M&A in Vietnam’s banking sector forecast to see big changes in 2019

Experts upbeat about M&A scene in 2019

Foreign direct investment in Vietnam expected to surge

Foreign investors pump $6 billion into HCM City via M&A 

Keppel Land purchased all contributed capital of Southern Waterborne Transport Joint Stock Corporation (Sowatco) in the office building project of Saigon Center. (Photo: SGGP)

According to the Foreign Investment Agency, foreign capital pouring into Vietnam via mergers and acquisitions (M&A) has increased sharply. Especially, in the first quarter of this year, there were 1,653 transactions of capital contribution and purchase of shares with total value of US$5.68 billion, three times higher than the same period last year, accounting for 52.6 percent of total registered capital.

This is the first time the foreign indirect investment capital has been higher than its direct counterpart although at the same time, registered foreign direct investment (FDI) into the country also jumped by 80 percent over the same period last year.

Noticeably, there were 785 new FDI projects being granted licenses in the first three months of this year, accounting for less than half of the numbers of successful capital contribution and share purchase transactions by foreign investors in the same period.

Of which, investors from Asian countries, including Japan, South Korea, Thailand and China have been pumping investments into real estate, consumer goods, distribution, retail, construction material manufacturing, chemicals, financial service and pharmaceutics.

Amid the tendency, Taisho Pharmaceutical (Taisho Japan) has taken the spotlight after its announcement that it would spend more than VND3.4 trillion to buy 28.3 million shares of Hau Giang Pharmaceutical JSC (DHG), or 21.7 percent stake.

The Japanese leading pharmaceutical company informed shareholders of Taisho that the buying price of DHG shares was expected to be at VND120,000 per share. The State Capital Investment Corporation (SCIC) is currently the largest shareholder at DHG, holding 43.31 percent stake and has not shown any movement suggesting that it will sell its stake in DHG. According to observers, by buying 21.7 percent stake, Taisho has had plans to collect shares from small shareholders or investment funds in order to raise its ownership ratio at DHG to 56.7 percent, or 74.12 million shares.

If Taisho succeeds in buying the aforesaid number of shares in DHG, the latter will become a subsidiary of the former after the company contributed capital to DHG three years ago.

Truong Hai Auto Corporation (Thaco) recently also approved a plan to issue more than 30.3 million shares for its Singaporean strategic partner Jardine Cycle & Carriage, equivalent to 1.34 percent of its current circulating stocks. The plan will be carried out this year, after the issuance, ownership ratio of Jardine Cycle & Carriage at Thaco will be increased to 26.57 percent.

Or at the shareholders’ meeting held in mid-April this year, the Board of Directors of Hoa Binh Construction Group JSC (HBC) asked its shareholders’ opinion about a private placement of 25 million shares, or 11 percent stake, for its strategic investor Hyundai Elevator Co., Ltd.

The Law on Investment 2014 has provided favorable legal corridor for foreign investors to conduct merger and acquisition transactions to domestic enterprises via capital contribution, share purchase and purchase of capital contribution of local enterprises.

With a population of nearly 95 million people, Vietnam’s market has a great potential. Strong and steady economic growth in the past years has strongly drawn FDI capital flow and M&A is considered as the shortest way for foreign enterprises to enter Vietnamese market.

There are several reasons that make local enterprises sell themselves but they can be summed up to two main reasons. Firstly, local enterprises retreat from the market because they concern that they will not able to compete with foreign ones or they realize that the market has been saturated and there are no potential for development. Secondly, domestic enterprises have been facing difficulties in approaching loans so they have to cooperate with foreign ones to ease financial crunch.

Mr. Nguyen Van Ngu, the founder of Ngu A Chau Service Production Trading Joint Stock Company (NAC), the former owner of Kanac Hair Salon Vietnam before selling its 97 percent stake to Japanese Takara Belmont Corp. last year, said that he was extremely hesitant because NAC was built and had been nurtured for more than 10 years. However, amid economic integration, he understood that this was a hard game and NAC would be unlike to survive when foreign competitors who are strong in brand, technology and financial potential have been entering deeply into domestic market.

On the other hand, after M&A, Takara Belmont still kept Kanac brand as well as pledged to make it become a popular hair care product brand not only in Vietnam but also in South East Asia which NAC failed to accomplish in the past 10 years.

In the unequal competition, selling their companies to others is possibly a way for the founders to have a chance to see their companies growing and thriving further. Some other enterprises explained that the market has been in saturation period so there is no potential for development.

For instance, although Kinh Do was a leading brand in domestic confectionery industry, it still decided to sell itself to foreign partner in 2014 because it realized that there were not many opportunities to develop in this sector left. Therefore, it shifted to the strategy to invest in food and staple product industry.

Meanwhile, some other firms said that capital contribution of foreign partners has helped their firms to develop stronger. At the same time, standing on the shoulders of giants helps firms to gain positions.

Particularly, DHG said that after three years of collaboration with the over-100-year pharmaceutical group Taisho, DHG has got several achievements, such as the factory of DHG was continuously upgraded. By the end of last year, the factory of DHG reached the PICs-GMP and EU-GMP standards. By February this year, the production line of Non-Beta lactam tablets was granted GMP certificate by Japanese Pharmaceuticals and Medical Devices Agency. This certificate will be a laissez-passer for products of DHG to be exported to Japan and developed countries.

From the perspective of a consultant for commercial deals, Mr. Jeffrey Pirie, deputy CEO of Deloitte South East Asia, said that the more M&A deals are the more successful the economy is.

However, in reality, in most M&A deals, Vietnamese enterprises did not take the upper hand and mostly were the underdog in negotiations. There were lots of cases in which Vietnamese enterprises were not only sold at low prices but also were constrained in administration and management, forcing them to completely withdraw.

This has not included a lack of legal understanding and professionalism of Vietnamese enterprises. Therefore, experts suggested that before thinking of M&A, domestic enterprises should improve administration capacity and develop their brands for their companies to be evaluated at the highest values. They should not sell their companies at any price for financial expansion while their core capacity has not developed correspondingly.

The incident that the owner of Ba Huan JSC, a producer of poultry eggs and meat, had to “ask for help” over concern that VinaCapital would take over its management after the Vietnam Opportunity Fund managed by VinaCapital invested $32.5 million to buy a large number of shares of this company, is a valuable lesson for other Vietnamese enterprises. SGGP