Driven by momentum in growth, Vietnam’s mergers and acquisitions market is expected to continue its strong focus on the sectors of consumer goods, retail, realty, and banking in the months to come.
On July 22, Vietnam’s mergers and acquisitions (M&A) market heated up when South Korea’s KEB Hana Bank, a subsidiary of Hana Financial Group closed a $885 million deal to acquire 15 per cent in Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) so as to broaden business activities in the country.
The new move, the biggest-ever M&A deal with foreign involvement in the history of the local banking sector, came one day before the press conference for the upcoming Vietnam M&A Forum – the biggest of its kind in Vietnam.
Michael DC Choi, deputy general director of the Korea Trade Investment Promotion Agency (KOTRA), said at the press conference, “On trends, and on the big deals, the main [Korean] focus is on the banking and finance industry as the latest deal between KEB Hana and BIDV shows. In addition, the deals between SK Group and Masan and Vingroup are also remarkable in stature.”
Evidently, banking is attractive to South Korean investors because of their strong performance in the country. “Last year, five South Korean-based commercial banks operating in Vietnam recorded $130 million worth of profit. One bank made a profit of $90 million here, which makes up 25 per cent of its global profit,” said Choi.
Being one of the four major commercial banks in Vietnam, BIDV has huge advantages of major total assets that reached VND1.3 quadrillion ($57 billion) as of the end of 2018, and operating income of VND44.5 trillion ($1.93 billion) to help KEB Hana boost its footprint here. KEB Hana currently operates two branches, in Hanoi and Ho Chi Minh City.
HOT SECTORS AHEAD
The acquisition of BIDV stakes by KEB Hana Bank is one outstanding example for the M&A trend among foreign investors in Vietnam. But in addition to banking, also in the crosshairs are textiles, consumer goods, food, realty, pharmacy, IT, and education.
According to the latest study from the Corporate Investment and Merger & Acquisition Centre and MAF Research, the most attractive sectors to M&A investment are those that enable such investors to get better access to the huge population of Vietnam.
“Consumer goods and retail are expected to be the target for financiers thanks to its growth potential and rising local demand. In particular, the food and beverage sector will remain attractive for M&A deals. With much room for potential transactions, famous brands such as Habeco, Vinamilk, and others will be on the radar of international groups from the United States, European Union, and neighbours like Thailand,” said Dang Xuan Minh, general director of AVM Vietnam.
Experts at the press conference also pointed out that partners’ acquisition of consumer goods companies enables them to buy the companies’ brands and distribution network to better access the local market.
On the back of stable economic growth and signing of many free trade agreements (FTAs), real estate is attracting great attention among domestic and foreign investors, especially those from Japan, South Korea, and Singapore who are betting on M&A deals to gain higher and stable profit in almost all segments, including housing, offices, hotels, and industrial parks. Realty transactions target projects in big urban areas, as well as new developed urban areas, resort projects, and centrally-located hotels, according to the experts.
In the list of potential sectors, banking and finance comes third, focusing on personal finance, consumer finance, card activity, and technology. Following those are energy infrastructure, pharmaceuticals, and education to serve the demand and to benefit from equitisation of state-owned enterprises (SOEs).
Japanese investors in particular have been leaning towards certain areas of investment, driven by the growing purchasing power of Vietnam’s population.
“Direct investment from Japan in 2016 was $2.1 billion, a 17.7 per cent increase from 2015,” said Takimoto Koji, chief representative of the Japan External Trade Organization’s Ho Chi Minh City Office. “In the last three years, Japanese investments have focused on consumer goods, services, and real estate sectors, reflecting the growth of Vietnamese purchasing power.”
In similar moves, in addition to the traditional sectors of real estate, construction, education, manufacturing, and infrastructure, there appears to be a trend towards rising consumerism in Vietnam as well as a surge in healthcare and renewable energy among Singaporean investors.
“The developments in healthcare and renewable energy could be due to government policies encouraging such sectors. Fast-moving consumer goods and IT are additional centres of attention,” said Jazreel Lim, former president of the Singapore Business Association of Vietnam.
