2014 – Brief recap

This year was a significant drop in both the number and value of M&A transactions in Vietnam in comparison to 2013. Only 67 M&A deals were closed, amounting to a total value of US$200m by the third quarter 2014, whereas 2013 concluded with more than 300 M&A transactions approximating to US$ 4bn in value.

This also appears to have been a tough year for dealmakers in the real estate, banking, fast-moving consumer goods (FMCG) and retail sectors. However, other speculation suggests that most enterprises (SOEs) as well as significant changes in the legal framework for doing business in Vietnam.

In fact, it was not until the last quarter of 2014 that there was a flowering of initial public offering (IPOs) by SOEs and the adoption of new laws on, among others, investment, enterprises and the real estate sector. Therefore, 2014 may be just a warm-up before an active M&A investment market in 2015.

Before, moving forward to 2015, let us recap 2014 by following the high-value deals, which include significant M&A transactions that have been made public and SOEs’ initial public offerings.

Berli Jucker Public Company Limited (BJC) acquires Metro Cash & Carry Vietnam (MCC) with US$ 879m

In September 2014, BJC announced it would pay US$ 879m to MCC to take over the entire business operations of MCC, including 19 distribution centres and the relevant real estate portfolio.

MCC is a wholesale business of Metro Group, one of the largest international retail groups based in Germany. In 2013 fiscal year, MCC’s revenue reached approximately US$ 692m. BJC is a Thai corporation with market capitalisation on the stock market of approximately US$ 2.8bn. BJC’s business is classified into five major supply chains, including packaging, consumption, healthcare, technology, retail and other supply chains. Although BJC has operated in Vietnam since 1995, it is this US$ 879m deal that will make BJC the spotlight of the Vietnam retail industry. The deal is expected to be closed around the middle of 2015.

Mondelez International Inc. (Mondelez) acquires 80% of the confectionary business of Kinh Do Corporation (KDC) for US$ 370m

Before the deal, Mondelez had already established a small presence in Vietnam via its Oreo, Ritz and Cadbury products. With the deal, Mondelez is acquiring KDC, the largest sweet treatment as a domestic investor would. Significantly, that definition opens up the possibility that foreign investors may only need to obtain an Investment Certificate (IC) once to establish an FIE, and then use that FIE as a holding company for many domestic companies, assuming each of those domestic companies has less than 51% foreign ownership. That structure allows joint venture groups to operate many different domestic companies in various industries, including those that were previously reserved for local Vietnamese investors.

The possibility of establishing a company without having a specific project requiring an IC would popularize the concept of a holding company, which has not yet been widely recognised in Vietnam. Moreover, under this new legal regime, special purpose vehicles (SPVs) can be established to acquire assets or projects in Vietnam without having to enter into a joint venture or acquire assets in a local company, thereby significantly reducing transaction costs.

Abolition of investment certificates for M&A investments

Previously, when a foreign investor or an FIE (at least 51% foreign ownership) conducted an M&A transaction into conditional investment projects or, as a consequence, ended up holding more than 51% equity of a target, then such M&A activity had to be registered with the local department of planning and investment (DPI) where the target was located (so-called Registration requirement). If these conditions are absent, M&A activity may be conducted solely under the LOE, thereby avoiding the requirement of obtaining an IC to close the M&A deal, which was the most troublesome condition under the former law.

Even when registration is required, the registration process will be simple and straightforward and must be reviewed within 15 days from submission. This change, together with the redefinition of foreign investors discussed above, will greatly streamline the process of M&A investments.

Reduction of 65% majority vote to 51% and 75% super majority to 65%

Vietnamese laws require at least 65% (or 75%, as the case may be) of voting rights for a joint stock company (JSC) to pass a resolution. These voting thresholds (65% and 75%) are referred to as majority voting and super majority voting, respectively. In other countries they are 51% and 65%. Now the LOE brings Vietnam’s regulations back in line with the rest of the world. With respect to a limited liability company (LLC), the default majority rule is 65% “unless otherwise provided by the Charter”. That effectively means a simple majority voting in an LLC could be as low as 50.01% if the charter so stipulates.

The quorum required for a board meeting for limited liability companies or joint stock companies will be reduced from 75% to 65%. While this change may not affect existing companies with their current charters, depending on how those charters were drafted, it opens up opportunities to renegotiate the charter for the benefit of the shareholders, as well as allowing more investors to buy shares in a company. Foreign investors will no longer be surprised when dealing with Vietnamese law.

Derivative actions – A boost for minority shareholders and private equity

Although the former LOE introduced the concept of fiduciary duty, it did not provide for an implementation mechanism to protect minority shareholders if the fiduciary duty was violated. For the first time, the new LOE introduces the concept of derivative actions, which allows shareholders holding at least 1% of the total shares to launch derivative actions against board members, directors and controllers for violating their duty to put their own interests before the company’s interests, and the duty not to abuse powers. The maker in Vietnam, and its manufacturing facilities and distribution network. Mondelez has an option to buy the remaining 20% of the business a year after the completion of the initial deal, which is expected to close in the second quarter of 2015.

Global Emerging Markets (GEM) to invest US$ 80m in Hoang Anh Gia Lai Group (HAGL)

In early November 2014, GEM undertook to invest US$ 80m in HAGL. GEM plans to acquire 10% of HAGL shares from existing shareholders within three months. The deal comes with a seat for GEM on HAGL’s board of directors and GEM’s support for HAGL to list its shares on the United State bourse.

