VietNamNet Bridge – The hastened pace of equitisation of state-owned enterprises has led many experts to opine that there is a second wave of mergers and acquisitions ready to hit Vietnam.

Many market insiders expect there will be a raft of M&A deals over the next two years.

On August 7, Vietnam Investment Review, in association with AVM Vietnam Company, will hold its sixth annual Merger & Acquisition Forum at the White Palace Convention Centre in Ho Chi Minh City. At a press conference held in Hanoi last week to announce the event, attendee market insiders reaffirmed their belief that state-owned enterprise (SOE) equitisation will propel the merger and acquisition (M&A) market over the next two years.

Dang Xuan Minh, director of AVM Vietnam, said the first wave of M&A in Vietnam occurred in the period 2009-2013. During this time, the total value of transactions increased from $1 billion to $5 billion.

Last year’s data from KPMG showed 238 M&A transactions were completed, but the market went quiet in the first half of this year with only 83 transactions, 10 less than the same period last year. Phan Thanh Binh, head of transaction services at KPMG Vietnam, forecasted that while the total number of M&A transactions this year will not exceed that of 2013, a massive influx is expected in 2015-2016.

Equitisation to dominate the market

In a bid to push up economic reform, early this year the government announced it planned to equitise 432 SOEs in the 2014-2015 period.

Vu Xuan Thuyen, head of the Investment and Corporate Governance Division of the Enterprise Development Department under the Ministry of Planning and Investment (MPI), said the announcement reflected the government’s effort to enhance the effectiveness of SOEs.

And when the government pushes up the equitisation of SOEs as part of economic reform, it brings the potential for a major increase of M&A transactions.

“We know that some of the major industries in Vietnam have been dominated by SOEs and the opportunities for foreign firms to enter the market have been few to none.

SOE reform will provide opportunities for Japanese companies in these industries to develop ties with SOEs, or even acquire them,” said Masataka Yoshida, senior managing director of Recof Corporation, a Japanese M&A advisory services provider.

Yoshida said Vietnam was better positioned than other ASEAN countries for M&A, which should be the main focus for Japanese companies in preparation for the ASEAN Economic Community in 2015. “The areas that allure Japanese investors most for M&A are finance, information technology-related sectors, logistics, food packaging, retail and restaurant chains.”

According to Recof’s database, the number of deals between Vietnamese and Japanese companies announced between 2011 and 2013 was 18 a year on average, but only four deals were announced as of June this year, compared with nine during the same period last year.

“We believe some external factors such as deregulation in Vietnam will trigger additional demand and make new opportunities available to Japanese companies. Together with the excitement over pending deals, we would not be surprised if the pace quickens to 30 or more a year by 2016,” said Yoshida.

The most anticipated SOE equitisations are from major corporations Vinatex, Vietnam Airlines, PVGas, Mobifone, Sabeco, BIDV and Vinamilk. AVM Vietnam estimates total value from the equitisation of these seven SOEs at around $4.79 billion.

Vietnam Airlines, for instance, is seeking final approval from the prime minister to sell 25 per cent of its stake to investors to mobilise at least $400 million.

In an equitisation plan sent last month by the Ministry of Transport to Prime Minister Nguyen Tan Dung, the ministry asked Dung to approve Vietnam Airlines’ issue of 35,254,600 shares in its IPO.

This is the final step Vietnam Airlines must take in carrying out the share issue, which is scheduled for this year’s third quarter. The initial price per share in the equitisation plan is VND22,300 ($1.06).

Vinatex, the national garment and textile group, last week announced that it would delay its IPO to September, against the previous plan to carry it out this week. The company explained that potential investors did not have enough time between roadshows and the deadline for receiving bids to effectively research the company and come to a decision.

According to Vinatex’s government-approved equitisation plan, the group has a total charter capital of $237 million. Once the group goes public the state will maintain a 51 per cent stake, 24 per cent will be offered to strategic investors, 24.4 per cent will be offered to the public and 0.6 per cent to employees.

Meanwhile, the government is also planning to hold an IPO for Mobifone, the country’s second biggest telecom, by the end of this year. Last month Mobifone successfully split from VNPT in order to carry out its equitisation.

Challenges Remain

Though there is great potential for an increase in M&A transactions thanks to the government’s effort to step-up SOE equitisation, market insiders have also noted a number of challenges. The first is the pace of equitisation. In fact, SOE reform was introduced in the 1990s, but has moved at a snail’s pace so far.

Thuyen at the MPI said the government’s target to equitise 432 SOEs by the end of next year would not go forward at any cost. He implied that equitisation might continue to move slowly due to market conditions, even though the government has allowed SOEs to divest from non-core businesses with shares even sold at below their book value.

Additionally, analysts have warned that foreign investors could be deterred from buying stakes from SOEs if the government insists on holding a majority position.

According to Yoshida, the list of obstacles faced by foreign investors in implementing M&A in Vietnam included a lack of information about the target companies in the early stages, inaccurate information about the target company and its industry, sudden changes to the seller’s stance, or difficulty in understanding the decision-making process.

VIR/VNN