Vietnam M&A 2019 Research Report| Issue 9 | August 2019
• Investing in Vietnam will allow foreign investors to receive reduced tariffs and non-tariff barriers on imports and exports from and to countries singed FTAs’ with Vietnam.
• Furthermore, the implementation of the FTAs urgeVietnam’s government and related parties to reform institutional, administrative procedures, intellectual property, procurement, labour, and sustainable development, thereby create a more favourable business climate and investment environment. Under the EVIPA signed on 30thJun 1019, Vietnam and EU countries allow free movement of capital and profit; commit to not expropriate or nationalise foreign private property without appropriate compensation, and to compensate the losses of the other side’s investors in the same way as domestic or third-party investors as a result of war and riots.
.
InfrastructureVietnam has been reinforcing infrastructure backbone including electricity, water, industrial zones, and human resources, etc. to take the full advantage of the signed FTAs. However, the state budget only able to cover around one-third of capital demands, which were estimated by Bloomberg at approximately US$480bn to 2020. Under the heavy financial pressure, the government has advocated mobilizing capital from the private sector, including divestments of SOEs. Many investors, mostly regional investors, have gained confidences from favourable investment conditions created by the FTAs to engage in acquiring infrastructure these SOEs’ stakes. In the coming time, the successful signing of EVFTA and EVIPA are expected to unfreeze the high-quality capital from the EU investors who had been cautious due to lack of information about Vietnam’s market and other investment environment concerns.
Export goods The FTAs leverage M&A activities in export sectors by encouraging domestic and international capital flowing into key export industries such as textiles, leather & footwear, joinery, and agricultural & aquatic products through removing tariffs and non-tariff barriers.
Especially, the EVFTA will eliminate 99% tariffs on exports from Vietnam to 28 EU member countries. Shortly, there is a high likelihood of new investments concentrating on weak spots of the current production and distribution to meet the strict quality and origin requirements of the EU’s customers. For instance, in the case of textiles, those soft points lie in spinning, weaving, and dyeing stages. Additionally, large domestic enterprises may see chances to enter the EU market through M&A deals with foreign partners.
Some of the sectors in which M&A activities potentially gain the most from the FTAs include
infrastructure, export goods, domestic consumer-oriented goods & services, real estates, and logistics.
New impetus from the new signed Free Trade Agreements
Along with the country’s economic integration strategy, Vietnam has entered multiple free trade agreements with various countries and regions around the world. 2019 saw the signing of the EU-Vietnam Free Trade Agreement (EVFTA), the EU-Vietnam Investment Promotion Agreement (EVIPA), and the entry into force of Trans-Pacific Partnership (CPTPP), ASEAN-Hong Kong, China Free Trade Agreement (AHKFTA).
Section 5: Key themes|FTAs & Opportunities
Although it might be too early to affirm the positive consequences of FTAs to Vietnam’s economy, the signings of FTAs are opening up golden cross-border investment and business opportunities for both domestic and international investors, stimulating great impetus for M&A activities. Many foreign investors trying to position themselves in Vietnam to get the most benefit from the FTAs.
Also, local businesses owning excess cash may accelerate M&A activities to enhance their competitiveness in the domestic market and global market.
In addition to those sectors, M&A deals are also expected to take place in areas such as semiconductor technology, water, and waste treatment, renewable energy, and other industries where EU enterprises and enterprise from other developed countries signed FTAs with Vietnam are in the position of strength.
LogisticsInfrastructure improvement and increasing export and import volume will create a climate for fostering the growth of logistics activities. Currently, 70-80% of market share belongs to few large companies owned by multinational groups which only account for 2%
of total number of logistics companies. They have strong competitiveness and provide comprehensive services. The remaining companies (98%), mostly small domestic companies with narrow operational range and limited capability, account for only 20-30% of market share. Going forward, the market expects more presences of international players. Under the EVFTA, Vietnam granted EU investors unlimited access to three more logistics’ services (including maritime agency services, foreign and domestic ship
maintenance and repair) and broader
participation in other shipping services. Under competitive pressure, local enterprises may consolidate or seek international cooperation.
