The Turkcell Fiasco: What Can We Learn?

It’s been a long couple of years, but the three-ring circus that is Turkcell’s ($TKC) boardroom power struggle is finally (sort of) coming to an end.

Queen Elizabeth’s Privy Council—which had jurisdiction because the holding company in question was domiciled in the British Virgin Islands (LONG story there…)—ruled last week that Mehmet Karamehmet may reacquire control of the company if he pays the $1.56 billion owed to a Russian-backed investor group.  This little spat dates back to the 2007 default on a loan in which the Turkcell shares were used as collateral.

Turkcell’s board of directors has been paralyzed by this squabble between its two biggest shareholder groups to the point that it hasn’t paid a dividend since 2010.  The company never actually cut its dividend, mind you.  Turkcell’s underlying operations have chugged along just fine, and it has plenty of cash available.  The dividend hasn’t been paid because the board of directors is so dysfunctional, they can’t sit in a room together long enough to declare it.

But while Mr. Karamehmet is busily getting the funds together to repay the debt,  the story doesn’t end here.  To start, Karamehmet was recently sentenced to seven years in Turkish prison due to completely unrelated charges dating back to the financial crisis of 2000-2001.  And even with the shift in controlling ownership, the board is still deadlocked…at least pending intervention by the Turkish government.  Turkish regulators have promised to appoint new directors and effectively take over control of the company to break the impasse.

While this story may have comedic value, there are actually some valuable lessons we can learn.

In InvestorPlace’s Best Stocks of 2012 contest, I came within a single percentage point of winning with my selection of Turkcell—which returned 37% on the year.  A major plank in my bullish argument was that a resolution of the boardroom crisis—which I expected in early 2012, over a year too soon—would mean a major short-term boost to the share price and the possibility of a massive, multi-year dividend payment.

I was dead wrong about that.  Yet Turkcell still had a great year.  Why?

It comes back to that old concept of margin of safety—or what Warren Buffett and Charlie Munger playfully call a “belt and suspenders” approach.  If an investment is strong enough and offers enough value, you can afford for large parts of your investment thesis to be wrong or for some unexpected bump in the road to happen.  If the belt fails, the suspenders will keep your pants from falling down.

Turkcell’s corporate governance at the board level was a joke.  But operationally, its management team was led by top-notch, Western-educated professionals.   Turkcell had (and still has) a dominant position in a critical industry in one of the fastest-growing emerging markets, and is a major player across Eastern Europe and the Middle East.  And the company consistently ranks as one of the highest-quality telecom providers in Europe—meaning it compares favorably with international giants like Spain’s Telefonica ($TEF) and Britain’s Vodafone ($VOD).

Furthermore, Turkey was an underrated emerging market at the time.  In early 2012, “emerging markets” meant the “BRIC” countries of Brazil, Russia, India and China.  But as that investment theme was looking a little long in the tooth to me, I expected investors to expand into lesser-followed markets like Turkey.  And until the recent Taksim Square political crisis, that is exactly what happened.

I expected a quick (ha!) resolution of the boardroom crisis to be the catalyst that caught investors’ attention but that the great underlying fundamentals would be what ultimately drove the stock higher.  I was wrong about the catalyst…but in the end, it didn’t matter.  Often, a quality stock trading at an attractive price creates its own catalyst.

DDAIF

My choice in InvestorPlace’s 2013 Best Stocks contest is German automaker Daimler ($DDAIF).  And again, it looks like I am wrong about the catalyst (strong Chinese growth) but right about the stock.

China’s growth continues to slow—and Europe is in outright recession—yet Daimler has cruised to 27% returns year to date, including dividends.

When I first recommended Daimler, a third of its market cap was in cash and it traded at a single-digit price earnings ratio.  At its then-current valuation, it was hard for me to imagine a scenario whereby I could lose money in Daimler over any reasonable time horizon.

Again, a quality stock trading at an attractive price has proved to be catalyst enough.

Sizemore Capital is long TEF and DDAIF.

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