HAGL is diversifying its business into agriculture, real estate, energy and mining. It is one of a few Vietnamese corporations that can access international financial markets via global depositary receipts listed on the London Stock Exchange and bonds issuance in the Singaporean market.

Telecom, textile and airline SOEs offered to the public

For the first time, an SOE in the telecommunications sector is offered to the public. It is Vietnam Mobile Telecom Service (MobiFone), the second-largest mobile network operator in the country with a 21.4% market share. 80% of its shares are being put up for sale later in 2014. In 2013, Vietnam’s growing telecommunications sector brought in an approximate US$ 9.9bn in revenue.

Vietnam National Textile and Garment Group (Vinatex) will sell 49% of its stake to the public. What makes Vinatex attractive to foreign investors in that Vietnam’s textile and garment industry is expected to be one of the biggest beneficiaries if the country becomes a member of the Trans-Pacific Partnership. Overall, the industry is anticipated to reap US$ 30bn and US$ 55bn in 2020 and 2030 respectively, which is a significant growth in comparison to 2014, with an export value of US$ 20bn.

Vietnam Airlines is the only major Southeast Asian carrier not currently publicly listed. This will not be true by the end of 2014, since Vietnam Airlines is on track for a second-quarter 2014 IPO. However, only 25% to 35% of the shares will be offered. The airline operates 39 domestic and 52 international routes with 83 aircraft. In 2013, it earned US$ 3.4bn revenue with a profit of US$ 25.3m.

What’s new in 2015

In November 2014, the National Assembly of Vietnam passed new regulations for enterprise, investment and residential housing. These new regulations are expected to create a new wave of foreign investment into Vietnam. They are new Laws on Enterprises (LOE) and on Investment (LOI) and an amendment to the Law on Residential Housing (LORH), which were adopted in November 2014 and will take effect as of July 2015. While the LOE and LOI may create a general hope for a new wave of foreign investment in Vietnam, the LORH excites the foreign developer as the law relaxes the hurdles for foreign ownership on housing. Below we would like to highlight the most important changes in these laws.

Concept of foreign investors redefined – the 51% test

In the past, a foreign-invested enterprise (FIE) with foreign ownership of less than 51% would still be regarded as a foreign company even if the FIE was established in Vietnam. Under the new LOI, foreign investors are only those who are established abroad, or if foreigners own 51% or more of a locally incorporated company. This is an important principle, because if an FIE is treated as a domestic investor, it will enjoy same national cost of the derivative action will be borne by the company. This can be considered good news for private equity funds or minority investors, who currently hesitate to participate in equalisation programs of state-owned enterprises (SOEs), because the major shareholders will be the Government or a relative of the SOE’s incumbent managers.

Nevertheless, the reform in the LOE should go hand in hand with the reform to the Civil Procedural Code to enable derivative actions to be fully recognised, unless the charter allows such actions to be arbitrated.

More relaxed housing regulations for foreigners

Early in 2009, a scheme for foreigners to purchase and own residential houses in Vietnam was piloted. Accordingly, each foreigner, including foreign organisations and individuals, is only allowed to buy one apartment. To do so, the foreigner must satisfy a series of hard conditions such as long-term investment, management position, making a contribution to Vietnam, having a university degree or knowledge or special skills that Vietnam needs, being married to Vietnamese citizen, and so on. Additionally, the individual must meet conditions that they are allowed to reside in Vietnam for 12 months or more, and with the organisation, and its investment certificate is valid for one year or more. Therefore, in practice little was achieved with that scheme, as only approximately 126 foreigners have successfully purchased an apartment from 2009 till now.

Now, the LORH provides favourable conditions for foreigners to purchase and/or own a house in Vietnam. The government hopes that the new regulations will attract more foreign investment and develop the real estate sector. The most outstanding change in the amendment Law is the abolition of the restraint on the number and type of houses that can be owned by the Vietnamese overseas. The LORH also loosens the conditions applied to foreign individuals and organisations for owning an apartment or individual house. Provided that they are permitted to enter Vietnam, the foreign individual is entitled to house ownership. Foreign organisations, which are not real estate developers, may also purchase and own houses for residency of their staff. Accordingly, foreign invested enterprises, branches and the representative office of the foreign invested enterprise, foreign investment fund, and branches of the foreign banks operating in Vietnam, may purchase and own houses.

Together these group represent a huge demand on real estate property. At the initial stage, these changes may be expected to resolve the issues of real estate bad debt and inventory. But in the far future, these changes should promote a stable development of the real estate market.

The year ahead

The government has vowed to privatize 432 SOEs up to the end of 2015. This excites foreign investors since it opens the door for investment in industries dominated by the state, including telecommunications. M&A in banking is also anticipated to be active, due to loosening the restrictions on foreign investors in this sector, together with the large number of failing commercial banks that are expected to undergo restructuring. In tandem with these factors, a more business-friendly environment is likely to be created in 2015 upon the reform of the legal framework in 2014. We have a positive outlook for the M&A market in 2015 as well as during the so-called second wave of M&A in Vietnam from 2014 to 2019. Experts estimate that M&A activities in this second wave may reach approximately US$ 20bn in value.