Comment - Drinks majors eyeing Turkey tax deal
After six years, drinks companies have hope of a tax settlement in Turkey
The likes of Diageo and Pernod Ricard are hopeful that the end is nigh for the long-running tax dispute with Turkish authorities that has severely hampered their access to the country's promising alcoholic drinks sector.
Proposed legislation that would enable foreign alcoholic drinks companies to reach a settlement with Turkish customs officials is in its final stages in the country's parliament.
In recent years, foreign drinks companies have been either frozen out of Turkey or forced to significantly scale back operations due to a dispute over the amount of money owed to the country's tax authorities.
But, if the newly-proposed legislation is passed in its final parliamentary reading - scheduled for the next few weeks - Turkey's Government plans to discuss the possibility of a cut-price settlement with drinks firms.
Access to Turkey could provide drinks companies with an escape route from weak markets elsewhere in Europe, including neighbouring Greece. At the same time, for local players such as Anadolu Efes or Mey Icki, it could either yield more competition or open them up to foreign acquisitions.
Sources within the drinks industry have told just-drinks that the current situation in Turkey is more promising than at any stage in the dispute's six-year history. "It's much more hopeful this time," said one source, "because there is a bill going through parliament.". However, there is caution in the trade. "There have been loads of false dawns on this," the source added.
Moves to open up the alcohol market to more companies - and particularly foreign ones - are politically-sensitive in Turkey. Around 99% of the country's population is Muslim, although alcohol consumption is tolerated more freely than in the Muslim countries of the Middle East.
It is understood that Turkey's Government has told drinks companies that it would prefer to have regular tax revenue, rather than pursue the dispute any further. There are several civil court cases pending against drinks companies in Turkey, brought by the customs authorities. Diageo said in its 2010 annual report that, if it loses all of the cases, then its financial losses could top GBP100m.
By comparison, the current proposed legislation paves the way for a settlement at relatively negligible cost. "Diageo Turkey would be amenable to agreeing a settlement at a level that is proportionate to the scale of Diageo Turkey’s business, which earns operating profit of less than GBP10m a year," said the group in its annual report. Diageo did not trade in Turkey in its most recent half-year, to the end of December.
Some companies, such as Carlsberg, operate in Turkey via licensing agreements with local producers. Others, including Pernod Ricard, still operate wholly-owned subsidiaries in the country.
Even if a tax settlement can be reached, a variety of barriers to growth will still remain in the country. Firstly, per capita alcohol consumption is low versus other European countries. Secondly, the country's ruling Justice and Development Party (AKP) has repeatedly hiked alcohol sales tax since coming to power in 2002. Tax on the local 'raki' drink rose by 30% in October last year, while tax on beer has increased eight-fold during AKP's rule.
Still, Turkey's economy is set to grow at an average of 5% annually over the medium-term and the country's population is young, with an average age of around 28. The major domestic players have also continued to build their businesses, despite regulatory concerns. Anadolu Efes dominates the beer sector and, in 2009, increased domestic beer sales by 7% to TRL1.26bn (US$792m). Operating profits for the division rose by 2% in the year to TRL503m.
If a tax settlement is reached, that the domestic players will be more exposed to takeover offers could provide ideal entry points for international players with the money to buy. In December, Diageo was linked with a $2.5bn bid for Turkish spirits group Mey Icki, which is owned by private equity group TPG Capital.
What likelihood, then, of this being the first of many such transactions in the coming years?
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