Tickers in this Article: TKC, TUR, VOD, TLSNY, VZ, T
It's typically a given that undervalued stocks come with a “but”. In other words, there's usually a reason that a stock is trading below fair value and it's up to investors to decide if the prevailing sentiment is overlooking the longer-term opportunity. In the case of Turkcell (NYSE:TKC), that's a very difficult question to answer. On one hand, the company's improving post-paid subscriber base and generally more rational competition bode well for profits. On the other hand, Turkey is going through a very dangerous time and the the squabbling between Turkcell's major shareholders have prevented the company from paying a dividend for multiple years now.

When Grown-Ups Act Like Children
The biggest issue for Turkcell is that its major shareholders do not get along in the slightest. It is a complicated situation with a lot of history, but the gist of it as is follows.

More than half (51%) of the shares of Turkcell are owned by Turkcell Holding – a consortium owned by TeliaSonera (Nasdaq:TLSNY) (47%) and Cukurova Holdings (47%), which is in turn owned by Cukurova (51%) and Altimo (49%). Unfortunately, Cukurova took out a loan from Altimo years back and used its 13.8% net stake in Turkcell as collateral. Cukurova defaulted and Altimo has claimed that the stake belongs to them. Cukurova has argued that they should have the right to repay the loan and reclaim the stake, the U.K. Privy Council has agreed (and why a U.K. body even gets a say is another long story...).

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The long and short of it is this – control of Turkcell Holding (which is the majority owner of Turkcell) is up in the air and none of the parties are willing to agree upon a proxy representative and allow an annual shareholder meeting to occur. As such, there can be no dividend payment. While the Privy Council's ruling in favor of Cukurova back in January was thought to pave the way to a resolution, that proved a vain thought – TeliaSonera has filed suit against Cukurova in New York for over $1 billion in damages and the Privy Council has not yet decided the interest that Cukurova owes Altimo, nor is it certain that Cukurova can afford the total bill which is likely to be in excess of $2 billion.

In theory, this could all be resolved quickly. There have been two failed shareholder meeting attempts this year, and Turkish law states that the Capital Markets Board can name independent directors “if the governance of the board is not functioning”. Unfortunately, this law seems to be more of a theoretical instrument designed to threaten/cajole companies into better governance. It has never, to my knowledge, been implemented and it seems like Turkish officials aren't quite sure how to proceed. With the Privy Council not likely to rule on the interest question before August, it may be difficult to resolve this situation and have a shareholder meeting unless the government steps up, and suffice it to say the Turkish government has more pressing issues today.

The Base Business Is Getting Better
Turkcell has certainly taken its licks in the market. Vodafone (NYSE:VOD) and Avea (owned by Turk Telecom) have competed fiercely on price, and regulatory changes have generally been quite adverse for Turkcell. Along those lines, new on-net tariffs represent yet another threat to Turkcell's 50%+ market share.

But things are looking up. Revenue rose 13% back in the first quarter on a 9% increase in ARPU and the first increase in revenue per minute (up almost 2%) in many years). Likewise, EBITDA was up 15%. Importantly, Turkcell is doing a very good job of recruiting post-paid customers (where ARPUs are 25% to 30% higher) and getting more high-value 3G/smartphone subscribers.

Smartphone penetration is still below 15% in Turkey, but Turkcell has a great network. Turkcell's download speed is not only 3x better than that of Vodafone or Avea, but is actually twice that of the 4G networks of Verizon Wireless (co-owned by Verizon (NYSE:VZ)) and AT&T (NYSE:T). Couple that with only 38% nationwide penetration of post-paid plans, and I believe Turckell is well-placed to benefit from an increase in the most valuable Turkish mobile subscribers. It also doesn't hurt that Turkcell's rivals have substantially lower margins and have realized that they cannot afford to compete with cut-rate pricing indefinitely.

The Bottom Line
If investors want to take advantage of the turbulence and worry in Turkey, I'd suggest buying the iShares Turkey (NYSE:TUR) ETF before Turkcell. That said, I do think Turkcell is meaningfully undervalued. On the basis of just mid-single digit revenue growth, I believe Turkcell is worth more than $16 per share today, and that does not include the possibility of upwards of $1.5 billion in cash (or nearly $2 per share) going back to shareholders in dividends once the ownership situation is resolved. Likewise, I think the company will pay a dividend around 4% on an ongoing basis.

It's up to each investor if that's enough compensation for the hassle. Sooner or later this situation will be resolved, Turkcell will have its meeting, and dividends will be declared. In the meantime, it is likely that the shareholder drama and the backdrop of political instability in Turkey will overshadow the operating improvements at the company.

Disclosure – As of this writing, the author owns shares of Turkcell.

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