Since the mid-2000s, Turkey's potent economic growth, rising middle class and liberal posture toward foreign investment have spurred a wave of private equity deals by U.S. and European sponsors. BC Partners Ltd., Bridgepoint Capital Ltd., Kohlberg Kravis Roberts & Co. LP, Carlyle Group and TPG Capital have all sown money there.

Now the very first such deal has come to an enormously profitable conclusion for TPG.

In late February, the Fort Worth- and San Francisco-based PE giant agreed to sell Turkish spirits company Mey Içki Sanayi ve Ticaret AS to the U.K.'s Diageo plc for $2.1 billion.

TPG, which bought Mey in the spring of 2006 for $810 million, will score more than a 400% gain on its roughly $330 million equity investment, say people familiar with the matter. A local Turkish private equity house, Actera Group, which owns about 10%, also will earn a bundle.

The lucrative outcome to the country's first leveraged buyout wasn't just beginner's luck. For starters, TPG scoured Turkey for years, well before other buyout shops. In early 2006, bankers from Citigroup Inc. learned that Mey's owners, Turkish entrepreneurs who had bought it in 2004 in a government privatization for about $300 million, were pondering taking it public. Citigroup alerted TPG partner Stephen Peel that the owners were looking for an exit. Peel swooped in and struck the deal.

For TPG, Mey's attractions were many. It was the dominant producer of raki, an anisette that is Turkey's most popular spirit. It threw off oodles of cash. Turkey's alluring demographics -- a population of 75 million, half of whom are under 30 years old, and a middle class of rising affluence -- promised healthy top-line growth.

Unlike other emerging markets such as China and India, there were few barriers to foreign buyers taking control of Turkish businesses. Turkey's government was stable and free market-oriented. Its banking system, which had been restructured in the wake of a crisis in the late 1990s, was sturdy. Though Citi led the financing for the Mey buyout, a group of local banks pitched in, eager to test the waters of LBO lending.

Another leading attraction was the fact that Mey, which had been a state-owned monopoly for seven decades, was riddled with inefficiencies that could be wrung out to lift the bottom line.

Steering that task were Galip Yorgancioglu, a former Burger King Holdings Inc. and Coca-Cola Co. executive whom Mey's previous owners recruited as CEO, and TPG operating partner Vincenzo Morelli, a restructuring specialist who'd worked nearly a decade for General Electric Co.

Together they cut Mey's roster of factories from 17 to 10, reducing manufacturing costs by 60% and simultaneously increasing production by 10%, a person knowledgeable about Mey says.

Moreover, "quality improvements" were made, the source says. "The tastes of the drinks would be different depending on where they were produced, and the time of year they were produced. This was not ideal for competing with foreign spirits."

Mey also cut the number of drinks distributors from a couple of hundred to 75 while professionalizing its sales force. On the marketing side, modern promotion techniques were introduced, and Mey redesigned the bottles and packaging of virtually all its rakis and vodkas. It launched several premium and budget-priced brands.

As a result of the makeover, Mey's Ebitda has more than doubled under TPG, the source says. In its last fiscal year, Mey had Ebit of 305 million Turkish lira ($193 million) on net sales of TL766 million.

The fastest-growing market in the region, with annual gross domestic product growth forecast to increase an average of 5% a year through 2012, Turkey should remain a happy hunting ground for the PE set for years to come.

In Mey's case, TPG is exiting at a logical time. In recent months the country's Islamist-rooted ruling party has tightened regulations on selling and promoting alcohol, and raised a special tax on booze by 30%.

Despite that, Diageo CEO Paul Walsh says he believes Mey's "superior distribution network" will prove an "outstanding platform" to disseminate such Diageo brands as Smirnoff vodka and Captain Morgan rum in Turkey.

He has TPG and Yorgancioglu to thank for strengthening that network.

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