PKN ORLEN submitted a bid for Tupras

Both PKN ORLEN and the Zorlu Group each have a 50% stake in the bidding consortium. Monitoring and assessing regional expansion opportunities in attractive markets is one of the three pillars of PKN ORLEN’s strategy.

In the new corporate strategy announced in February this year, PKN ORLEN stated that it would monitor and assess regional expansion opportunities in attractive markets as one of the ways to create value for our shareholders.

Tupras fits perfectly with this strategy as it offers significant value creation potential. It is a pure play refining business with a leading domestic position. It operates in a large and rapidly developing market that is converging to EU levels. Similarly to PKN ORLEN, it also benefits from the sweet-sour crude differential. Finally, it represents a significant step in positioning PKN ORLEN as a regional downstream champion.

PKN ORLEN has taken a rigorous approach to its participation in the Tupras privatisation process

PKN ORLEN has analysed the opportunity in significant detail, having performed a full due diligence programme regarding Tupras. It included meetings with Tupras management; ddetailed analysis of operating, financial, legal and environmental data, as well as visits to selected facilities. PKN ORLEN engaged a full team of advisors, each of which is a leader in their field. Management resources have been identified in Poland and the Czech Republic to support implementation of the business plan and the Zorlu Group was selected as the best partner after meeting with a broad range of local parties.

The Turkish market is highly attractive

One of the key aspects of analysing each investment opportunity is the analysis of the underlying market. In this context, the Turkish fuel market is very attractive, as it clearly stands out with its combination of a strong growth profile and large market size.
Car ownership and refined product consumption per capita in Turkey remain low in comparison with the EU country average which creates a huge growth potential. This will be driven by sustained economic growth, continued expansion of the motorway network and the demand transition from gasoline to diesel.
Moreover, Turkey’s convergence with EU standards of fuel quality will have a positive impact on Tupras.

Tupras is the leading downstream oil company in Turkey

Tupras is the leading downstream company in Turkey, clearly dominating the refining and wholesale segments. With its 4 refineries Tupras has 100% of the country’s refining capacity and in the wholesale market its share amounts to around 70%.

The most attractive assets of Tupras are two coastal refineries in the western part of the country:

• Izmit refinery, located on the Sea of Marmara, the region with the highest population density and fuel consumption in Turkey, with capacity of 11.5 million tonnes of crude oil throughput.
• Izmir refinery, located on the coast of the Aegean Sea, with capacity of 10 million tonnes of crude oil throughput.

The other two refineries are smaller, but their inland location provides significant benefits, as PKN ORLEN knows well from its experience in Poland.

• Kirikkale refinery, located near Ankara in Central Anatolia, with capacity of 5 million tonnes.
• Batman refinery, which is the smallest facility, located near the Iraqi border, with capacity of 1.1 million tonnes.

Tupras’ assets also include a petrochemicals complex in Korfez, however its contribution to the overall company performance is not significant.

Compared to PKN Orlen, the average Tupras complexity of 6.0 and white products yield of 63% indicate that there is a significant room for improvement and value creation.

Partnership with the Zorlu Group significantly strengthens PKN ORLEN’s investment case

The Zorlu Group is one of the largest and most reputable industrial, financial and technology groups in Turkey. It currently controls more than 40 companies in a broad range of industries and employs 16,000 people.

The two main listed subsidiaries of Zorlu Group are Vestel Electronics, a leading electronics manufacturer in Europe, and Deniz Bank, the 11th largest bank in Turkey, with total assets of around $6 billion.

The Zorlu Group is controlled by the Zorlu family.

Bidding with The Zorlu Group has a number of advantages for PKN ORLEN. It not only reduces our financial commitment in this transaction, but it also brings us a partner who has significant expertise in Turkey and who has the ability to share management responsibilities and requirements.

The Zorlu Group has a long and proven track record of successfully managing Turkish industrial assets and they have a deep knowledge of Tupras specifically, as they were the winner of the previous privatisation process that was later cancelled by courts.

PKN ORLEN will take the lead role in refinery operations and leverage off our management experience and expertise.

Summary

PKN ORLEN and The Zorlu Group have identified a number of ways to create value for their shareholders through this transaction. On one hand, PKN ORLEN will be able to leverage its core expertise in improving Tupras performance by applying our best practices in refinery management. Here, PKN ORLEN can use its experience from the mid-1990s in implementing the investment programme aimed at increasing the complexity of refineries.

PKN ORLEN can also assist Tupras in the transition from a public to a privately controlled company. In addition, the Zorlu Group will bring significant knowledge of the local market and expertise in managing industrial assets in Turkey.

Due to the ongoing privatisation procedure, PKN ORLEN is not in a position to comment on anything related to bid pricing at this time.

As officially stated by the Turkish Capital Markets Board, the acquisition of the 51% stake in Tupras will not require a mandatory tender offer for the remaining public shares.

Tupras also represents an excellent platform to potentially explore other value creation opportunities in the region in the future.

Taking into account all these considerations, PKN ORLEN and the Zorlu Group represent a powerful consortium that is very well placed to create a lot of value for their shareholders from a potential acquisition of Tupras.