When ridding itself of 18.6% of Turkey’s Garanti Bankasi for $3.776 Billion earlier today, GE Capital (NYSE:GE) clearly left money on the table. Compare that to the $2.06 Billion that Dogus Group, a major shareholder of Garanti Bankasi, got for just 6.3% of Garanti Bankasi.
GE Capital not only received 22% less than the current market price of what Garanti Bankasi got in the Istanbul Stock Exchange, but also received 38% less than what Dogus Group received for each share. Is GE in serious trouble? Why did GE sell a major share of Turkey’s best bank for such a huge discount?
Let us explain. Back in 2005, GE bought a 25.5% in the Turkish company for $1.75 Billion. That deal valued the bank at $7 Billion. Two years later, GE sold 4.65% of Garanti Bankasi back to Dogus Group at a deal that valued the bank at $14.5 Billion. The move that got GE more than 100% return on that 4.65% seemed like a great deal because Garanti shares went down by nearly 70% a little more than a year later. But the trend stopped shortly after. Since the end of 2008, the 20.85% of shares that GE was left with went up 500%. As all this is happening, the Turkish lira appreciated in real terms against the US dollar, so the value increase in Garanti Bankasi shares is astounding.
Currently Garanti Bankasi has a market cap of $26 Billion (remember – GE paid only $1.75 billion for more than a quarter of the company) with a trailing P/E ratio of 10.1. The price and multiple for one of the best managed banks in one of the fastest growing countries in the world are quite reasonable. The Turkish economy grew by more than 10% during the first half of 2010 and it has huge potential in the banking industry. The real interest rates had been more than 10% for nearly 30 years. Only during the past year or did it go down to normal levels. The banking industry is still very small compared to developed markets, but that may be because Turkish people aren’t used to borrowing money from banks yet. As the culture changes, the role of banks will solidify. Right now, the total value of outstanding mortgages is only 4% of Turkey’s GDP. This is nothing. Low interest rates and the flood of foreign capital is enabling a boom in the real estate market where people are finally able to borrow at affordable rates. Banks will be big winners during the next few years.
For some unknown reason, GE sold its Garanti Bankasi stake – valuing the company at only $20.3 billion – for nearly a quarter less than the current market cap. Why? We don’t know. What we do know is that Garanti Bankasi isn’t a bad stock to own. So there must be something going on at GE. They left nearly $1 Billion on the table. Remember the 4.65% share GE sold in 2007 to Dogus Group? Dogus Group received more than double that for the same number of shares today when they sold their stake. Dogus Group also received 61.5% more per share than GE received.
A series of bad moves, and GE knows it. We think GE is desperate.
Disclosure: Long NBG