Accelerating relentless equitisation

November 01, 2019 | 10:50
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The Vietnamese government has made the latest bold move in a bid to further accelerate the long-lasting equitisation of state-owned enterprises. Tony Foster, managing partner at the Vietnam office of Freshfields Bruckhaus Deringer LLP, discusses how the new direction makes impacts on international investors, and how the 2020 equisitation targets can be achieved.
accelerating relentless equitisation
Equitisation of state-owned enterprises offers many benefits, such as greater competition and diversity (Photo: Le Toan)

The latest push on the long-lasting equitisation saga came on August 15 when the prime minister issued Decision No.29/2019/QD-TTg, setting out a list of enterprises to be equitised by the end of 2020. In addition to the Hanoi Tree Park Company and Hanoi Zoo Company, there are some more substantial companies on the list including Agribank, Vinacomin, MobiFone, VNPT, Vinachem, VICEM, Vinacafe, Vietnam Paper Corporation, Power Generation Corporation 1 and 2, Saigon Industry Corporation, Saigon Trading Group, and Saigon Tourist Holding Company.

Many of these companies have been on previous lists. Thus, how will the 2020 targets be achieved?

accelerating relentless equitisation
Tony Foster, managing partner at the Vietnam office of Freshfields Bruckhaus Deringer LLP

There are two main avenues. The first is through equitisation - a state-owned enterprise (SOE) is turned into a joint-stock company and some (often not very many) of its shares are sold to employees and outsiders. In some cases, notably the equitisations of state insurance company Bao Viet, two of the state banks (Vietcombank and Vietinbank) and one of the state beer companies (Habeco), outsiders have included strategic overseas investors.

The second avenue is through state divestment of its interests in an already-equitised SOE. Notable recent divestment transactions have included the sale of a 54 per cent interest in Sabeco for about $5 billion, and the acquisition by British conglomerate Jardines Matheson of an interest in Vinamilk for about $1 billion.


The state can sell to strategic investors but if past performance is any guide, the answer is that it is unlikely to sell much to such investors. There are several reasons for this. First is a lack of information. The main deterrents for foreign backers have been a combination of high prices and poor information, probably driven by a combination – in many state-owned entities - of poor information systems and the spectral presence of skeletons best left undisturbed. Unless investors are allowed to undertake meaningful due diligence, or are willing to take strategic bets on the future of a company over which they have little influence, cases show that attempted auctions among strategic investors are unlikely to fare well.

Unfortunately, strategic investors cannot wait out the auction process and hope to reach a bilateral agreement during equitisation. In recent cases, the government has refused extensions. The potential financier therefore has to wait for a new process of state divestment of unsold shares to begin, or for the equitised company (with state approval) to do a private placement of new equity.

Another reason is state control. Only companies in which the state retains more than a 50 per cent interest can offer shares to strategic shareholders.

Third, the price is often the highest market price paid by a financial investor. This tends to be too high for a strategic investor that will bring a lot more to the company then mere money and whose shares will be locked up as well.

The strategic investor is required to put down a security deposit of 20 per cent of the value of the shares for which it registers in order to subscribe at the starting price set out in the equitisation plan. The investor can lose the deposit in certain circumstances.

Next is ownership percentage. The maximum ownership interest that a strategic investor can acquire is often very limited, and 20 per cent is often the cap.

Another reason is the lock-up period for a strategic investor is at least three years. Longer lock-up periods of up to 10 years have been demanded in practice, particularly in respect of businesses that are seen as having national security components. This was the case for example in the equitisation of PV Oil.

So is it not better to buy in at the initial public offering?

An acquisition of shares during an initial public offering (IPO) is the simplest means (though sadly this is relative and one cannot say that it is simple) by which foreign investors can acquire shares in an equitisation, as this involves no negotiations, approvals, or lock-ups.

Depending on the decision of the competent authority, an initial offering can be conducted by public auction, underwriting, direct negotiation, and book building. Decree 126/2017/ND-CP on SOE equitisation issued in November 2017 for the first time provides for book building. However, only the prime minister can decide which SOEs will be eligible to carry out book building IPOs.

Investors buying shares in the IPO may not be able to buy as many as they would like. Depending on the capital structure of the SOE, there might be a limit imposed on the number of shares available to a single bidder.

There is always, of course, some uncertainty associated with buying shares on the open market.

State divestment of interests

It is not necessarily much easier to carry out acquisition of state shares in a later divestment compared to equitisation, particularly because there are limitations on the price for which the “state capital” can be sold.

In particular, if the sale is conducted on the stock exchange, the selling price must be within the trading band of the exchange provided that it is not lower than the starting price (determined by an authorised valuer).

Also, if the sale is conducted by way of a public auction, a competitive offering or a negotiated sale, the selling price must not be lower than the reference trading price on the auction date, the date of competitive offering, or the date of signing the share purchase agreement (in case of a negotiated sale), provided that it is not lower than the starting price.

Some investors buy minority interests in SOEs in the hope of increasing their ownership stake over the course of time. But there are ownership limitations set out in the law. Furthermore, after equitisation, most companies become public companies, subject to the standard 49 per cent foreign ownership limitation.

(i) No sales of state interests

The state will retain 100 per cent ownership in sectors of national interest, such as publishing, transportation safety, lotteries, multi-purpose electricity production and distribution entities, multi-purposes hydro power and nuclear power projects that have especially significant socio-economic, national defence, and public security positions; and companies operating national railways or urban railways invested by the state.

(ii) 65 per cent state ownership

The state will continue to own at least 65 per cent of the charter capital of large-scale SOEs operating in, among other things, large-scale mining, food, and banking and finance.

(iii) 50-65 per cent state ownership

The state will retain a 50-65 per cent stake in numerous companies in the following sectors: water, cement, coffee, mobile phones, post and communications, chemicals, pharmaceuticals, public services, and more.

(iv) 50 per cent state ownership or less

The state can sell down more than half of the charter capital of SOEs in sectors such as paper, power generation, housing and urban development, tourism, and water supply.

Meeting 2020 targets

The benefit of properly-considered equitisation of SOEs has been shown over the last 30 years in numerous countries, starting in the UK and expanding to Europe, Japan, and many other countries.

Such benefits include greater competition in sectors that had previously been monopolies or quasi-monopolies; healthier public finances resulting from the proceeds of sale or reduced subsidies for inefficient state companies; improvements to efficiencies and services to customers as a result; and greater inflows of foreign investment.

Vietnam would receive another big boost to its economy from achieving the 2020 targets.

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