In fact, this momentum is driven from the trend over the last three years. In 2016, retail ruled the M&A market with a number of acquisitions of distributions chains, with outstanding cases involved Thai investors. Central Group spent $1.05 billion on acquiring Big C from Casino Group, while previously, TCC Holdings bought Metro Cash & Carry for more than $800 million.
This trend continued the following year when consumer sector retail took the lead, making up 57 per cent of total M&A value, followed by real estate (27 per cent), and banking and finance (4 per cent). Also, between July 2018 and now, real estate construction (19.98 per cent) and the consumer sector (10.53 per cent) continued to lead M&A investment in the country.
A POSSIBLE BIG PUSH
According to VIR’s editor-in-chief Le Trong Minh, to create major forward motion for the M&A market, it needs more strong action to improve the business climate in order to unblock foreign investment amid complicated global changes, as well as local barriers related to state-owned enterprises (SOEs) equitisation, attraction of the economy, and legal frameworks.
The local M&A market has for years attracted many small transactions valued at $5-6 million, making up over 90 per cent of total number. In spite of this, Vietnam’s M&A market has seen strong growth in recent years buoyed by major deals, thus placing it on par with other regional countries.
Last year, most Southeast Asian nations reported a fall in M&A value. However, Vietnam still ranked second in terms of value with $7.64 billion, or 74.9 per cent of that in 2017. Excluding the deal in which ThaiBev bought 54 per cent equity of the country’s leading brewer Sabeco for a record high $4.8 billion in 2017, M&A investment rose 41.4 per cent on year. Thailand topped the list with $9.3 billion, while Singapore ranked third ($6.7 billion), followed by Malaysia ($5.1 billion), and Indonesia ($2.8 billion).
The sweet aftertaste of the M&A transaction between ThaiBev and Sabeco still lingers today, as it has helped increase M&A value to a record high of $10.2 billion, up 175 per cent on-year.
The latest transaction involving KEB Hana is exactly the type that the M&A market is waiting for, in order to create a new breakthrough for future growth and thus enabling it to reach $6.7-6.8 billion in 2019.
International investors continue to play an important role in large and medium-sized M&A deals between $20 million and $100 million. Such deals have tended to increase in recent years, thus bringing high hopes for the future.
Vo Thanh Thong, Deputy Minister of Planning and Investment said at the press conference that, “the Vietnamese government is keeping on track to improve the business climate with more concrete actions, restructuring the economy, and renewing the growth model towards increasing efficiency and national competitiveness. Accordingly, the country is determined to sell more stakes in SOEs, even in profitable ones.”
“Moreover, together with the enforcement of FTAs, the government is promoting the new economic model, meaning cross-border investment without capital contribution. These factors will open more M&A opportunities and create a big push,” Thong added.
With the Vietnamese government’s strong commitments, the M&A market is promising to welcome more such major deals as the KEB Hana-BIDV in the months to come.
Since 2015, the State Securities Commission and the government have loosened regulations allowing listed companies on local stock exchanges to determine the foreign ownership limit instead of having a legislative threshold.
Since then, many businesses have posted very upbeat performances, and strategic investors might acquire higher stakes at these companies. This is a strong factor in helping thembecome more enticing for investors. In this aspect, since the enactment of the Law on Enterprises 2014, corporate governance and transparency at Vietnamese firms have narrowed the gap with international and regional standards. With improved corporate governance and transparency, overseas investors would be more confident with minority equity investments. Recent major deals of SK Group’s investment in Vingroup, or KEB Hana in local lender BIDV are eminent examples. Albeit each of such deals value nearly $1 billion, foreign investors in these cases have very limited involvement with the day-to-day management of the investees.
Based on recent market movements, in the near and mid-term future, foreign investors will be more interested in businesses that directly provide goods and services to the consumers, such as consumer finance. As Vietnam hosts a fairly young population and a workforce segment with stable incomes continuing to rise, the consumer finance market prospective is proving buoyant. In addition, production of goods directly serving consumers such as food and pharmaceutical products will likely be the growth engine. It is important for investors to aim at creating synergies and leveraging their track record in production and capital support in order to help the Vietnamese partners, the investees, to launch better products, lowering production costs and creating a more efficient operation.
