Economy bolstered through M&A deals

Many more M&A deals have been and will be signed in Vietnam,signaling an imminent boom with related waves to ride

Minister of Planning and Investment Bui Quang Vinh could well be the happiest person in Vietnam at the moment, as the economy takes a clear and sustainable turn towards recovery, providing him solid accomplishments as the chief of the advisory body for the government on macro-economic matters.

In the first half of the year, the nation’s GDP has increased by 6.28 per cent. Vinh thus believed that with due effort, the growth rate could be maintained above the set target of 6.2 per cent by the end of the year.

“The economy has, in fact, robustly recovered and now stands as the basis of confidence that we will be able to achieve a higher and more sustainable growth rate in the next five-year plan,” said Vinh, revealing that the Socio-Economic Development Plan for the next five years, beginning in 2016, was currently being drafted and that the targeted GDP growth for the 2016-2020 period was set at 6.5-7 per cent a year.

The upturn of the Vietnamese economy as well as the rosy potential for growth in the medium to long-term are the grounds underpinning investor confidence and rising capital inflows into the country in the time to come.

According to Vinh, it is, however, not only the economic upsurge, but also the new development phase of 2016-2020 that will present more transparent objectives and fresh opportunities as well as challenges, opening up new economic space for the country.

According to some economists, the groundwork for this has been laid by the newest generation of free trade agreements (FTAs), such as those with South Korea, the EU and the Customs Union of Russia, Belarus, and Kazakhstan.

The Trans-Pacific Partnership (TPP) agreement is the particular highlight here, as it triggered a raft of multinational corporations to choose Vietnam as their headquarters to expand production and Asian business bases.

Likewise, with the formation of the AEC fast approaching, the country will be joining a common market and taking full advantage of a population base of 600 million and a combined GDP of almost $3 billion. ASEAN is currently the 7th largest economy in the world, and is expected to rise to 4th place by 2050.

“The ASEAN region will become more attractive for foreign companies. On the other hand, regional businesses with excessive cash flow will pay particular attention to M&A activities to enhance their competitiveness on the global market. Furthermore, this tendency is not a characteristic exclusive to the regional M&A boom, but to Vietnam, as well,” stated the Vietnam M&A Forum (MAF) in its recent report, adding that the opportunities are too grand for any business to pass up.

Echoing the MAF’s view, Phan Thanh Binh, partner in charge of transaction services at KPMG Vietnam, has also agreed that Vietnam’s joining the TPP and the formation of the AEC would help lure a stout inflow of capital investment from abroad. “In my opinion, the big deals will be conducted in the second half of 2015 and early 2016,” he said.

Thus, Minister Vinh’s optimism was widely shared when he commented that given the opportunities the TPP or the AEC bring for Vietnam, coupled with the clear policies for economic and bank restructuring, as well as SOE equitisation, the country is indeed ready to grapple with a second wave of M&A activities.

New rules of engagement

At the recent Vietnam Investment Promotion Conference held in New York, CEO of the Nasdaq-OMX Stock Market Robert Greifeld questioned if it was possible for foreign investors to purchase 100 per cent stake in the Vietnamese stock exchange, after learning that the country was going through an economic restructuring process and creating opportunities for investors to acquire large shares in or the entirety of businesses in Vietnam.

Minister of Finance Dinh Tien Dung’s negative response to Greifeld’s question came as little surprise, as both the Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange were 100 per cent state-owned. However, the state has been building a pathway for the equitisation of the stock exchange, and is planning to sell step by step.

While it is impossible to take over 100 per cent of these stock exchanges, the US and other international investors can own up to 100 per cent of many other domestic companies.

A massive number of Vietnamese firms are available for M&A at the moment. The State Capital Investment Corporation (SCIC) has revealed that companies are yearning to divest their state-owned stakes at some 300 enterprises this year and next year alone.

The question is: will foreign investors seize the opportunities?

There are many ways to carry out M&As: through purchasing shares on the stock exchange, initial public offerings (IPO), selling stakes to strategic foreign investors, or self-negotiation between Vietnamese companies or local companies with foreign investors.

Whatever the way is, there is no doubt that the progress of SOE equitisation will bring a large number of foreign businesses to the local M&A market. Last year, the MAF’s working group mentioned many optional deals on the M&A market, such as MobiFone, Vietnam Airlines, Sabeco, BIDV, and Vinatex. The successful IPOs of these enterprises have proven themselves worthy.

However, these businesses have also been in the process of finding strategic foreign investors. BIDV, for instance, is working with financial services provider Morgan Stanley to search for a long-term strategic foreign investor. BIDV wants to sell this potential strategic investor a maximum of 20 per cent stake and the financial investor a maximum of 10 per cent of its shares.

Besides the above-mentioned companies, there are another 532 SOEs accelerating their process of equitisation for the period of 2014-2015. The prime minister has stressed the efficiency of this process, and warned the heads of SOEs that further delay will definitely result in early retirement. With these companies now (featured) on the list, there will be abundant supply on the thriving M&A market.

“The state policy was pretty clear on the equitisation schemes. The state has even given the green-light for divestments to dip below the par value,” commented StoxPlus director Nguyen Quan Thuan.

“In addition, lifting the foreign ownership limit (FOL) will take effect this September. All of these positive changes, in our opinion, are prerequisites for the promotion of large share transactions among local businesses,” Thuan added.

Statistical data revealed that in the first quarter, 32.3 million shares were sold out of the total 46.9 million shares on offer, equivalent to a 68.8 per cent successful bidding rate. In February alone, the total value of shares sold was recorded at VND438.3 billion ($20.38 million), VND73 billion ($3.34 million) higher than the starting price.

Two-thirds of the IPO companies were able to sell 100 per cent of their offered shares. Divesting the above IPOs then brought over VND140 billion ($6.51 million) to the state coffers, VND24.4 billion ($1.13 million) higher than the starting price.

