Quick Pitch: D-Market Electronic Services & Trading (HEPS)

Mandatory buyout offer – 45% Upside

This is one of the quirkiest setups I’ve come across in a while. Admittedly, the situation is a bit too deep in the weeds for me, but it’s fascinating to follow, even if only for educational purposes. The situation was covered on VIC and subsequent commentary – the post is in public domain, but you need free guest account to access it. Below is my best efforts to summarize this complicated case.

D-Market Electronic Services & Trading (ticker HEPS) operates Hepsiburada, Turkey’s largest e-commerce brand. The founding Dogan family is selling their entire controlling stake in HEPS to Kaspi, a Kazakh super-app developer. The transaction is for 100% supervoting Class A shares and 61% of Class B shares, which trade on Nasdaq as ADRs. Class A shares are getting acquired at $7.57/share and Class B shares at $4.75/share (45% upside).

This deal constitutes a change of control and is expected to close in Q1 2025. Antitrust approval has already been received. Under Turkish law, a change of control (defined as the transfer of 50% or more of voting rights) typically triggers a mandatory takeover offer for all minority shares of the same class. This offer must be presented in cash to shareholders within six days of acquiring control. However, HEPS’ press release stated:

It is Hepsiburada’s current understanding that the Agreement does not contemplate a tender offer for the shares of minority stockholders in connection with the transaction.

How come?

The buyer is exploiting a regulatory loophole that exempts companies from Turkish Capital Market Laws unless they have more than 500 shareholders of record. From the annual report:

We are not a publicly held company for purposes of the Turkish Capital Markets Laws and Regulations unless and until the number of shareholders holding our shares amounts to 500 or more.

Since HEPS is only traded in the U.S. as ADRs, and all ADRs are held by a single custodian, the company effectively has just one shareholder of record. As a result, the mandatory takeover offer rule doesn’t apply.

So, can anything be done about this?

In order to force Kaspi to include minority shareholders in the offer, the number of HEPS’ shareholders of record has to be increased to 500.

The simplest solution would be for ADR holders to call their brokers and convert their shares into local Turkish shares. However, this option is blocked because the custodian, Bank of New York Mellon, is reportedly refusing to cooperate, leaving brokers unable to process conversions.

The VIC pitch author (Jeremy Raper or “puppyeh”) is now trying a more creative approach: finding 500 Turkish retail investors and giving each one a share, which could then be converted into local stock since Turkish residents should be able to hold local securities – no idea how successful such an effort can be. If this doesn’t work out, the author plans to go straight to the regulator to block the deal on fairness grounds.

There are a couple of possible scenarios of how this setup could play out:

• Activism fails and Kaspi simply proceeds with buying the controlling stake. In this case, the stock would likely remain substantially above pre-announcement ($2.2/share) levels. With a new majority owner that has an excellent track record and the potential for a buyout in the future, HEPS would likely trade closer to $3/share. That would result in low-high teens downside.
• Activism efforts succeed and Kaspi is forced to extend the same offer to the minority HEPS shareholders (i.e. $4.75 for Class B shares), resulting in 45% upside.
• Kaspi decides it’s better to drop the transaction altogether than pay up for the minority owned class B shares. In this scenario, the stock would likely drop to around $2.5/share – based on the $2.2/share pre-announcement level plus appreciation of the main Turkish stock market index (BIST 100) since the transaction was announced.