Hopes raised on divestment increase for stock synergy

SCIC will divest almost a hundred SOEs this year including some of the biggest names in the market, Photo: Le Toan

State Capital Investment Corporation (SCIC) has unveiled its divestment plan for 88 state-owned enterprises (SOEs) in 2021, including 31 listed companies. A big name topping the list is Saigon Beer-Alcohol-Beverage Corporation (SABECO) with a charter capital of just over $277 million, of which SCIC owns 36 per cent.

Meanwhile, FPT has a charter capital of $337.4 million, of which SCIC holds 6 per cent. Other companies include Song Da Corporation (SCIC owns 99.79 per cent) and Vietnam National Textile and Garment Group (SCIC owns 53.49 per cent), to name a few.

The lengthy divestment process has deterred investors’ appetite. SCIC has held auctions several times for 6 per cent ownership at FPT but there were no investors to participate due to complex and strict procedures. However, the shares increased to around VND95,000 ($4.10) apiece as of June 1 – a relatively high price for investors at the moment.

In another case, a sharp rise in MSB shares (nearly double the starting price that the Debt and Asset Trading Corporation applied at the end of last year) has also posed challenges for foreign financiers.

SCIC admitted not all of the sales could reap benefits, as only a few SOEs are proving lucrative to investors. As SCIC only holds a minority stake, it is impossible to have an influential impact in management if sales are executed successfully, which make such auctions less appealing to buyers.

However, the mechanism for non-voting depository receipts (NVDRs) – one of the most effective ways to entice foreign capital into Vietnam – is still stuck in the mud.

While waiting for NVDRs, foreign investors, particularly ones who wish to buy shares in listed SOEs, must purchase from another non-national at a price which will typically be 7-15 per cent above the prevailing listed price, according to VinaCapital’s calculation.

This dilemma also exacerbates roadblocks for international funds to expand their footprint in Vietnam, thus hampering state capital divestment pace. In a broader context, lack of foreign ownership easing conditions also thwarts Vietnam’s equity market to be upgraded to emerging status.

Sticking blocks

Le Song Lai, deputy general director of SCIC, said that long-awaiting guidance for Decree No.140/2020/ND-CP issued last November on changes to the legal framework covering the divestment of SOE capital in private enterprises have paralysed SCIC’s divestment activities since the beginning of this year.

Thus far, the regulatory obstacles have seriously hampered state divestment, making it lag behind stock market growth momentum.

Seck Yee Chung, partner at Baker McKenzie Vietnam, told VIR that it is interesting and encouraging to see SCIC announce its plan to divest from the 88 companies. It continues the government’s long-standing agenda to reduce state holdings in a whole raft of originally state-owned and presently equitised companies.

In this regard, peak excitement was last reached in 2017 with ThaiBev’s majority stake acquisition in SABECO. Since then, no divestment has generated the same amount of attention and eye-catching deal size, simply because no similarly-sized companies have been put up for investors since. In the meantime the government, various stakeholders, and investors at large continue to monitor the outcomes and developments of the landmark deal.

With the onset of the pandemic in early 2020 came new uncertainty in the market but SCIC maintained its divestment plans for the year. In parallel, various equitised companies also had their state holding transferred to SCIC – including SABECO, where the state holding was originally by way of ownership of the Ministry of Industry and Trade.

“Again, these are indications that the government is staying the course on state divestments, even while recognising and addressing the challenges,” Chung added. “The companies in the new 2021 list are diverse in terms of size and sector. It has some very well-known names, like SABECO, FPT, and Bao Viet Group. However, there are also many companies that have considerably smaller book sizes. At this point, whilst this news will generate interest, it is too early to tell to what extent there will be landmarks deals created.”

According to the latest report by the Finance and Budget Committee sent to the National Assembly Standing Committee, only 27.3 per cent of the divestment plan in 2020 was fulfilled with 89 SOEs yet to be equitised as of last December. The coordination between the owner’s representative agency and local authorities on disposition of public property remained sluggish.

The committee proposed the government to accelerate the process of divestment, equitisation of state capital, and rearrangement of SOEs in production and business fields where non-state economic sectors operate more efficiently.

Feasible solutions

On May 26, the prime minister issued Circular No.36/2021/TT-BTC on guiding a number of contents on state capital investment, management and use of capital and assets at SOEs as prescribed in various decrees over the past five years.

Circular 36 guides many provisions, of which the most important one is the guidance on determining enterprise value based on their cultural and historical values.

Circular 36 is expected to take effect from July 10 this year. Thus, SCIC can start execute some divestment deals, the corporation said.

Thus, investors can lay their hopes on an accelerating divestment pace in the second half of this year, which is a main catalyst to boosting the domestic stock market’s synergy.

In the same vein, analysts at Mirae Asset Securities said that following the successful earnings season, the domestic stock market is expected to extend its further rise within the range of 1,130-1,480 points, with the base-case target of 1,300 points.

“Among them, one of the market’s main drivers is SOE privatisation and a wave of bank initial public offerings or transfers to the main bourse. Other factors include the government’s commitment to controlling the pandemic, the rollout of vaccinations, buoyant market liquidity, accelerated credit growth combined with low interest rates, and others,” Mirae Asset Securities highlighted.

In order to create significant investor interest and larger-sized deals, Chung from Baker McKenzie believed that the company would need to be a market leader and a sizable business to begin with. Meanwhile, the state would also need to be prepared to divest a majority stake so as to essentially give the new investor at least simple majority control. This also means that investors will be looking out to see if there any foreign ownership caps for these companies.

In terms of legal framework, Vietnam has new investment, enterprise, and securities laws that took effect in January, as well as a more robust merger control regime that took effect from around mid-2020. This means that state divestments in 2021 will put to test these new laws, regulations, and procedures, according to Chung.

On the upside, he said that there is more leeway under the new laws under which foreign ownership may go above the 49 per cent cap that was imposed on all public companies under previous laws. In addition, there is no longer a legal requirement for a shareholder to hold shares for at least six months before being allowed to nominate a board of management member.

“However, the merger control rules are much more encompassing and it is likely that any majority acquisition, and the parties and company involved, will meet the notification thresholds and will trigger merger filing. The preparation, application, and review process can be time-consuming - especially if the target is a market leader,” he added.

In 2021, the divestment of SOEs is expected to generate around $1.73 billion. Dang Quyet Tien, director of the Corporate Finance Department under the Ministry of Finance, said that the implementation of state divestment and equitisation this year depends on the control of the pandemic. If it continues to cause major disruption, it will be difficult to organise the bidding auction for divestment. On the other hand, the result of divestment depends on movements in the stock market.

“Hopefully in the second half of this year, the progress of state divestment and equitisation will pick up thanks to a more open valuation of enterprises, attaching responsibility to the valuation organisation. Besides that, the auction regulation is more in line with the market mechanism, making auction activities more attractive to investors,” he added.