Ben Gray, director of Capital Markets at Cushman & Wakefield Vietnam

Ben Gray, director of Capital Markets at Cushman & Wakefield Vietnam, higlighted that with investors targeting fast-moving consumer goods and growth industries like pharma, additional regulation, transparency, and alignment with international accounting standards will be needed.

There were strong reactions to the announcement made on December 3 that Masan Group’s consumer holdings subsidiary and Vingroup’s VinCommerce and VinEco business lines are finalising legal terms for a merger, which will form the country’s largest consumer platform.

This new platform is exceptional in its scale and reach in the market: 2,600 supermarkets and convenience stores in 50 cities and provinces with 14 eco-farms. This now gives Masan Group, as part of the fast-moving consumer goods ecosystem, greater reach for its products, maximising the benefit from Vingroup’s investment into the retail space.

It is an excellent example of a strategic merger of two goliaths of the Vietnamese market. Both have had clear lines of sight and a robust strategy to keep ahead of the structural changes in how consumers are maturing in the market, seeking greater convenience and quality, and seeking out their favourite branded products.

The short term gains and losses are as expected with a merger of this scale in this size of a market.

Masan’s share price took a hit on the announcement, falling 700 basis points (bps) over the days’ trading and then continuing to fall to close down 1041bps at the end of December 5. Its subsidiary MCH managed to pair its early gains over two days of trading to settle back pretty much where it started. Both are expected to see a robust increase in price when the details of the deal are confirmed. The Vingroup share price remained largely unchanged with a gain of 60bps over the two days.

The market for the last two years has been strong. Foreign direct investment (FDI) into Vietnam has been led by Japan, with the Ministry of Planning and Investment reporting a total investment of around $8.6 billion in 2018.

Overall, the flow of FDI into Vietnam has been steadily increasing. Last year saw over $35.4 billion of capital flow into Vietnam while the first quarter of 2019 showed a significant 2.5-fold increase on-year.

Fast-moving consumer goods (FMCG) and real estate have witnessed the most successful merger and acquisition (M&A) deals, collectively taking the lion’s share of the $49 billion in transactions over the past 10 years. Meanwhile, the food and beverage market has become a target sector for many investors due to the country’s stable GDP growth and booming, young middle class both factors supporting the purchase of Vietnamese companies and the continued consolidation of positions held by foreign investors.

The well-known benchmark transaction in the market was set at $4.9 billion in 2018 when state-owned enterprise Sabeco was divested to VietBev, itself backed by BeerCo and its parent company, ThaiBev. In real estate, we had GIC investing $1.3 billion into Vinhomes, and the Central Group deal with Big C was valued at $1.14 billion.

However, 90 per cent of M&A deals in Vietnam are valued at less than $50 million and a significant majority of these are at an even lower ticket size of $3-4 million. Investors operating in the smaller ticket space took around 90 per cent of the $5.4 billion in closed deals during the first half of 2019. These deals are typified by both market consolidation and investors increasing their current stake in companies.

This is not necessarily a negative. When KPMG carried out its annual survey this year, 18 per cent of respondents were optimistic about the market in the next five years. This result was driven by the anticipated next wave of state-owned enterprise (SOE) equitisation and attitudes toward Vietnam’s macro-dynamics.

Pharma and life science is a growth industry in Vietnam, and we expect that this industry will be strongly targeted in the next 12 months. Due to the heavy regulation surrounding pharma, M&A is the most viable route for foreign operators to enter the market and secure government licensing.

When looking at the Vietnamese market, real estate investors are identifying the same key concerns they have been highlighting for years. These risks include the regulatory and legal framework that investors must navigate, the complex nature of Vietnamese tax law, and the sometimes murky business and deal-making environment.

The valuation of assets in Vietnam continues to be problematic. Investors’ expectations on pricing are frequently incongruous with the sellers’ perception of the asset’s worth. Furthermore, management and accounting standards are lagging behind their international counterparts. In the absence of quality public information on target companies, partners, or transaction evidence, investors find it difficult to crystallise a deal that is in line with global standards.

The value of a partnership or company and its underlying asset base or project is often overly-optimistic or overestimated due to differing valuation standards, and Vietnamese companies failing to regularly produce business plans or financial projections. This is a strong contributor to deal failure and accounts for the low close rate for M&A in Vietnam, with only 2 per cent being successful. Most of these hurdles can be readily cleared if investors use third-party advisors to track records from deal origination to execution and provide post-deal support.

Going forward, we believe the real estate sectors that will continue to attract foreign investment will be infrastructure and development, utility and support services, and FMCG and pharma.

Although Japan and South Korea will continue to lead the charge in real estate, one should not discount the domestic market’s promise. Development, third party logistics, and manufacturing companies are maturing and looking to increase their market share in each of their respective sectors, forming joint ventures and taking on new projects. We feel that as the real estate M&A space matures, we will begin to see more management buyouts, with creative use of debt becoming more common as projects and companies are taken over. Noticeably, the market is becoming more familiar with carve-outs and spin-outs, which may become increasingly utilised by large, local, multi-faceted entities concentrating on core businesses selling off profitable arms to target buyers. VIR

Ben Gray

Director of Capital Markets at Cushman & Wakefield Vietnam

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