Globally, 2017 has been an unpredictable year for the mergers and acquisitions (M&A) market, with the hangover of political and economic instability from 2016 inspiring caution among investors.
Foreign investment has been put on the back foot due to rising protectionism and the failure of promising free trade deals like the TPP (Trans-Pacific Partnership). Vietnam in particular has suffered and will need some big breakthroughs to regain lost momentum.
Although the TPP would have brought some big benefits to Vietnam, it is expected that other trade deals on the horizon will make up most of the shortfall. The nation has joined six regional FTAs as an ASEAN member, including the ASEAN Free Trade Area (AFTA) and the five FTAs between ASEAN and China, Japan, South Korea, India, Australia and New Zealand, as well as four bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). Negotiations over an FTA with the European Union (EU) have also been concluded.
Whereas 2016 was an exciting year for M&A in Vietnam, 2017 has gotten off to a slower start. According to a report released in advance of the M&A Forum (August 10, HCMC), deals in Vietnam hit an all-time record of US$5.8 billion in 2016, a growth of 11.92 percent compared to 2015. However, the market has slumped since the latter half of last year with fewer headline signings. The total value of M&A activity reached just US$1.1 billion in the first quarter, a drop of 24.4 percent year-on-year.
The few billion-dollar M&A deals have had a huge influence on a range of industries, primarily in the real estate, retail and consumer goods sectors. In addition to strong foreign interest in the M&A market, the main factor driving the development of M&A activities in Vietnam last year was the equitisation of various state owned enterprises (SOE) (such as Vissan, Vietnam Airlines and Petrolimex).
Coupled with the involvement of big players in the region such as Thailand, Singapore and Japan, and the recovery of the real estate market, signs were looking good for another bumper year in 2017. The raft of FTAs suggested that economic growth was on an upwards trend, and there were expectations that Vietnam will involve itself more deeply in the ASEAN Economic Community (AEC).
Big push for bigger deals
Vietnam’s M&A market value is small in comparison with other ASEAN countries such as Singapore with total M&A value in 2016 hitting US$62.3 billion. Indonesia, Thailand and Malaysia manage around US$11-16 billion each.
Apart from a few outliers, in terms of deal value, most M&A deals registered in Vietnam were small, with over 64 percent valued below US$20 million. The bigger ones, for example Thailand’s Central Group spending US$1.05 billion to acquire Big C Vietnam from the Casino Group, and TCC Holdings purchasing the entire chain of Metro Vietnam Cash & Carry for US$800 million, were the exceptions.
M&A activities in 2017 will face continuing competition from regional countries and a slowdown in SOE equitisation. Organisers of the M&A Forum 2017 have expressed the need for a big push from the government and businesses to boost M&A activities, ensuring that both quantity and quality are maintained.
After a promising start, the rate of SOE equitisation has failed to meet expectations of both the government and investors. Only 52 SOEs were equitised in 2016, just 25 percent of the number recorded in 2015. In the first half of this year, the number was just 20, down 24 percent from the same period last year. According to current plans, 45 government SOEs will be equitised throughout the whole of 2017.
Conservative estimates have the total value of M&A deals reaching around US$5 billion this year, down 14 percent from 2016. At the more optimistic end, assuming a breakthrough in the SOE equitisation process, total value could reach upwards of USD$6.2-6.5 billion, equivalent to growth of 6.5-10 percent.
Domestic and foreign investors will be keeping their eyes peeled for some upcoming divestments, including Sai Gon Beer-Alcohol-Beverage Corp (Sabeco), Hanoi Beer Alcohol and Beverage JSC (Habeco), Petrolimex, Vinamilk and MobiFone.
Clearly the near future of M&A deals will encompass consumer goods, telecommunications and energy, with the possibility of some big deals in the pipeline. If things go well the country could regain some of its lost ground.
Breaking barriers to entry
Despite a lot of foreign interest in Vietnam, the government has yet to consolidate legislation governing M&A to streamline international capital flow while ensuring local enterprise is protected. As a consequence, many M&A negotiations take too long and closing can be difficult to achieve.
The main laws governing M&As, the Law on Enterprise (LOE) and the Law on Investment (LOI), suffer from a number of overlaps and inconsistencies, causing confusion. For foreign enterprises, the process of establishing a company under the LOE and obtaining a business registration certificate (BRC) can seem daunting, as first time investors would need to receive an investment certificate (IC) before they can establish their project companies. This step on its own requires the production of documents which may take some time to prepare. With time and costs mounting up, it’s not hard to see why some investors are put off.
Despite the tricky legal landscape, there remains significant enthusiasm for M&A opportunities in Vietnam. Buyers are keen on getting a slice of the country’s stable economic development, which is set to continue expanding by more than 6 percent every year. With a young and rising population, and a high rate of urbanisation, the consumer market is an ideal target for these investments.
To make the most of this potential, state divestment in Vietnamese enterprises should be implemented more quickly and thoroughly. Vietnamese law should be clarified and streamlined to prevent misunderstandings, presenting a transparent environment in which to do business. As it stands, if they’re not put off, M&A participants still require high-quality advisors to guide them through tax issues and legislation if they want to get a piece of the action.