Some might be acquired by others.
.
Domestic consumer-oriented sector including retails, personal & household goods, private healthcare, pharmaceuticals, e- commerce, fin-tech, tourism, and other consumer-based industries.
Firstly, the “fertile soil” of almost 100 million inhabitants with a growing urban middle-class still has lots of “room” for newcomers. For instance, aside from some prestigious retailers such as Vingroup, Saigon Co.op, EB Services Co (Thailand), etc., mainly operating in big cities, 90% of
retailers in Vietnam are small and medium businesses with limited resources and
experiences. Also, e-consumer industries such as e-commerce and fin-tech have emerged.
Meanwhile, foreign investors have advantages in capital resources, management experience, and operating system, but lack domestic
infrastructure systems to distribute their products to Vietnamese consumers. Taking benefits from FTAs to engage in M&A activities with local enterprises is the fastest way for them to penetrate Vietnam market.
Secondly, under the competitive pressure from multinational and transnational giants
exacerbated by the FTAs, domestic enterprises may consolidate, and the current big players in the industry may target the small and medium- sized companies to occupy market share.
Real estates The recent entered into force CPTPP and (AHKFTA) and the new singed EVFTA and EVIPA will connect investors from member countries of the FTAs to domestic real estate developers who are eager to find alternative sources of finance due to credit tightening policies. Foreign investors are also keen on taking full potentials of rising industrial real estate demand led by the shifting of factories from other countries to Vietnam, and residential real estates serving the urbanizing middle class and the influx of foreigners coming to settle down in Vietnam.
FTAs are expected to stimulate M&A across various sectors
Vietnam M&A 2019 Research Report| Issue 9 | August 2019
Section 5: Key themes
5.1 Valuation Review
5.2 SOE IPOs & Divestment 5.3 FTAs and opportunities
5.4 Regulatory updates and expected changes
The New Competition Law under the M&A’s perspectives
• The Act now governs competition-restraining acts and economic concentration of both domestic and foreign entities.
• Foreign enterprise manipulating the Vietnamese market from abroad or any offshore activities that adversely affect the domestic market.
Vietnam’s Law on Competition came into effect on July 1, 2019, replacing the 2004 version of the law. The new LOC is focused on (1) competition-restraining agreements, (2) market dominance (3) economic concentration, and (4) unfair competitive practices. The Government has also drafted a decree to guide the implementation of the law.
Under previous law, a merger filing is required only when the combined market share of participants reach 30% of the relevant market. The New law requires participants in an M&A transaction to notify NCC in advance if such arrangements reach one of the following thresholds:
✓ Total asset value of a participating party in Vietnam: From VND1,000bn (US$43mn)
✓ The total revenue in Vietnam of a participating party: From VND1,000bn(US$43mn)
✓ Transaction value: From VND500bn (US$21.5mn)
✓ The combined market share of the participating parties is 30% or more in the relevant market for the preceding fiscal year
✓ 30 day-period preliminary review is set for NCC to decide whether the transaction can proceed, or an official merger evaluation is required
✓ If an official merger evaluation is required, the evaluation may take another 90 days or longer in a complex case
The 2018 law specifies the authority for National Competition Committee (NCC) which has been merged from Vietnam Competition Authority and Vietnam Competition Council as the regulatory body. The Competition Investigation Agency has also been formed to monitor the compliance of the Competition Law.
• Under the 2004 law, certain competition- restraining agreements were prohibited when the parties have a combined market share of 30% or more. The 2018 new Competition Law removed such thresholds and came up with a new concept of “significant competition- restraining impact or ability to cause significant competition-restraining impact”.
• The authority will apply a number of evaluation criteria to decide whether the agreement is causing or potentially causing a competition- restraining effect. Such criteria include (1) market shares, (2) market entry barrier, and (3) access to critical infrastructure facility.
