Turkcell-Vodafone Rivalry Is Heating Up

Turkcell-Vodafone Rivalry Is Heating Up

Wireless phone company Turkcell has a lot going for it -- Turkey's strong economy and a young population that likes to gab on cell phones -- and one big worry: Vodafone.

Shares in Turkcell TKC, which holds nearly 60% of its home nation's wireless market, have gained more than 50% in 2007, including a 12% jump during the market's rebound Tuesday and Wednesday. Turkey's GDP is forecast to grow at around 6% in 2007, more than twice the U.S. forecast. About three-fourths of Turkey's population uses mobile phones, up from 60% two years ago, says market research firm Informa. Turkcell has almost 34 million customers, up 5 million in the past year.

But U.K.-based Vodafone VOD, the world's No. 1 wireless firm, wants a bigger slice of Turkey's wireless pie.

Vodafone plunked down $4.5 billion in late 2005 to buy Telsim Mobil, Turkey's No. 2 wireless firm. Vodafone has 15 million customers in Turkey, up from about 9 million when it bought Telsim.

"Turkcell is facing increased competition," said Dario Talmesio, an analyst at Informa. "Vodafone sees Turkey as a very profitable and fast-growing market."

Vodafone plans to spend $1 billion to upgrade Telsim's network.

"Vodafone has been executing well," Talmesio said. "They've taken a former state-owned company (Telsim) and improved its operations."

Turkish regulators are expected to shake up the market by requiring "number portability," which lets mobile users keep their phone number when they switch carriers.

Requiring number portability would likely hurt Turkcell and help Vodafone and Turkey's No. 3 wireless firm, Avea, says Talmesio. He says some of Turkcell's higher-spending customers could jump ship. Turkcell garners $14.10 in average monthly revenue per subscriber. Vodafone gets $11.70 per customer, and Avea only $9.80.

Turkey's government hasn't set a firm date for instituting a portability rule. In what observers called a move to pressure the government to set a date, Vodafone and other companies did not bid for next-generation 3G licenses in early September. Turkcell was the lone bidder, though on Wednesday the government cancelled the award because no one else bid.

Analysts say it doesn't make sense for Vodafone and other Turkcell rivals to invest in 3G services without the portability rule in place.

Still, an economic rebound has raised incomes and spurred wireless usage. In 2001, Turkey faced a financial crisis. It owed the International Monetary Fund $20 billion. But it now owes just half that, after a strong economic rebound sparked by reforms and privatization of state-owned companies.

Turkcell's second-quarter per-share profit jumped 210% to 31 cents. Revenue rose 29% to $1.5 billion, aided by currency gains.

Wireless usage has soared among Turkey's business users and its young, analysts say. About 47% of the country's 73 million people are under 25.

As long as Turkey's economy stays strong, wireless penetration and per-minute usage should go up, say analysts. Turkcell added 1.5 million customers in the three months that ended June 30, a quarterly record.

"Vodafone Turkey is not interested in launching a large-scale (price) war to gain market share," Alex Kuznetsov, a Bear Stearns analyst, said in a recent note to clients. "As we have seen in Egypt, South Africa and other emerging markets, Vodafone is a rational competitor focusing on profitability and return on capital rather than market share."

Turkcell has expanded into Ukraine, Georgia, Cyprus and Kazakhstan. It eyed Saudi Arabia, too, but pulled back when the cost to acquire a license seemed too pricey.

On its second-quarter earnings conference call, Turkcell confirmed its interest in expanding into Kuwait and Iraq.

The company also has regional rivals. Egypt's Orascom Telecom, the region's biggest wireless firm, as well as Kuwait's Mobile Telecom have made acquisitions.

Orascom outbid Turkcell for a Greek wireless firm last year, analysts say.

UBS analyst Alex Wright says Turkcell's Ukrainian business, Astelit, could have a big upside. The unit has 6.3 million subscribers. He says Ukraine's fierce competition could ease as a result of mergers.

Turkcell's ownership might soon change because of a legal tussle. Turkey's Cukurova Group is the biggest shareholder, followed by Nordic firm TeliaSonera and Russia's Alfa Group.

In 2005, Cukurova agreed to sell TeliaSonera a controlling stake in Turkcell. But Cukurova Group instead sold a smaller 13% stake to Alfa Group.

An arbitrator recently found that the first Cukurova-TeliaSonera deal was binding, putting pressure on the Turkish holding company to work out a deal.

Kuznetsov says there's a "high probability" of TeliaSonera gaining control over Turkcell. He says that would be a plus, because TeliaSonera has plenty of technology and managerial expertise.