Letter to the Board of Directors of
February 16, 2015
February 16, 2015
Board of Directors
Akfen Holding A.Ş.
Koza Sokak No: 22
Ankara 06700, Turkey
Dear Members of the Board,
WSD Capital Management, L.P. (collectively, “WSD”) is an institutional investor
with an attributable economic interest in shares of Akfen Holding A.Ş. (“Akfen”
or the “Company”). We are publishing this letter now, following the Annual
Shareholders’ Meeting, so as to initiate a transparent debate about Akfen’s
renewed plan to optimize shareholder value going forward. While we applaud the
announced TL 200 million share buyback authorization, we believe strongly that,
by itself, this move is not enough to improve shareholder value.
By way of background, WSD is a value-oriented investment management firm
that seeks to invest in companies and special situations with a compelling cata-
lyst to enhance value for the benefit of all shareholders. Our approach to such
investments is to actively engage with management teams and boards of direc-
tors in a constructive manner to execute on opportunities to unlock shareholder
value through a combination of strategic redirection, improved operational execu-
tion and more disciplined capital allocation.
We have conducted an extensive amount of research on Akfen and the industries
in which it operates. Based on our team’s experience assisting companies in
designing and executing strategic corporate initiatives and enhancing capital
allocation and efficiency, we believe that Akfen is deeply undervalued, both in
absolute terms and in relation to its peers, and that a number of opportunities
exist to create significant value for shareholders based on actions within the
control of management and the Board of Directors of the Company (the “Board”).
Akfen is one of the largest industrial conglomerates in Turkey with over 37,000
employees1 and more than TL 1.1 billion in gross revenues.2 The Company cur-
rently operates in the field of infrastructure investment, project management,
development, operation, and construction, both in Turkey and abroad.
This is a durable, high-quality business that operates in growing markets. Akfen
provides a critical service and has an established track record for investments for
which the competition is low or in which the income stream is determined with a
minimum guarantee. In addition to the income derived from its subsidiaries, the
Company generates significant income out of the divestiture of its infrastructure
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investments, their public offering, and new projects issued by means of strategic
and financial corporate initiatives.
Akfen has a strong value proposition that drives long-term economic growth: it is
able to generate efficiencies in the construction and management of its projects
while avoiding competition in congested and stagnant markets. The increased
demand for new infrastructure projects and favorable demographics should result
in stable concessions with monopolistic market structures and sustainable cash
flows through long-term minimum income guarantees.
Despite its favorable business characteristics and the compelling growth pro-
spects for its industry, Akfen currently trades at a deep discount to its intrinsic
value. Over the past 1-, 3- and 4-year periods, Akfen has underperformed both its
peer group and the broader stock market.
Akfen Historical Share Price Performance:*
1 Year 3 Year 4 Year**
BIST Stock Index (XUTUM) 16% 35% (1%)
Proxy Peer Index (XHOLD) 13% 45% 8%
Akfen Holding A.Ş. (AKFEN) 1% (38%) (55%)
Underperformance vs. BIST Stock Index (14%) (73%) (54%)
Underperformance vs. Proxy Peer Index (12%) (84%) (62%
Source: WSD, Borsa Istanbul
* Annual performance as of December 31, 2014 (USD-based relative returns; not adjusted for dividends)
** As of date of IPO, May 2010 through December 31, 2014
It is our belief that the deficit in the Company’s share price performance has been
driven above all by a combination of lackadaisical execution and supine capital
allocation. Furthermore, we respectfully disagree with Akfen management’s
current assertion that there is nothing left to do to improve the Company’s share
price performance.3 In order to assiduously unlock Akfen’s latent value, we
believe that management should take dedicated action, as outlined in more detail
below, to strengthen execution, improve capital allocation, and explore all availa-
ble alternatives to maximize shareholder value.
We estimate that pursuing this plan of action could more than double Akfen’s
share price. Improvements should be easily achievable over the next year and
could result in an estimated share price of TL 10.62 – TL 11.68.4
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We believe a persistent conglomerate discount limits total shareholder returns
(TSR) over time. In Akfen’s case, things are complicated further because it is
neither a pure-play growth company, nor a cyclical recovery play nor a capital
return story. More importantly, it fails to deliver low EPS volatility and strong
EPS growth, the fundamental rationale for a conglomerate.