• An anticompetitive agreement can be a
horizontal agreement between business entities in the same industry, or a vertical agreement between parties in different industries but the same supply chain.
Foreign manipulative behaviors affecting Vietnam market are now under jurisdiction
Circumstances where a merger filing is required
Combined market share: Removed threshold of 30%
Governing body
Abuse of dominant market position
• 05 enterprises with a combined market share of 85% or more in the relevant market are treated as a group of enterprises dominating the market
• However, those with a market share of less than 10% in the relevant market is no longer counted when determining market dominance.
It may take time to see how well the new regulation fits the market, but as soon as the draft decree becomes official, it is poised to matter M&A transactions with some notable changes as below.
Merger control: Threshold of 50% was removed
• The 2018 law removed the provisions prohibiting economic concentration among enterprises with a combined market share of over 50% of the relevant market.
• The New law only bans businesses from conducting economic concentrations that potentially have significant competition
restraining impact, based on assessment by NCC.
Vietnam M&A 2019 Research Report| Issue 9 | August 2019 Vietnam M&A 2019 Research Report| Issue 9 | August 2019 Vietnam M&A 2019 Research Report| Issue 9 | August 2019
Awaited Securities Law to remove foreign ownership limits
The State Securities Commission has posted the revised draft Securities Law for comment before submitting to the National Assembly for approval by the end 2019. The new law proposed to be in force from 2021 is expected to bring changes, notably the issue of foreign ownership ratios.
Section 5: Key themes| Regulatory updates & Expected changes
• Actually, the current law (Decree 60/2015/ND-CP) has allowed companies that do not belong to conditional business sectors to proactively ask for room relaxation to 100%. However, in fact, since the Decree 60/2015/ND-CP has been issued so far, only more than 30 enterprises officially open room to 100% in Vietnam stock market. This shows that current regulations did not help to improve lifting the foreign room as significantly as expected.
• From our previous survey, the main reason for slow FOL removal is stemmed from the long list of conditional business lines regulated by the government and the “lowest room applicable” rule applied for considering the foreign restriction when a company operates in multiple business lines.
The fact is that most Vietnamese companies register and operate in multiple business lines. Our FOL review of 100 companies under VN100 on HOSE indicated that there are 1,925 business lines registered on their Enterprise Registration Certificates and on average, each company has 19 different business lines. The rule is a big challenge for the opening of the FOL in practice as it is complicated for companies to review their lines of business and reconcile with different domestic and international laws and to go through procedures with related Government agencies
• In fact, the enterprises doing business well, growing steadily and having large enough market capitalization and transaction value are favoured by foreign investors, but the majority of them are now full of foreign room. Therefore, if the amended Securities Law is actually issued to help enterprises with foreign room to increase to 100%, it will create an equal treatment mechanism in approaching investment opportunities for domestic and international investors. As a result, the investment capital flow into Vietnam stock market is expected to witness a substantial growth in the coming years.
The draft bill grants allowance to foreign investors to own 100% of the shares at a Vietnamese listed company, an equitized SOE or a private non-listed business operating in a non-critical business sector
Lifting FOL is still entangled. The question to be answered: What type of ownership will be applicable when the foreign room reach 51%?
• The latest issuance of the draft Securities Law has not yet solved the problem under current regulations. As afore-mentioned, many listed companies do not want to open room for foreign investors under the current Decree No 60, another reason lies in the rule of 51% of charter capital held by foreign investors:
- Under the current investment Law, Article 23.1 stipulates that if 51% or more of charter capital of a company is held by foreign investors, such company will be treated as a foreign company. This condition has been the main legal constraint in almost all companies who are under reviewing process to loosen their FOL. As they would be considered as a deemed foreign investor, thereby they will have to comply with various other regulations and business
practices such as taxation, offshore investments, investments in associates and subsidiaries, financial investment & trading activities, credit application process that currently applied for a foreign entity.
