Activist hedge fund challenges Turkish regulator

Date: Wednesday, March 24, 2010
Author: Hedge Funds Review

QVT Financial, an activist hedge fund based in the US, has filed a lawsuit against Turkey's market regulator, claiming it failed to protect shareholders when it authorised a merger of sections of the Galatasaray football organisation.

QVT is trying to prevent a merger between Galatasary football club and an affiliate known as Galatasaray Sportif Sınai ve Ticari Yatırımlar (Sportif), which receives the revenues from the merchandising and television broadcasting rights of the club.

The merger was authorised by the Capital Markets Board (CMB) of Turkey on March 9, 2010.

QVT is seeking an injunction against Sportif to stop the deal going through and is also suing the regulator, claiming it failed to apply properly Turkey's capital markets laws when it approved the deal.

Galatasaray football club is the majority shareholder in Sportif, which was spun out and listed in 2002. QVT is the largest minority shareholder and owns almost 18% of the public stock.

QVT claims Sportif withheld funds which it had previously pledged to distribute to shareholders and instead used them to provide loans to Galatasaray football club.

Galatasaray now plans to acquire the outstanding shares in Sportif for Turkish lira 155.77 ($101.3072) a share.

QVT said this offer undervalues Sportif by as much as 75% and described it as "a scheme" to avoid repaying the Turkish lira 343 million ($223.07 million) in outstanding loans extended to the club by Sportif. The loans are due on March 28. The loans alone are worth more than the tender price, QVT said.

Sportif was trading at Turkish lira 167 ($108.6)  on March 19, having been as high as Turkish lira 227 ($147.6) in the past 12 months.

Dan Gold, chief executive of QVT, said Galatasaray had made "a coercive tender offer, at an egregiously low price, on unclear terms". He described the proposed deal as an attempt to perpetrate "a blatant and outrageous fraud".

Gold said the CMB's decision to approve the merger raised serious concerns "about the protections afforded to minority shareholders in Turkey".

It is not unusual in Turkey for private groups or families to have a controlling stake in publicly listed companies.

Gold said investors in Turkey "depend on the authorities to enforce Turkey's securities laws".

"There is no problem with the laws themselves. They just need to be properly enforced. The current situation appears to give the green light to controlling shareholders to dominate investors with minority interests in Turkish companies," said Gold.

QVT Financial was spun out of Deutsche Bank's proprietary trading business in 2003. The compay has over $7 billion in assets under management.

QVT's investments Turkish companies are worth more than $100 million and are mostly in football related ventures.

QVT has had a position in Sportif since 2005, when it was trading at below TRY 100 per share. Gold said the investment reflects QVT's view that "football related broadcasting rights are undervalued and will appreciate a lot in value over time."

When the broadcast rights for Galatasaray games were re-auctioned in January, the winning bid was almost double the value of the previous contract.

The investment in Sportif has been profitable, Gold said. "This is not a case of us being upset about losing money. We have made money on this investment, even at this tender price. We are taking this action becuase this is an extremely important issue for investors in Turkey," he said.