Significant changes in the law should spur a surge in M&A activity

Since the early 2000s, Vietnam’s steady economic growth and ongoing efforts to reform its legal system provided encouraging signs for a thriving M&A marketplace to develop. This progress continued to gain traction in 2005 when Vietnam engaged in earnest preparations to join the World Trade Organization (WTO), finally acceding in 2007. In order to become a member, Vietnam issued a number of new laws and amended many others to satisfy WTO requirements.

The market responded favorably, and despite the global financial crises from 2007 to 2009, corporate investment into and within Vietnam steadily grew and the value of M&A transactions increased 15-30% annually until 2012. However, in 2013 the value of M&A transactions in Vietnam dropped precipitously from US$ 5.3bil (520 deals) in 2012 to US$ 3.8bil (370 deals). In somewhat of a rebound, the market is slowly regaining some momentum in 2014. The market has so far witnessed 400 deals valued at US$ 4bil, an appreciable difference from the year before.

The three most active sectors are consumer goods, finance and real estate. Among those, the consumer goods sector ranked first with total deal value of US$ 960 mil (accounting for 24% of the M&A market), the finance sector came in second with total deal worth of US$ 880 mil (accounting for 22% of the M&A market) and the real estate sector lagged behind at US$ 400 mil (accounting for 10% of the total M&A market).

While it is comforting to see that the total number and deal size of M&A transactions have regained an upward trend, the most interesting developments, portends a robust and active M&A market in the short- to mid-term.

The emergence of local companies taking a more active role in buying companies will contribute to a stronger M&A market. The most active among them is the Vingroup JSC, a listed Vietnamese company specializing in real estate development. However, foreign companies from Japan and Korea continue to lead the pack in volume for M&A deals in Vietnam.

Another critical improvement is the new policies Vietnam instituted to manage banks, a key sector for M&A activity. A strong and vibrant banking sector will further spur more M&A in the market. Along with an improved regulatory banking framework, the Vietnam government mandated the equitization of state-owned-enterprises (SOEs) within a clear timeframe and has even allowed the purchase price to be lower than par value in some cases. These developments have created and will continue to create new opportunities for investors to buy larger stakes in local banks as well as SOEs in key economic sectors.

The final macro-level development this past year involves key legal changes to the law. In the past, Vietnam’s M&A landscape faced legal and administrative barriers, including a lack of transparency owing to insufficient disclosure of information from the target companies. Furthermore, a lack of clarity on the applicable laws unnecessarily prolonged transactions, as well as created a need for third-party intervention to reconcile differences caused by this lack of clarity. Foreign buyers also had to manage WTO restrictions and foreign ownership limitations when structuring deals.

Many of these issues have been addressed by the recently enacted changes to the Law on Investments and the Law on Enterprises on November 26, 2014. These changes will greatly contribute to the improvement of the investment environment in Vietnam. (See below for more details on these changes.) Additional amendments are due to be considered and passed in June 2015. Moreover, as of January 14, 2014, Vietnam must now fully comply with WTO requirements in almost every industry sector.

SIGNIFICANT TRANSACTIONS AND HIGHLIGHTS

In 2013 and 2014, Vietnam was graced with significant M&A transactions in a broad spectrum of sectors, particularly in banking, real estate and consumer products. A number of key transactions have been internationally recognized.

Banking Sector:

PVFC and WesternBank merged to create PVCombank with charter capital of US$ 430 mil. This was the first transaction between a bank and finance company. In addition, a number of other commercial banks and financial companies successfully closed M&A deals, including HDBank and DaiA Bank, MBS and VIT, VP Bank and TKV, and Sumitomo and Mobivi.

Real Estate Sector:

In this sector, most of the M&A transactions were completed by Vincom through property transfer schemes instead of project or capital transfers. In particular, Center A of VinGroup was sold to VIPD for US$ 470 mil. Gemadept Tower was purchased by CJ from Korea with the purchase price of US$ 45 mil. In addition, Mapletree purchased Center Point Tower for US$54 mil. EXS also became a new shareholder of Son Kim Land after paying US$ 37 mil to the sellers. A number of shares of the Sheraton Nha Trang project were transferred to an undisclosed buyer for US$ 42 mil.

Consumer Products and Distribution Sectors:

With the 14th largest population in the world, companies in the consumer sector in Vietnam have always been a top target for M&A. Family Mart, a chain of convenient stores and Metro Cash & Carry Vietnam, a leading company in the wholesale sector, was acquired by BJC from Thailand. Likewise, CDH Electric Bee Ltd acquired 20% of thegioididong.com, a famous electronics retailer in Vietnam, for an undisclosed price. In July 2014, thegioididong.com became a listed company on the Ho Chi Minh City Stock Exchange. Masan, a leading company in the consumer products sector, also acquired 75% of Vinh Hao, a mineral water company, after paying US$ 26 mil to the sellers. In addition, Kinh Do Corp., one of the leading food companies in Vietnam, engaged in a number of M&A transactions, buying and selling assets before it sold 80% of its confectionary business to Mondelez International Inc. for US$ 380 mil in December 2014.

