Removing foreign ownership limit to accelerate M&A

A number of companies are jumping on the government initiative to remove the FOL and attract foreign invesmtent

According to Vu Anh Dung, vice president of Vietnam-Japan University cum head of panel of judges of the M&A Deal Awards 2017 under the framework of Vietnam M&A Forum 2017, one of the factors making foreign investors ignore Vietnamese enterprises is the low limit of foreign ownership, which is currently maximised at 49 per cent.

Besides, in equitised domestic enterprises as well as large-scale private enterprises, domestic shareholders still want to hold the controlling stake. Meanwhile, when foreign investors plan to acquire domestic enterprises, they want to own a majority stake in order to join management activities as well as build development strategies and business plans.

The problem has been resolved since Decree No.60/2015/ND-CP was issued. Notably, about 20 domestic enterprises have completed procedures for increasing the FOL, garnering foreign investors’ attention.

In late July, Vietnam’s biggest publicly-traded drug maker Hau Giang Pharmaceutical JSC (DHG) received its shareholders’ approval to lift the FOL to 100 per cent.

This decision is expected to lure in more foreign investors along with the existing big foreign shareholder Taisho Pharmaceutical Holdings (24.5 per cent). At present, DHG is operating with positive business results. Notably, in the second quarter of this year, DHG acquired VND1.03 trillion in revenue and VND186 billion in after-tax profit.

According to the cumulative figure of the first six months of this year, DHG earned VND1.8 trillion in net revenue and VND360 billion in after-tax profit, signifying increases of 7 per cent in net revenue and 17.2 per cent in after-tax profit.

Binh Minh Plastic Company (BMP) and Tien Phong Plastic JSC (NTP) are domestic enterprises receiving attention from foreign investors after State Capital Investment Corporation (SCIC)’s decision to divest from them in 2017 and their shareholders’ approval to lift the FOL to 100 per cent.

Numerous other domestic enterprises, including Thanh Cong Textile-Garment-Investment-Trading JSC (TCG), foodstuff producer Kido Group, and PVI Holding Company, have published information about their plans to remove the FOL to attract foreign investors.

Luring in foreign investment is part of a long-term strategy to expand foreign operations. Hoa Binh Construction and Real Estate Corporation (HBC) is also considering removing the FOL in 2017.

According to HBC chairman Le Viet Hai, Vietnamese enterprises need to think globally and attracting foreign investment is an important step to help them expand their operations aboard.

According to theory, when the FOL barrier is removed, foreign investors will immediately jump to acquire stakes in domestic enterprises. However, according to Vu Anh Dung, the reality is different because there are other problems persisting.

First, almost all foreign investors pay attention to large-scale enterprises with strong development potential. Meanwhile, almost all listed Vietnamese enterprises have the chartered capital between $2-4 million, and the capitalisation of VND5-10 million, thus, their competition capacity is low.

Second, in case of large-scale enterprises, when foreign investors hold a majority stake (over 50 per cent) in any enterprise, removing the FOL will not attract the existing strategic foreign shareholders because they already hold a controlling stake and increasing investments will not bring much more benefit.

Besides, foreign investors are also worried about the transparency of financial records made available by Vietnamese enterprises as well as barriers in legal procedures, divestment and equitisation policies.

Almost all M&A deals in Vietnam are small-scale deals valued under $20 million, making up 64.16 per cent of the total deal value and 90 per cent of the number of transactions. Deals worth over $500 million make up 17.66 per cent, while deals worth $100-500 million make up 8.72 per cent. 9.47 per cent of the deals were worth $20-100 million.

Singaporean enterprises rank first in the number of deals, with a total of 20 transactions, while Thai enterprises became the largest investors with a total capital sum of $1.2 billion.

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