Once star businessman falls from grace

HDN | 6/23/2002 12:00:00 AM |

He once was known as the richest Turk. Now he's an entrepreneur who lost the key sources of his wealth and credibility. It's not exactly a "riches to rags" story, but Mehmet Emin Karamehmet will likely be a milestone in the Turkish business

He once was known as the richest Turk. Now he's an entrepreneur who lost the key sources of his wealth and credibility. It's not exactly a "riches to rags" story, but Mehmet Emin Karamehmet will likely be a milestone in the Turkish business history, one that signifies a turning point in decades of crony capitalism.

Turkey's banking watchdog last week seized one of the two banks belonging to Karamehmet's Cukurova group and took control of the management at the other bank, depriving the prominent businessman of the management of both. Pamukbank, the 20th bank to be hauled into state receivership in the past five years, was Turkey's sixth largest private bank. Yapi Kredi, where the Cukurova group and majority stakeholders lost their rights because of the mismanagement of Pamukbank, is the fourth largest. The two banks have last week applied for a merger, but the BDDK didn't find it viable to merge a healthy bank with one that was fundamentally siphoned off of its resources.

"The move leaves the banking system in a much stronger position than if the merger had gone through," Deutsche Bank said in a commentary.

Fall from grace

Karamehmet and Osman Berkmen, his age-old comrade at the Cukurova group, were immediately removed from the board of Yapi Kredi and two new members were appointed by the Banking Regulation and Supervision Agency (BDDK). Pamukbank was seized because of criminal activity on the part of owners, i.e. a high ratio of non-performing loans, of which analysts say a good deal has arisen from connected- party lending. Pamukbank was found out to have lent some $2.5 billion to Cukurova companies. The bank was determined to have a capital shortfall of $2 billion as a result of three-round audits administered by the BDDK. Members of its board including Mehmet Emin Karamehmet and general manager Orhan Emirdag are banned from leaving the country and a freezing order was made for their assets.

Mehmet Emin Karamehmet, owner also of Turkey's number one mobile carrier Turkcell, to which he owes a majority of his current wealth, was the world's 29th richest person according to the Forbes 2000 list and 87th with a $4 billion personal wealth on the 2002 list.

After the Pamukbank takeover and his assets were frozen, an Ankara court fixed a monthly wage of TL 2 billion (approximately $1,300) until he repays his debts. Karamehmet is said to have objected to the amount via his lawyers on the grounds that he couldn't possibly live on that money.

Karamehmet was a minority shareholder in Yapi Kredi until 1980 and acquired the majority stake in that bank and its affiliate Interbank, a move that made him the owner of three banks. Later on he sold Interbank to Cavit Caglar, another rising star of the late Ozal period and a close friend of the ninth president Suleyman Demirel.

With this financial power, Karamehmet broke into all sorts of businesses from detergent production to steel and the Cukurova group expanded rapidly. But in early 1980s he and Osman Berkmen faced a suit for smuggling gold outside the country. It was alleged that considerable quantities of gold were acquired in the domestic market at then cheap prices, taken out of the country and sold there, only to be brought back in the form of worker remittances and pre-financing foreign currency transfers. When an arrest decision was issued for him, Karamehmet fled Turkey and dwelled illegally in Switzerland for two and a half years.

With a lucky twist of events, the arrest decision and the cases against Karamehmet were rendered invalid when the then Prime Minister Turgut Ozal passed regulations that stipulated economic punishments for economic crimes. He was suddenly free to return to the country.

In 1994 he accepted a proposal by bankrupt businessman Murat Vargi to jointly operate the country's first mobile carrier, which would later on become a lucrative business with millions of subscribers because past administrations, disregarding the norms of competition in a free market, didn't auction new licenses for years. Turkcell is still a market leader in Turkey with some 11 million subscribers, moiré than twice its closest rival has.

Karamehmet, who hated publicity and constantly avoided television screens and newspaper pages, also has mainstream media interests and has recently acquired the Aksam newspaper and Show TV television station.

Uncertainty in the short term

With the latest BDDK move, Pamukbank will now be operating under the administration of the Savings Deposit Insurance Fund, while the condition of Yapi Kredi remains unclear. The BDDK plans to sell the 48 percent stake it took hold of in the bank, as Karamehmet and the other shareholders have lost their eligibility to become bank founders.

The move itself attracted much applause from the International Monetary Fund, the U.S. administration, foreign investors and local analysts, as it constitutes the boldest reform step in the last years.

"The surprise takeover of Pamukbank is a watershed in Turkey, At a time of political uncertainty, the government has taken one of Turkey's most aggressive reform decisions in years, if not the past decade," Wall Street investment bank Merrill Lynch said in a note.

"This bold decision to challenge one of Turkey's largest business groups sends a clear signal: Despite political uncertainty the government and the IMF are committed to addressing the economy's structural shortcomings," it said.

But the action also creates uncertainty regarding the near future, because the BDDK now indirectly controls Cukurova companies and will somehow seek to bridge Pamukbank's capital shortfall through the sale of the group's assets. A major concern of the market centers on the ownership of Turkcell, a joint venture with Finland's Sonera and the first Turkish company to become listed on the New York Stock Exchange.

Like in other group companies Turkcell has complex cross shareholding structure. Pamukbank owns 0.5 percent directly of Turkcell but holds a 15.4 percent in Turkcell Holding which owns 51 percent of the mobile operator. Yapi Kredi has 1.05 directly in Turkcell and 20 percent in Turkcell Holding. Other Cukurova companies own 32 percent directly in Turkcell and 18 percent of Turkcell Holding.

"Our perspective is that the events at Yapi Kredi and Pamukbank will accelerate a change of ownership in Turkcell and that this will be good for the company in the long run," JP Morgan said in a research note.

"Turkcell has a dominant position in the second largest European market, which appears unchallenged by competition to date. Realistically telecoms balance sheets in Europe do not allow any purchase of Turkcell apart from Telia-Sonera, who themselves are in the middle of a merger," it added.

Mobile owner woes?

A potential Turkcell acquisition by a foreign investor as a result of or in relation to its owner's wrongdoing would be a case that awakens quite recent memory.

Earlier this month, Motorola, the big telecommunications equipment group, has secured worldwide asset freezing and disclosure orders on the Uzan family, owner of the second biggest mobile operator Telsim, after a year's bickering with the group over a multi-billion dollar default on vendor financing by Telsim.

The freezing orders were made against Kemal Uzan, the 70-year-old family patriarch; his two US-educated sons, Hakan and Cem; and their sister, up to the value of $200 million for each. The London court decision has also required each defendant provide disclosure of all his/her worldwide assets that have a value in excess of $14,600.

Motorola and Nokia, which also seeks to recover $700 million from the Uzans, have alleged in the US courts that the family intended to defraud them of loans to Telsim - for which shares in the Turkish business had been pledged as collateral - by not repaying the loans and illegally diverting funds and assets to other family enterprises.

Ankara - Turkish Daily News
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