Akfen – Peer Group Comparison:*
AKFEN ENKAI TKFEN
Asset Turnover 0.02 0.50 0.64
Cash Conversion Cycle 1,247 days 42 days 23 days
Return on Assets 0.5% 6.2% 5.1%
EPS Volatility (5-Year Avg.) 444.1% 12.5% 99.4%
Source: WSD, Company Filings
* Calculated from most recent available data.
Moreover, Akfen has underperformed its peers in terms of efficiency across a
number of key operational metrics that undermine the Company’s long-standing
economic potential. It is our belief that fortifying managerial focus on execution
will be of primary concern to stress-test Akfen’s resolve to bring its efficiency in
line with both its historic averages and its industry peers.
In light of this historical fact pattern, we believe there is a meaningful and credi-
ble opportunity to regain the growth legacy of the Company through a “back-to-
basics” approach that is rooted in operational and financial performance.
Improve Capital Allocation
Given Akfen’s extensively undervalued shares, we urge the Company to take
advantage of its excess liquidity by accelerating it’s repurchase program to net a
high return on capital.
This is not intended to criticize the overall trajectory of the current three-year
share repurchase program. In fact, it represents a strong belief in Akfen’s future
as well as its ability to commit to delivering value by using a balanced approach
of investing in its business, maintaining a flexible financial position, and return-
ing capital to shareholders.
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Leading Turkish equity research analysts agree and share our outlook on Akfen’s
exceptional upside potential and share buyback program, targeting an average
share price increase of ~20%.5
Explore Alternatives to Maximize Shareholder Value
Akfen’s unique portfolio of assets offers many opportunities for financial corpo-
rate initiatives that would result in a lower NAV discount attached to the mar-
ket’s rating of the Company’s shares. That is to say, these initiatives would
prompt the market to more fully value the Company's existing assets.
Mersin International Port (“MIP”) is one of the top container ports in the world, a
trade gateway to 190 countries with coveted access to multimodal connections, a
monopolistic port corridor connection to the Mersin Free Zone, and the largest
domestic port with the capacity to provide all port services in the same port area.
By our analysis, MIP today comprises a major percentage of Akfen’s enterprise
value, contributing over 40% of the Company’s EBITDA. While MIP is a top
performer within Akfen, its true value appears to be ignored by the market.
Mersin International Port Financial Overview:
2013 2014 (9M)
Operating Revenue $275 million $218 million
EBITDA (Adjusted) $163 million $133 million
EBITDA Margin (Adjusted) 59.3% 61.0%
Net Debt $474 million $377 million
Container Handling Volume (TEU) 1.38 million 1.12 million
Source: Company Filings
We believe this underperformance would be remedied by listing a minority stake
of MIP and injecting meaningful liquidity into Akfen. We are of the firm belief
that investors would be attracted to MIP’s growth potential and favorable busi-
ness characteristics. To give a glimpse of the hidden value attainable, at a modest
valuation of 6x EBITDA, an initial public offering would contribute an incremen-
tal $519 million in market valuation for the Company’s 50% ownership share in
MIP or approximately TL 4.86 per Akfen share.6
Like many conglomerates, Akfen has a portfolio of strong businesses facing
different challenges side by side, each obscuring the other’s true worth. The
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Board must weigh the potential upside from the available corporate initiatives
against the execution risk associated with all other strategic alternatives.
This is a rather advantageous period for Akfen and we believe that now is the
time to decisively pursue the initiatives outlined herein while recognizing that
the opportunities created by today’s healthy market conditions may not be avail-
able in the future. As Akfen’s most industrious investor, we have a vested inter-
est in seeing the Company take advantage of all available opportunities to create
sound value for the benefit of all shareholders.
We have outlined a far-reaching plan to improve the value of the Company and
we look forward to discussing all of these points in more detail. We believe our
proposal to strengthen Akfen serves all of its stakeholders – employees, manage-
ment, and fellow owners.
WSD Capital Management
1 Total number of employees working for companies subject to joint management as of Sept. 2014.
2 Consolidated revenue from 2013 operations including the share of revenue from JV subsidiaries.
3 Sümeyye Dalkılınç, “Yabancı Yatırımcı Büyüme Görmeli”, Anadolu Ajansı. January 18, 2015.
4 Valuation range assumes Akfen is able to prompt market to re-rate its shares through an
accelerated share repurchase program and public listing of a minority stake in MIP.
5 Price targets: Ak Yatırım (TL 6.38); İş Yatırım (TL 6.80); Garanti Yatırım (TL 6.40).
6 In USD terms, $1.98 per Akfen share converted at the current rate of exchange (TL 2.4581).
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