• Moreover, If the foreign investor's ownership rate is raised to 51% of the charter capital, the enterprise is still bound by the investment items, for example, it is possible that the enterprise is investing in industries that have not yet allowed foreign participation, for instance, pharmaceutical distribution)
• Therefore, further study for this issue is proposed so that the official new law can bring more investment-encouraging conditions among foreign and domestic enterprises
Existing constraints that have hampered M&A activities
Overall, M&A activities in Vietnam have flourished over the years. However, there exist many barriers that resolving those will help the M&A market to thrive in the coming years. 5 major of concerns include Legal barriers, Long turnaround time for approval, Transparency, Valuation, FOL
Legal barriers
Long turnaround time for approval
• A single and comprehensive regulatory framework has not been developed yet.
• Provisions related to M&A are scattered in investment Law, Enterprises Law, Competition Law, and Securities Law along with their sub-law regulatory guidance.
• Regulations are everchanging and sometimes overlapped or contradictory with each other.
• Negotiation to determine to the price is not only the most time-consuming process in deal-making in Vietnam. It is licensing process, i.e. seeking approval from the which can cause deal makers to lose motivation and change their minds eventually.
• Due company complicated legal procedures; it may take from 6 months to few years to complete a deal. The target company is legally speaking only required to apply for a change in its shareholders.
However, in practice, the authority further requests the company to apply for an investment certificate in order to convert the company into a foreign-invested company.
• Additionally, the process requires extensive discussions with the authority to reach a consensus about the transaction. Lobby is very popular here if deal makers want to speed up the process.
Transparency
• Due diligence is essential when it comes to M&A in Vietnam due to quality of disclosed information that matters investor confidence.
• In fact, many local companies have not built up culture of compliance. Additionally, maintaining two different accounting books, one for tax purpose and the other for management purpose is still common in Vietnam.
• Managers tends to hide adverse information about the corporate performance for instance, overstated assets and/or sales, tax arrears or other pending financial obligations. Therefore, in many cases, investors changed their minds due to potential risks of tax obligations, legal disputes or reputation.
Valuation
• Company owners tend to be over-optimistic in their financial projections, inconsistent in providing information, or lack of supporting assumptions. Some large firms may agree to use an independent appraiser, but costs and doubts usually make the majority of local companies refuse to use.
• Another factor is fair value of intangible assets (technology, brand, know-how, etc.,) which is very controversial because Vietnamese entrepreneurs still have not clearly figured out the value or execution of intellectual copyrights.
• Valuation process suffers from long approval process of land use rights among SOEs privatization.
Foreign ownership limit (FOL)
• Foreign ownership in many sectors is currently capped at 49%. Some critical sectors such as banking and aviation are limited up to 30%.
• The government maintains a list of so-called conditional businesses, meaning the government is not ready to let foreigners take full ownership.
Vietnam M&A 2019 Research Report| Issue 9 | August 2019
Expected changes to boost M&A activities in upcoming years
Section 5: Key themes| Regulatory updates & Expected changes
Building a single and comprehensive legal system to regulate M&A activities
✓ The legal system is expected provide detailed regulations in terms of (i) procedures, principles, methods of valuation, rights and obligations of the parties; (ii) issues arising after the M&A deal.
Easing the foreign ownership restriction
✓ From M&A perspective, inbound investors tend to prefer majority stake have enough
influential voice at Vietnamese companies to influence corporate governance and information transparency. Therefore, the high restriction must be the very first concern for foreign investor seeking presence in Vietnam.
✓ The government may study to gradually cut down on the number of conditional business lines for the industries that are not really critical. As other countries in SEA region follow the roadmap to reduce FOL, easing foreign ownership may be considered a solution to maintain the competitive advantage.