Michael Choi - Deputy general director KOTRA Hanoi
Looking at foreign direct investment in Vietnam over the past few years, we see that about 35 per cent of South Korean investment in this country is going through mergers and acquisitions.
In the context of strong development in the technology era and investment capital flowing into Vietnam, I think investors should seize the opportunity as soon as possible because in the present time, the investment environment in this country has improved on a great scale.
Vietnam has opened its market to attract capital over the last 30 years and especially strengthened investment-related laws. For example, South Korean investment in Vietnam has experienced tremendous growth and the country has become one of the largest investors in Vietnam through either foreign direct investment or via indirect means.
The South Korean government in the past few years has been implementing new policies, and considers Vietnam as a key investment market. In the upcoming time, both direct and indirect investment capital from South Korea to Vietnam will increase sharply.
South Korean companies are interested in deals in the fields of textiles, consumer goods, food, and cosmetics. However, to talk about the big deals, the main focus is on the banking and finance industry, such as the latest deal between KEB Bank and BIDV. In addition, the deals between SK and Masan and Vingroup are also remarkable in status.
For South Korean investors who come in the future, I think it is not too late because Vietnam’s economy is growing very well with the ratio of 7.08 per cent last year and is expected to reach 6.8-7 per cent this year.
Therefore, there is no reason that investors globally, not just South Korea, ignore the opportunity to take advantage of this potential growth as well as a country with a young population and large consumption.
Tran Thi Bao Ngoc - Director, Investment Banking Services, VPS Securities
The demand of the M&A market is large. International investors, especially South Korean ones, are seeing a large space for development. However in terms of law, there are still certain limitations.
Valuation is always an issue taking a lot of time to be solved. From the beginning, and during the appraisal process, many problems arise that require adjustments of price. In addition, there are differences between Vietnam’s accounting and auditing standards compared to other countries. But, the most worrisome issue is legal element. Foreign investors are particularly concerned about legal factors such as commercial consistency, and how to process documents with state agencies to complete transactions.
Although they ask for lot of professional legal advice, they are still unsure about expected timelines. All of these factors make the duration of M&A deals longer, especially in the field of finance and banking. During that extended period, many other issues occur and information is required to be updated, and even the value of the business could be adjusted over time.
Nguyen Viet Khoi - Associate dean, Faculty of International Business and Economics, Vietnam National University
In the last six months, the most prominent points of the M&A market in Vietnam are the deals in market-related industries, and then the investment capital flow from Asian investors. The M&A market in this country has a lot of potential and a lot of capital inflows, alongside the growth of the economy. Fast-moving consumer goods attract a lot of investment capital, and other sectors related to financial services and insurance also serves the domestic market.
One of the things that determine the breakthrough in the market is a sustainable strategy that benefits the domestic market. At present more and more buyers are indeed purchasing, and in particular free trade agreements have created opportunities to attract more buyers to Vietnam, but the country’s enterprises need to have an M&A strategy with better financial reports so that the buyers can better evaluate the goods.
Quang Dang - Director, JLL Vietnam
M&A in the real estate market is very active. Foreign investors are interested in two things – the transparency in the information of real estate companies, and real estate companies often setting their value higher than reality.
These are two factors that hinder in this area. For investors, information transparency is an important factor that they care about. The government should follow the commitment to provide transparent information to investors. For instance, if investors want to search for planning information on the relevant authorities' website, it is very difficult. Thereby, investors will waste time and money, and lose desire to invest.
Previously, Singapore had many investors enter the Vietnamese market but under Chinese capital. China itself is also very encouraged to invest abroad according to its policy, but recently, due to the influence of the US-China trade war, China no longer encourages investment to other countries as before, causing less Chinese cash flow through intermediary investment.
However, real estate investors from China enter the Vietnamese market mainly through moving their factories. Therefore, buying and selling real estate in Vietnam from Chinese investors has not increased.