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Let’s talk about Turkey’s private sector debt: The Ulker Case

Baris Soydan, in his article, is having a closer look at the Ulker story, spotting the aggressive investments decisions taken by Turkish firms over the past decade that created Turkey’s current problematic and sizable external debt owed by its private sector.

Let’s talk about Turkey’s private sector debt: The Ulker Case

T24 columnist and economist Baris Soydan penciled an eye opening article this week.

Forbes magazine ranks Turkey’s confectionery mogul Murat Ulker as Turkey’s richest man with a net worth estimate at 3.9 billion dollars.  Yildiz Holding, owned by Murat Ulker had purchased Belgium’s chocolatier maker Godiva in 2008 for 850 million dollars and British United Biscuits in 2014 at a record high price of 3.1 billion dollars; including debt.

What was seen as a lucrative purchase then turned out to be a troubling investment today.  The biscuit sector, on a global scale, is under pressure from an array of new, mostly healthier, products. Faster-growing healthier snacks market has been biting big chunks off from the sweets market for some time.

Fast forward, today Yildiz Holding is in talks with Turkish banks to consolidate and to refinance its 6.5 billion loans in order to keep the company’s growth path intact. Yildiz Holding is not alone at its quest to extend maturities on its loans seeking a multi-year grace period before payments begin.

Baris Soydan, in his article, is having a closer look at the Ulker story, spotting the aggressive investments decisions taken by Turkish firms over the past decade that created Turkey’s current problematic and sizable external debt owed by its private sector.


Ulker and Dogus, two of Turkey’s prominent conglomerates, are in talks with banks for the restructuring of their respective debts of 6.5 billion and 2.5 billion dollars.  These are huge numbers.  Until now, it was already in the news how these sizeable loans were raised from which banks, their maturity structures and how these two giant companies want to restructure their debt.  Yet, nobody talked about why such sizeable loans were raised to being with.

However, Turkish public needs to be informed about Turkey’s private sector debt problem which is affecting the country’s macroeconomic balance.

This much of an immense debt does not occur with spending money on buying houses or yachts; but through making large purchases and giant investment decisions. Then only one question comes to the mind and that is whether these investments were wrong decisions.

Ulker and Dogus have completed a vast number of acquisitions in recent years. Dogus is more into the food-and-drinks sector with a focus on brands that have growth potential like Nusret, Kitchenette, Zuma; and a number of hotels in Spain and Italy.

Ulker played bigger. For 850 million dollars, he bought Godiva, the world famous chocolate brand of Belgium, and United Biscuits, the leader of the UK biscuit market for 3 billion dollars. These acquisitions took place quite a lot in the media, based on the information given by the companies. However, not many had an inquisitive approach.

Yet, on December 1st 2016, Moody’s cut the credit rating of British biscuit company United Biscuits bought by Ulker and lowered it from Ba3 to B1. (At the same time, the company’s credit outlook had been pulled from “stable” to “negative.”) Moody’s had two reasons for doing so: 1) Low operating performance. Due to poor performance, the incompatibility of use of credit in with the company’s Ba3 rating;  2) Due to the unfavorable conditions in the UK and the global market for biscuits, the limitedness of improving the performance of the company in the following year.

There was also an added reason for the rating downgrade: the rise in raw material prices.

United Biscuits’ EBITDA in the third quarter of 2016 fell by 17 percent annually on a yearly basis. The decline was largely due to weakness in Northern Europe and international markets (ie markets outside the UK). Profit had shrunk by 51 percent in northern Europe and by 62 percent in the international segment.

The only problem was not the decline in the company’s profit. When Ulker bought United Biscuits, there was also a loan problem from the past: the United Biscuits pension fund had a deficit of £ 277 million. In this period, that is one year prior to the third quarter of 2016, the ratio of debt to EBITDA had risen to 7.9X.

Moody’s had warned that, if the profitability of the company is further diminished, if the debt to EBITDA ratio exceeds 7 times, there would be a further rating downgrade. In Moody’s report on United Biscuits the rating agency also had forecasted that there would be no significant improvement in the company’s performance in 2017 due to unfavorable market conditions.

Why were the market conditions unfavorable? To find the answer to this question, let’s look at another source, the Financial Times, examining the contraction in the British biscuit sector. The UK market is critical for United Biscuits. The company is the market leader in the UK and earns the biggest income from there.

According to the Financial Times, “the British consumer is moving away from the traditional biscuit.” The reason for this is the rising healthy lifestyle trends, which affects the whole world. Speaking to the Financial Times, analyst at Euromonitor, Alexander Kottke underlines that consumers “desire to lessen their sugar intake and to migrate to snacking options with a higher emphasis on all-natural and free-from”. Grain and fruit bars which are on the rise in Britain and Europe also recently began to appear on supermarket shelves in Turkey.

Meanwhile, the competition in the market is also exacerbated. For example, Cadbury’s chocolate biscuits from leading UK brands were purchased by global confectionery giant Mondolez.   Mondolez known for its Oreo brand in Turkey is also a very successful company in developing healthy snacks according to the Financial Times. Ulker, in an effort to keep up with the healthy snack trends, also released new products like the gluten-free Hobnobs, 31 calorie Digestive Thins and Digestive Nibbles.  But it is difficult to say that these products stopped blood loss in the market.  As a matter of fact, United Biscuits sold Delacre and Delichoc brands in Belgium from an unannounced amount to Italian Ferrero in order to cope with the difficult situation.

Another reason biscuit companies suffered in the UK is the rise in wheat and sugar prices. When Ulker bought United Biscuits, “Brexit” was not expected.  “Brexit” led to an unexpected fall in sterling against the dollar and the euro, and a rise in raw material prices.

Let’s wrap it up … The result we will pull out of the Moody’s report and the figures from the Financial Times: Ulker is spending 3 billion dollars and entering a sector that is actually contracting. The question is whether the biscuit sector was a growing industry in Europe, would the United Biscuits, the biggest company in the market, be sold to Ulker? This is only one question…

Another question: Did Ulker account for the increase in raw material prices and the contraction in the market? Or did Ulker jumped in to a sector where only the giant corporations like Mondolez can survive?

Without giving answers to these questions, we cannot find the answer to the question of where 6.5 billion dollar debts rose from and whether the company can pay such an amount easily.


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