Institutional reforms

The M&A boom in Vietnam can be seen as the ultimate constellation of the right place, the right time, and the right people.

The first two elements are apparent in the context of economic recovery, with opportunities abundantly presented by deeper global economic integration, as well as the state’s efforts to restructure the entire economy and equitise SOEs. It is, however, also due to the hard work of numerous officials implementing the institutional and economic reforms that add value to the local M&A boom.

“It is the best method to boost the M&A market in Vietnam. The cap removal on the FOL is expected to heat up the local market when the big foreign capital influx starts,” the MAF report stated.

In 2014 and in the first few months of 2015, Vietnam has seen a series of reforms related to institutions and economic policies. The amendments to the laws on Investment and Enterprises were put into practice on July 1. Businesses and individuals can now carry out any activity as long as it is not prohibited by the state. Such development has opened a passage for the private sphere to enter the market and, at the same time, given momentum to M&A activities in Vietnam.

Do Nhat Hoang, director of the Ministry of Planning and Investment’s Foreign Investment Agency, stated that the revolutionary changes in both laws, such as the separation of the investment certificate and the business registration certificate, as well as the more systematic and transparent guidelines on business registration and investment activities, would significantly reduce the hurdle of assessing key information on businesses for investors.

Hoang also added that new provisions on the separation, split-up, and consolidation of businesses would further ease M&A transactions. Furthermore, the definition of a foreign-invested company has also been clarified, and now states that foreign investors must hold more than 51 per cent of the company’s stakes. This, in turn, removes hassles for listed businesses wishing to sell shares to foreign investors.

“We believe that such regulations will make the development of M&A activities in Vietnam more possible by a significant margin,” said Hoang.

Meanwhile, general director of Bao Viet Securities Nhu Dinh Hoa claimed that the obligatory requirement on SOEs to disclose information on business performance had, in fact, helped investors access official information on the enterprises of interest they wished to purchase.

“The enforced requirement will smooth the process of SOE equitisation, as well as M&A negotiations,” Hoa commented.

Ta Thi Thanh Binh, deputy general director of the Securities Market Development Department at the State Securities Commission (SSC), referred to Decree 60, which slackened the limit on foreign ownership, as a prime example of governmental legislation likely to foster M&A activities in Vietnam in 2015.

“US investors were indeed very excited at the Investment Promotion Conference and were very keen on the country’s new regulation on FOL,” said Binh.

These changes are said to placate investors, particularly potential strategic shareholders who often want to join in the administration and control of a business after sumptuous investment. Before, the state would still hold the primary stakes at SOEs following the equitisation process, and investors were not at all pleased with being left out of the decision-making process.

Decree 60 additionally specifies that following equitisation, and 90 days after business registration, the enterprise must register to trade on the Unlisted Public Company Market (UPCoM). Also, within one year following business registration, the enterprise must also register to trade on the stock exchanges.

“One of the reasons why SOE equitisation was less attractive is that foreign investors could not see the imminent liquidity of acquired stocks. As such, the new decree plays a crucial role in prompting the process of SOE equitisation in Vietnam,” Binh thus concluded and emphasised that the guidelines on individual stock offerings would also promote M&A activities more effectively.

More deals to come

When the MAF’s working group predicted a second wave of M&A in Vietnam last year, many experts remained unconvinced, until the MAF’s statistics pointed out that the value of all local M&A deals amounted to $4.2 billion, a 20 per cent increase compared to 2013. Likewise, StoxPlus’s statistics revealed an even higher figure of $4.7 billion. While both figures were lower than the $5 billion record high in 2012, experts admitted that a new wave of M&A was to hit Vietnam soon.

Looking back at a trail of hot M&A deals in 2014 and the first half of 2015, there is an ample list of high-profile agreements. Thailand’s Berli Jucker Public Company (BJC), for instance, while having vainly attempted to take over Metro Cash & Carry (Vietnam) for $870 million, has fruitfully purchased 65 per cent of the coffee producer Thai An Group’s stakes, which in turn indirectly bagged them 64.55 per cent of the leading local distributor and retail giant Phu Thai Group. The deal began in 2013 and was just recently finalised.

Meanwhile, BIDV Insurance (BIC) has signed a share sale and purchase agreement with Fairfax Asia Ltd., a subsidiary wholly owned by Toronto-based Fairfax Financial Holdings. Accordingly, the Canadian insurer will acquire 35 per cent of BIC’s stakes by subscribing for newly issued shares and become BIC’s strategic foreign investor.

BJC and Fairfax are only the tip of the iceberg. Similar deals have been conducted in ample numbers. Japan’s shopping mall developer Aeon acquisition of the local supermarket chain Citimart, or Thailand’s Central Group subsidiary, Power Buy, taking over the local electronic appliances retailer Nguyen Kim, are only a few M&A deals to name.

With regards to the banking sector, Thailand’s Siam Commercial Bank has been greenlighted by the central bank to establish branches in Vietnam by taking over the troubled joint venture Vinasiam Bank.

In the first half of the year, Vietnam has seen three of its banks, the Vietnam Construction Bank, the Ocean Bank and the Global Petro Bank, being bought out by the central bank for practically nothing as part of the monetary authority’s attempt to weed out weak banks from the country.

Within the context of the Investment Promotion Conference held in early July, Truong Anh Tuan, chairman of Hoang Quan Consulting Trading Service Real Estate Corporation (HQC), has officially signed an investment contract with Global Emerging Market (GEM) chairman Christopher F. Brown. In particular, GEM will invest $20 million in HQC by acquiring shares within 30 months.

Many more M&A deals have been and will be signed in Vietnam in the near future, signaling an imminent boom with related waves to ride.