Other Sectors:

Other notable transactions include: (1) UPS’ 49% acquisition of VN Post’s shares in a joint venture company, converting it into a 100% foreign owned entity; (2) en-Japan’s acquisition of approximately 90% of the offshore parent of Vietnamworks.com, the biggest recruitment services company in Vietnam, for US$ 25 mil; (3) in early November 2014, GEM announced an investment of US$ 80 mil in HAGL, one of the biggest conglomerates with a wide range of business lines in Vietnam and the Indochina region; and (4) REE, a leading listed company in the electronics sector, also acquired a number of hydroelectricity projects and feed projects.

LEGAL DEVELOPMENTS IMPACTING THE M&A MARKET

This year there has been a number of legal developments that should generate many more opportunities for foreign investment into Vietnam’s dynamic economy.

Under the WTO roadmap requiring equal treatment regardless of citizenship, Vietnam opened up many different sectors to 100% foreign ownership in January 2014. However, this does not apply to restaurant services until after 21 January 2015. This development would legally allow a number of foreign investors to join the Vietnam market or restructure their holdings to become 100% foreign owned in many different sectors which was previously restricted and/or allowed limited shareholdings.

The new Law on Enterprises and Law on Investment now allow investors to conduct all business activities which are not prohibited or subject to conditions under the law. The M&A procedure for foreign buyers were also clarified and the timeline shortened. With respect to joint stock companies, except for limited circumstances, many corporate matters can be passed with 51% of the voting capital instead of 65% as was the case under the previous version. The Law on Enterprises also allows third parties to request authorities to provide financial statements and information under certain conditions. The issuance of these new Laws will be a tremendous boost for M&A activities in Vietnam in the near future.

Foreign ownership of real estate in Vietnam has finally been approved and enacted into law under the new Law on Housing. Foreigners can legally lease and sublease real estate. The new Law also simplifies, shortens and makes more transparent the procedure to obtain approvals for real estate projects.

Corporate income tax will be reduced to 20% after January 1, 2016 and the new Law on CIT provides more favorable treatment and incentives for enterprises. Apart from this, the tax system has been simplified to facilitate the application of the International Financial Reporting Standards starting in 2020. Significantly, tax payers can now use the internet to submit and manage tax reports and filings.

However, among these many positive changes, M&A transactions in Vietnam still face difficulties.

According to a survey conducted in 2011, Government red tape, together with corruption, and infrastructural issues, the legal system in Vietnam was cited by 82% of respondents as one of the main factors constraining their investments. Because Vietnam follows a civil law system, the written laws must be updated and clearly defined to ensure consistent interpretation by relevant authorities. Inconsistent and even contradicting interpretations remain a substantial barrier to conducting business in Vietnam. It negatively impacts the appetite for M&A transactions as well as causes unnecessary delays and increases transaction costs.

While these amendments were a necessary step to improve business conditions in Vietnam, they are subject to further detailed implementing guidelines by Decrees and Circulars. Thus, if the law makers do not put adequate efforts to properly prepare these Decrees and Circulars to implement the intent of the new Laws, the current challenges will remain and the business environment will not improve even with the passage of these new Laws.

Another challenge remains limited access to certain economic sectors. Under the WTO, Vietnam reserves the right to restrict foreign ownership (entirely or majority control) in a number of services including road transportation, high school education, certain financial and securities services, leasing, film production, recording services and others. These sectors are subject to high scrutiny by relevant authorities and many transactions in these sectors remain uncompleted due to these ownership restrictions.

Majority control still remains a sticking point in certain industries. Under Decision 55/2009/QÐ-Ttg only 49% of shares/securities are available for foreign investors to buy when it relates to public companies, listed companies, investment funds and securities companies. A draft of new regulations to increase the cap for foreign ownership to 60% is under consideration, but, to date, these regulations have not been officially issued. According to a report from the State Security Commission, these new regulations are set to be issued in October 2015.

Finally, mergers and acquisitions may still be stalled when reviewing for antitrust issues. The basis for calculating the “market share” in relation to an “economic concentration” is not currently addressed clearly by the Law on Competition and corresponding regulations. Therefore, this may impact clearance reviews by the local competition authorities.

A NEW WAVE OF M&A TRANSACTIONS

Vietnam remains a challenging market to conduct business. The government, however, has made an earnest effort to engage the business and investment community to address their concerns. In 2014, after a number of open discussions and productive dialogue, Vietnam’s legislature successfully passed into law a number of material changes reflecting feedback received from the commercial sector. Investors should be pleased to know that further positive reforms are underway.

These changes have galvanized the marketplace and many investors believe a new page of M&A transactions in Vietnam will emerge. In fact, as reported by the MAF Research Group, 72% of the surveyed investors believe that a new wave of M&A transactions in Vietnam would start in early 2015. We believe investors are justified in their optimism about entering Vietnam or expanding their presence in Vietnam.