Work in progress

Work in progress

Vietnam is looking to offer shares in some major state enterprises but valuations and control remain major issues.

Major foreign brewers including Thailand's two largest players are bidding to acquire shares in Saigon Beer Alcohol Beverage Corporation (Sabeco), which listed on the Ho Chi Minh Stock Exchange last month. (Photo: Reuters)
Major foreign brewers including Thailand's two largest players are bidding to acquire shares in Saigon Beer Alcohol Beverage Corporation (Sabeco), which listed on the Ho Chi Minh Stock Exchange last month. (Photo: Reuters)

Merger and acquisition (M&A) transactions have been surging in Vietnam, as steady economic growth and an expanding middle class draw interest from companies in Thailand, Japan and South Korea among others.

Reforms of state-owned enterprises (SOEs) also present opportunities for foreign businesses looking to tap into the fast-growing market, says the international consulting firm KPMG.

Major deals in banking, industrial, engineering and consumer product businesses are taking place and the total number of M&As is higher in Vietnam now than in any market in Asean except for Singapore.

"From 2016 forward, we are expecting that by 2020, we may well see US$10 billion worth of M&A transactions in Vietnam which is a pretty healthy number," John Ditty, managing partner of KPMG in Vietnam, told Asia Focus.

"We are starting to see much more activity in larger-scale transactions," he said. "Over the last 18 months, Thailand has been the largest M&A spender in Vietnam, not in terms of volume because there is more activity from Japan and South Korea, but in terms of value."

Thai businesses concluded the second- and third-largest M&A deals in Vietnam in the last three years. The French retailer Casino sold its Big C supermarket business to Thailand's Central Group for €920 million last year, while Thailand's TCC Group bought the cash-and-carry wholesale business of Germany's Metro Group in 2015 for €400 million.

Thailand's Singha Corporation is now investing $1 billion in the consumer business of Masan Group, one of the three largest private companies in Vietnam by market capitalisation, with interests in everything from instant noodles to financial services and telecoms.

These huge transactions reflect the fact that Vietnam is "an attractive opportunity" for Thai companies looking to expand abroad, said Mr Ditty.

"It is very easy for Vietnam to do business with Thailand because you can fly from Ho Chi Minh City to Bangkok faster than going to Hanoi," he said.

"The whole Mekong and Asean concept has made it easier for Thai and Vietnamese companies to talk about common issues."

Vietnam has a number of large SOEs that could be highly attractive to investors if reforms currently under way are successful. Under a plan announced by the government this month, the state will retain full ownership of 103 SOEs, while another 137 will be opened up to investors through share offerings between now and 2020.

The enterprises to be equitised include big names such as Vietnam Posts and Telecommunications Group (VNPT), MobiFone, Agribank, Electricity Corporation, Post Corporation of Vietnam, and Oil & Gas Corporation of Vietnam. The state will maintain at least 65% of the charter capital in four of the 137 enterprises, 50-65% in 27 others, and less than 50% in the remaining 106.

The process is part of a restructuring that began in 2012 to make state enterprises more competitive.

"The Vietnamese economy, when it started, was dominated by SOEs and the government was under a lot of pressure from the World Bank and the International Finance Corporation to divest those SOEs," said Linh Bui, partner at Allens, an international law firm in Vietnam.

As of December 2016, the government had sold stakes in 55 enterprises, bringing the number of SOEs equitised between 2011 and 2016 to 554. As of the end of 2015, state holdings in some 800 companies were worth $55 billion.

"Public debt in Vietnam is reaching the maximum level allowed under the law at 65% of GDP, although it is pretty low compared with countries in Europe, but it is a major problem for the government, which has been pushed to look for new sources of revenue and one of those is selling stakes in leading SOEs," Ms Bui told Asia Focus.

Vietnam's budget deficit also remains high at around 6% of gross domestic product.

"Another exciting opportunity for foreign investors in Vietnam is the opening of foreign ownership in public and listed companies," she added. Many of these also began life as state enterprises.

PV Power, a PetroVietnam subsidiary and the country's second-largest electricity producer, is now in line to be equitised. It is considering selling a stake of up to 25%, estimated to be worth $700 million, to foreign investors. The South Korean power producers SK and Kospo are reportedly interested, as is Tohoku Electric Power of Japan.

Most of the SOEs sold or equitised so far have been small, and the state generally kept substantial stakes in them, noted Ms Bui. Now some of the bigger names are coming onto the market in the next 18 months.

"The government, because of the deficit problem, is now under much, much, more pressure to sell so some of the big names are now being offered such as MobiFone, a leading mobile operator, which has been the target of a lot international investors for the last 10 years but the deal has been on and off for a long time," she added.

In another long-awaited sale, the State Capital Investment Corp finally sold 5.4% of its stake in Vietnam Dairy Products JSC (Vinamilk) last month to Bangkok-based Thai Beverage Plc. Saigon Beer Alcohol Beverage Corp (Sabeco) and Hanoi Beer Alcohol Beverage Corp (Habeco) are among others on the list and they have drawn a lot of attention.

"Unlike a full acquisition, you can actually buy a controlling stake in these shares that the government is divesting and in the case of Sabeco and Habeco, Heineken and ThaiBev have already expressed their strong desire to buy," said Ms Bui.

However, foreign investment in SOEs has been slow to take off because even for strategic investors, chances for a controlling stake or management control are very limited.

"Usually they would get 10-20% by putting a significant amount of cash into the company, but in return they would not get any management control, and in order to become a strategic investor they would be subject to various restrictions," she said.

In some cases, they need to provide technical assistance or agree to a lock-up period of five years for their shares, so a deal requires a lot commitment without any control, and that has been a major issue.

Another big problem is valuation of state assets. The law stipulates that only certain firms are allowed to conduct valuations, and attaching too low a valuation has consequences.

"If you undervalue the state asset you can be criminally prosecuted, so that is why none of the international accounting firms are on the list and I don't think any of them would want to be," Ms Bui said.

"What happens is that some of the valuations based on the Vietnamese standard will be high by taking into account the initial investment, which does not match international valuation principles, so how you match the standards or bridge the gap between valuations is key," she added.

In any case, the government appears determined to speed up the process and has set deadlines for SOE managers to meet.

"A lot of SOE managers do not want to equitise because all the issues and problems such as valuation will come up," said Ms Bui. "They might get prosecuted if they undervalue the asset so some of them choose to sit on it, retire, and leave it for somebody else to deal with. But now there is a lot of political pressure to equitise since the government has set deadlines but we will have to wait and see how this will pan out."

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