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Thorts - Turkey - Fertile Soil or Barren Earth
Thorts - Turkey - Fertile Soil or Barren Earth
Published Date: 2017-06-02 | Source: DealMakers | Author: Johan Holtzhausen
Turkey: Fertile Soil or Barren Earth? - Johan Holtzhausen
Cross border M&A transactions are always subject to additional complexities and challenges due to the differences in the regulatory and legislative frameworks, as well as the language and cultural differences.
On March 31, 2017, it was announced that Zaad Holdings Limited ("Zaad"), a subsidiary of Zeder Investments Limited ("Zeder"), concluded agreements for the acquisition of a 35% stake in the Turkish company, May-Agro Tohumculuk Sanayi ve Ticaret Anonim Şirketi ("May Seed"), with the option to acquire the remaining 65% of the company in time. The 35% interest would be achieved partly through the acquisition of shares from the existing shareholders and partly through the subscription for new shares in May Seed (in order to capitalise the company).
May Seed is the largest private sector agricultural seed breeder, producer and distributer in Turkey. The company has two manufacturing plants and various product registrations. It operates in Turkey but also exports its products to more than 35 countries within the strategic geography of the European Union, Black Sea, Middle East, Africa and Central Asia regions.
Zaad serves as Zeder's focused platform for operationally complementary investments in the strategic agricultural inputs sector. Through the various investments made by Zaad in recent years, it has established itself as a leading producer, marketer and distributor of a wide variety of agricultural seeds across several countries in Africa and abroad, under established names such as "Agricol", "Bakker Brothers" and "Klein Karoo Seeds".
Despite the fact that Zaad had successfully implemented several cross border acquisitions (most notably its acquisition of Gebroeders Bakker Zaadteelt en Zaadhandel BV, a seed company incorporated in the Netherlands and its acquisition of K2 Seed Growers Inc, which is incorporated in the United States of America) the negotiation and conclusion of a transaction in Turkey remained challenging for the management team, who accordingly appointed PSG Capital as transaction advisers.
Despite its recent political turmoil, Turkey still remains the world's 7th largest agricultural producer overall. The Turkish government has implemented several projects and incentives to grow and to attract foreign investment into the country's agricultural sector. The most important of these would be the South-Eastern Anatolia Project, a multi-sector integrated regional development project that includes investments (largely related to agribusinesses) into the underdeveloped South East region of Turkey. The increased agricultural production in this region, as a result of the aforementioned government investment, will lead to the further expansion of the Turkish seed market in which May Seed operates.
Turkey has also introduced regulations aimed at enhancing its business environment and has improved its "doing business" rankings considerably in the last decade. It has, for example, decreased the number of days to set up a business in Turkey from 38 days in 2003, to six days in 2012.
The Turkish government also provides incentives for investments and support to its agricultural sector which are competitive on a global scale. These include product-based incentives that are in place to support production per unit, tariff tax exemptions, VAT exemptions and tax discounts.
The parties both recognised that the existing and potential synergies between Zaad and May Seed are numerous. Zaad determined that the benefits of the transaction largely outweighed any potential risks.
During the negotiations it became clear that the interests of the parties were largely aligned and that, ultimately, the majority of the outstanding issues arose purely from the differences in the regulatory environment, including, but not limited to, the following:
- various differences exists between the Turkish Generally Accepted Accounting Practices (GAAP), as applied by most private Turkish companies, and the International Financial Reporting Standards (IFRS) applied by most multi-nationals;
- the accounting policies applied by the parties in respect of the capitalisation of research and development expenses, which was of particular importance for this transaction, varied greatly from each other;
- despite the aforementioned efforts of the Turkish government, the implementation of a sale of (or the subscription for) shares in a Turkish company is still highly regulated and procedurally intensive. For example, a formal closing meeting must be held to implement such a transaction, at which meeting the presence of a representative of the local commercial registry is required;
- Turkish corporate legislation is highly prescriptive of which decisions fall purely within the scope of the shareholders' powers and which decisions may only be taken by the board of directors of a company;
- certain provisions of the Turkish corporate legislation may also have practical implications when foreign shareholders are involved, such as the fact that shareholders' resolutions may not be taken in writing (a mechanism which is provided for in section 60 of the South African Companies Act) and the onerous requirements relating to electronic participation in shareholders' meetings, which may unnecessarily increase the number of times a representative/proxy of a foreign shareholder needs to be present at a shareholders meeting in Turkey; and
- the language barrier also poses a real impediment to concluding cross border transactions in Turkey. Not only because many Turkish nationals are not fluent in English, but also because the Turkish corporate legislation requires several documents, including the articles of incorporation of a Turkish company and all employment agreements, to be executed in Turkish. In addition, Turkish corporate laws prescribe that all shareholders meetings must be conducted in Turkish. These stumbling blocks can be overcome by obtaining warranties from the Turkish shareholders that there are no differences between the official Turkish versions of such documents and the translated English versions signed by the Parties and the inclusion of conditions that a translator must be present at each shareholder meeting.
It is important to remember that in any cross border M&A transaction, despite the potential complications (some of which are outlined above), the principles of deal making remain the same. Yes, experience counts, but it is not a requirement to involve an international investment bank or advisory firm to get a transaction of this nature across the finish line.
What is, however, required, is a level head, common sense, deal making experience and a reputable and experienced in-country advisory firm or firm of attorneys to give you the local "lay of the land". PSG Capital was privileged to have worked with such local partners, who assisted in the successful conclusion and implementation of this transaction.
We are confident that with the right conditions, fertilizer and enough water, so to speak, South African investors' "seeds" will yield a good harvest in Turkey.
Johan Holtzhausen is the managing director of PSG Capital.
(This article first appeared in DealMakers, SA's quarterly M&A publication)