 Stocks for 2012” contest.
When I chose Turkcell, I knew full and well that that the company had “issues.” It was one of my reasons for liking the company. Most good contrarian value investments have obvious flaws that cause investors to overlook or discount their less obvious virtues.
In the case of Turkcell, I saw a fine company selling an essential service to a vibrant and growing emerging market middle class — an emerging market that happened to be sandwiched between the two main crisis zones of 2011, debt-burdened Europe and a Middle East being roiled by the Arab Spring.
These macro worries and the ongoing boardroom circus had acted as a weight on Turkcell’s stock price (and alas, still do). But once that weight is released and the dividend is restored, I expect this stock to enjoy a nice rally. Barring a broader emerging-market selloff, I believe returns of 50%-100% are reasonable over the next 12-24 months.
We shall see. In the meantime, I continue to recommend buying shares of Turkcell on any weakness.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”
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