The shape of things to come in Vietnam’s M&A domain

Tony Foster, managing partner of the Vietnam offices at Freshfields Bruckhaus Deringer

The Vietnamese M&A sphere is in its longest bull run to date. Despite this, regulations remain a messy patchwork and clearer principles will be needed for mergers and spin-offs. Equality of tax treatment between public and private share transfers, and between share transfers and asset transfers, will help to streamline activity.

One problem has irked both buyers and sellers in a foreign-to-foreign deal: the need to pay through the target company’s onshore capital account. This was supposed to be solved by the State Bank of Vietnam (SBV), but more clarity will be needed.

The complexity, lack of consistency with the Law on Enterprises, and the conservatism of the banks (which have to enforce the rules), mean that buyers and sellers are both affected.

Bonds

The bond market is buoyant. Debt is relatively cheap for good companies. It is available even for those that are not, but problems will ensue when the tide turns.

The recent Decree No.163/2018/ND-CP on the issuance of corporate bonds allowed the issuance of bonds by companies without a track record of profitability and via private placement, though greater disclosure requirements have been imposed. Domestic bond issuances have soared.

This is likely to continue – the new Law on Securities passed by the National Assembly (NA) in 2019 requires a company to be profitable for at least two years before raising equity in the public markets.

International bond issuances are likely to be next although ratings, accounting, and disclosure issues will narrow the window well into the next year for many companies here.

Foreign companies refinanced Vietnamese assets last year using project bonds issued offshore. While debt remains cheap, other good projects are likely to follow in the slipstream in 2020.

Private capital

Private capital continues to drive high volumes of acquisitions. Large private equity houses such as Warburg Pincus, EQT, CVC, Abraaj, and Barings have all been active.

Local success stories such as Mekong Capital and Vietnam Investments operate strongly, often creating attractive assets for the larger groups in the process.

The quantity of interest and money available will push financial sponsors towards larger deals in 2020.

Public-to-private deals may be next, assisted to some extent by the new Law on Securities when it comes into effect.

Portfolio optimisation

A fact of life in other parts of the world is coming to Vietnam – the Masan-Vingroup merger of retail assets is the beginning of portfolio optimisation. Plenty of room exists for more rationalisation, though the corporate and tax laws often impose an unfortunate cost. If a recession arrives, this trend should accelerate.

Distressed asset deals will not materialise because of the inadequacies of the insolvency regimes and bankruptcy laws.

Banking consolidation

The SBV has been working on resolving legacies of the last downturn in banking. A sale of 15 per cent of BIDV, one of the state-owned behemoths, to KEB Hana Bank went through in 2019. Vietcombank has exited a dull insurance joint venture, carrying out a lucrative bancassurance deal in the process. VietinBank and BIDV face pressure to do the same this year.

The SBV has new powers to encourage banks that take over zero VND banks. One or more acquisitions of these lenders can be expected in 2020.

That may herald a long-awaited change to another way of importing much-needed capital: lifting the foreign ownership limits (FOLs) in banks set out in Decree No.01/2014/ND-CP on foreign investors’ FOLs at Vietnamese credit institutions (currently capped at 30 per cent). But the narrative for payment intermediary businesses is trending the other way – a draft decree that may be passed in 2020 may create a new 49 per cent foreign ownership.

Infrastructure

There is an increasingly acute risk of power shortages starting in 2020 and progressively worsening towards 2023. Coal power plants are the short-term fix, but few new ones will skate through the twin hazards of environmental concerns and reluctant banks.

A long-run palliative came into being in 2019: both Electricite de France and AES signed MoUs with the Ministry of Industry and Trade to develop power plants using liquid natural gas at Son My in the south-central province of Binh Thuan. But opinion on a realistic timeframe for these to come to fruition is varied.

The feasibility study for Long Thanh International Airport, phase 1, scraped through the NA, but the vexed question of who was to invest in it was kicked back to the government. This quest for perfection was mirrored in the stuttering progress on the Law on Public-Private Partnerships.

The solar energy ramp-up (almost nothing to over 4000MW of installed capacity) has been impressive thanks to generous feed-in tariffs (FiT). But both solar and wind energy projects were buffeted by tariff changes and (in the case of solar) by a decision not to fix the FiT’s second round. They will be replaced by an auction mechanism in 2020, but both continue to be constrained by inadequate transmission lines.

State monopolies

The new Law on Competition came into effect last July, and it will eventually underpin a dynamic and healthy business sector. Implementing decrees will be issued in 2020, and a new competition council will come into being.

Over the past year, the Ministry of Finance (MoF) grappled with revisions to decrees on state-owned enterprise (SOE) equitisation and divestment, which set stringent procedures to avoid selling state assets at an undervalue. These procedures have made sales of interest in SOEs harder.

Amended decrees are expected soon, which may accelerate the valuation of intangible rights such as trademarks and of land rights. The MoF’s draft revisions also attempt to limit some of the perverse pricing rules which kept all investors away from bidding for Sabeco, except for ThaiBev.

The environment

The environment emerged as one of the key themes of 2019 globally. Large cities in Vietnam are suffering from poor air quality. Parts of Hanoi had no drinking water for a period of time due to an incident at a reservoir, and swathes of the Mekong Delta are suffering from salt-water intrusion. The inference may be drawn that other swathes of the country are less than pristine. Laws exist to protect the environment, but the implementation of them is not streamlined. Expect greater focus on this area from now onwards.

Land

Decrees were issued in 2019 relating to valuation of public assets used to compensate investors in build-transfer projects. In 2020, the Law on Land will be revised to establish a more market-based valuation framework, covering all value arising from location, planning, infrastructure, and land-use zoning.

While this may mean higher land valuations, it will ultimately lead to more certainty for investors, who will face less risk of subsequent state attempts to capture further value at later stages of urbanisation and planning.

Agriculture

The government will issue a decree on land consolidation in agriculture. In Vietnam, there are limits on how much and how long a farmer or a corporation owns farmland.

The draft would enable a company to rent, purchase land-use rights, or enter joint venture or co-operative arrangements with farmers (with their land rights as capital contribution). They would be protected by having land requisitioned back to them if a venture fails.

Labour

The Labour Code was amended for the fourth time in 2019. For the first time, it allows workers to form or join a trade union that is not affiliated with the General Confederation of Labour. These trade unions can, therefore, start to exist. This was one of the consequences of the commitments in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), which was signed in late June last year. These required Vietnam to ratify core International Labour Organization conventions.

To the future

Growth will continue in 2020, especially if the EVFTA is ratified. Indeed, a lot of future reform in Vietnam is baked into this agreement and the CPTPP. They will make Vietnam a more attractive investment destination in a world where predictability is in decline.

The commitments made by Vietnam are deep and comprehensive in many sectors, and the long-term of Vietnam’s business trajectory is predictable, even if the short-term hiccups and the external shocks are not.