✓ Also, the Government may reconsider Article 23 of the Investment Law regarding Vietnamese enterprises having foreign ownership over 51% to create a fairer treatment between domestic and foreign enterprises to minimize interruptions to companies’ activities after foreign ownership rises to more than 50%. In particular, Article 23 of the Investment Law prescribes that Vietnamese enterprises having foreign ownership over 51% will be considered foreign enterprises. Thus, the foreign investors are concerned that when the FOL at Vietnamese companies surpasses 51%, they will be automatically regarded as a foreign entity by the local authorities, which would make them subject to stricter rules on investment, land ownership, and taxes, creating unfair competition and potentially causing disturbance after restructuring for businesses. A number of matter categories in need of review particularly for listed
companies including:
o Exceptions to the Investment Law 2014 on their investment activities o Taxation matters
o Offshore investments
o Investment in other companies
o Financial trading and investment activities including G-bonds o Credit and applying for bank loans
✓ Commercial banks have found difficulty calling for capital from inbound investors due to the FOL of 30%. Therefore, studying for lift-up of foreign rooms from 30% to 49% could be a solution.
Vietnam M&A 2019 Research Report| Issue 9 | August 2019
M&A activity to rebound in 2H2019 and 2020
M&A in Vietnam is forecasted to reach US$6.64bn by the end of 2019 to make up 86% of 2018’s M&A value. The main growth drivers include the actuation of megadeals which have been negotiating, speed-up of SOE IPO and Divestment process, easing regulations and the massive growing domestic consumer demand
Section 6: Outlook & Perspectives
▪ Due to the state of the economy, as well as businesses environment in Vietnam, the excitement of the M&A activity depends heavily on the progress of SOE divestments and IPOs.
This trend is expected to maintain in the next few years given the existing long list of mandated IPOs and divestments among SOEs and large corporations.
▪ South Korea, Singapore, Japan and Thailand continue to be leading investors in Vietnam. 70%
of Japanese companies in Vietnam are planning to expand their business, according to the Japanese External Trade Organisation
(JETRO).The market also expects America and European investors following signed FTAs.
▪ At the same time, domestic M&A is increasingly proactive and aggressive in merger and
acquisitions to well compete with foreign players and take full potential of strong domestic
demand, given the growing of local companies, big conglomerates and the inner restructuring of corporates structures.
▪ In 2019 and upcoming years, M&A deals will continue to focus on domestic consumer-oriented sectors including real estate, construction &
materials, industrial goods and services and retail. Especially, the booming of e-commerce, fintech, consumer finance and rapid
improvement in logistics infrastructure will collaboratively facilitate a retail ecosystem and attract investors surrounding.
▪ Also, utilities, especially renewable energy, health care, especially pharmaceuticals, and education will expect large inbound flows in the next few years thanks to increasing investment interest to leverage growing demand for high quality and green services. However, government currently limit granting additional licenses in these fields, hence, the trends to see will still be foreign investors repurchasing existing projects or collaborate to share interest with domestic players.
▪ Also, M&As in Vietnam will continue to benefit from significant policy reforms, which should make inbound investment more attractive.
Particularly, the latest Competition Law, the long-awaited Securities Law and the revised Investment Law are expected to contribute significantly to M&A activities in Vietnam in the next period. Furthermore, continued easing of FOL, combined with the signing of FTAs, including the CPTPP all augers well for the future.
▪ The biggest obstacles that have held M&A activities in Vietnam back include: High ratio of state ownership in enterprises after IPO and divestment, transparency issues of financial statements and information disclosure, incorrect valuation and long turnaround time for approval process.
▪ Overall, we are optimistic about the outlook for M&A in Vietnam in the next couple of years.
Although the market cooled down a bit in 2018, making total value dropped 44% on 2017’s level (14% without Sabeco deal) and stayed calmed in 1H2019 at US$2,15bn, given on confidence in actualization of pending megadeals and speeding-up SOE divestment in 2H2019, we forecast deal value will reach around US$6.64bn in 2019, equal to 86% of 2018 deal value.
▪ With all factors indicating a very good future for Vietnamese M&A trends, M&A activities in Vietnam is expected to grow at 21% as the period 2008-2018 to reach US$8bn by the end of 2020.
▪ Considering government’s effort to improve legal and governance barriers, low market
transparency which are regarded as the greatest concerns for investors, it is reasonable to say that Vietnam will continue to be one of the most promising destinations for market entry.