Why M&A is so vibrant in Vietnam?
Viet Capital Securities Joint Stock Company (VCSC) is eyeing opportunities from Merger & Acquisition (M&A) across the board in Vietnam. In the following interview with the Saigon Times, Richard Fitton, VCSC’s senior manager in charge of Investment Banking, elaborates on the issue.
Q: Please give a brief account of the M&A market in Vietnam.
Ever since Doi Moi (Renovation) opened up the economy in the late 1980s, Vietnam has been considered by foreign investors as a market of great potential. But M&A activity was always constrained up until recently by a cumbersome privatization process that has taken a long time to materialize and still has some way to go.
The last two or three years have seen a significant change in investor sentiment on the country and a huge rise in M&A, which increased 40% in 2015 to exceed US$4 billion in value, and is set to rise even further in 2016.
While homegrown giants like Masan and Vingroup have been the most active buyers of local businesses in recent years, we are seeing more and more foreign companies taking minority and majority stakes in Vietnamese companies.
We saw this beginning ourselves two years ago when we sold Nguyen Kim to Thai conglomerate Central Group, and we have been consistently busy ever since, including in just the last 12 months advising on the sale of local packaging companies to Korean Dongwon Group; a local food distribution business to Japanese group Kato Sangyo; and closing the sale of the second largest supermarket chain in the country, Big C, to Central Group again, Vietnam’s largest M&A transaction to date at over €1 billion and following on in a long line of modern retail acquisitions by the likes of Thailand’s BJC, Japan’s Aeon and Vingroup.
Q: What are the most attractive sectors in M&A?
- Retail and logistics are both popular targets for overseas buyers. Businesses with a consumer focus always attract significant interest, as shown by Singha’s US$1-billion investment in Masan at the end of 2015 and Mondelez’s US$370-million acquisition of Kinh Do earlier that year. These types of acquisitions are so attractive to foreign buyers as they provide an immediate entry into a very fast-growing market, as well as immediate access to local relationships and networks that are often almost impossible to replicate for foreign firms growing here organically.
Even in sectors where foreign ownership limits remain, this has not put off international investors. The stronger banks are now attracting interest, as evidenced by Singapore-based GIC’s recent investment for a 7% stake in Vietcombank, and there have been several transactions in insurance; the pharmaceuticals sector is increasingly attractive, with strategic stakes in listed Vietnamese companies already taken by U.S. and Japanese groups; in transportation, Airports Corporation of Vietnam (ACV) and Vietnam Airlines have sold small stakeholdings to France’s Aeroport de Paris and Japan’s ANA respectively; and in energy, there have been investments in local hydropower companies by Singapore-based Armstrong Asset Management, UOB and Japan’s Orix.
Q: In your opinion, why has M&A accelerated in recent years?
- The characteristics that attract foreign investors to this market—demographics and the emerging middle class, population size and urbanization prospects, the inflexion point of Gross Domestic Product (GDP) per capita in regards to consumer spending—have all been building up and point to high medium-term returns to opportune investors.
The international economic climate, with yields very hard to find in the West and Japan; economic and political trouble in the emerging BRICS (Brazil, Russia, India, China and South Africa); and political instability in other parts of ASEAN, including Thailand, the Philippines and Malaysia, has driven many investors to steadier frontier markets like Vietnam searching for returns and relative political stability.
Moreover, the recent announcements and actions of Communist Party General Secretary Nguyen Phu Trong to not only root out corruption but also to drive forward the equitizations of State-Owned Enterprises (SOEs) since he took over earlier this year may also be helping to reassure investors that the country is heading in the right direction. The removal of foreign ownership limits for listed companies, most visibly with Vinamilk last month, makes the local stock market a more viable exit, especially for financial investors, further increasing the appeal of M&A.
Q: What can we expect of the M&A market going forward?
- Further growth in in-bound investment is expected in the consumer space, which turns the most heads in the international investment community, both strategic and financial. More brands will be built in Food & Beverage (F&B) and across modern retail. The logistics sector, including distribution, will remain attractive targets especially for Japanese, Korean and Thai companies. This will be driven by further liberalization of trade as various free trade agreements take effect including with ASEAN, Europe and possibly even the Trans-Pacific Partnership (TPP), which we wait for with baited breath.
Elsewhere, you can expect further consolidation in the still highly fragmented banking sector; further opening up in the energy sector as foreign investment is sorely needed to meet rising demand; and exciting developments in IT and the digital economy.
Q: In this vibrant picture, what role do you expect VCSC to play?
- VCSC will continue to bring opportunities to the private market across many sectors, including in the near future attractive local targets in pharmaceuticals, furniture, industrial manufacturing and F&B. The ongoing development of the capital markets will spur further M&A investment by giving investors further encouragement to invest in pre-IPO companies. In this regard, several hotly-anticipated international transactions will help: we are co-running two upcoming landmark IPOs of leading entrepreneurial companies, being Vietjet, the country’s leading airline, and Novaland, HCMC’s leading real estate developer. In addition, there are some major equitizations of SOEs being watched carefully, with positive recent announcements being made on Sabeco and Habeco, attracting attention from Europe, Japan and Thailand. There are also strong prospects in energy and telecoms.
We look forward to continuing to help increase the appeal of Vietnam as a destination for capital of both financial and strategic investors, through advising clients across all sectors and stages of the business cycle on attracting foreign investment.
Q: Among M&A deals, VCSC has been much interested in advising deals in the retail sector. How would the trend be like in the years to come?
- I think it’s going to grow at a very fast rate. The traditional sector is still responsible for the majority of transactions in retail. People are still buying their food and non-food items in traditional markets or independent stores, especially when you move further from the centers of HCMC and Hanoi. There is a big opportunity on the outskirts of the main cities as well as Dong Nai, Can Tho, Haiphong and other fast-growing urban centers.
And it is an area where both local and foreign players are succeeding, with home-grown giants like Saigon Co.op and Vingroup dominating a field which is seeing rising numbers of international participants, as we have seen with the likes of Aeon and Central Group. I think the retail mall model is becoming very popular here where the consumer can go for shopping, entertainment and F&B. Gradual deregulation since joining the WTO in 2007 is also helping the sector develop faster.
I think it looks very positive for the sector. The “middle class” is on the way to triple in size from 2012 to 2020, when it will contain a third of the population of nearly 100m, all looking to spend their disposable incomes in malls, supermarkets, convenience and modern electronic stores, and investors are positioning themselves to reap the rewards.
Q: How would you advise your clients to benefit from this situation?
- Firstly, I would emphasize to local companies looking to raise capital the need for effective financial management. Cleaning up the accounts is a must if you want to maximize value of your business and not scare off investors. This process should start as early as possible. Hiring a reputable auditor is always a good start, and employing a qualified and competent Chief Finance Officer (CFO) will likely add more value than the initial cost when it comes to an equity sale process.
Secondly, if you want to achieve the highest valuation for an equity sale, competition is key. This may involve strategic buyers in the process, even if you ultimately only want a financial investor, as it can push bids up higher.
Thirdly, make sure you don’t become distracted from your business by the M&A process, as it is much harder to maintain potential investor interest and high valuations if your business misses its projections during the process because the management team has lost focus. It is much easier to hire a professional adviser to do the heavy lifting. At VCSC we also offer access to an extensive investor network and invaluable expertise in effectively managing a bidding process, fighting your corner in those crucial SPA negotiations, and obtaining the required regulatory approvals to ensure an efficient closing.
Reported by Huong Duong