Crystal ball-gazing future M&A trends
Crystal ball-gazing future M&A trends
Predicting future market trends is not a perfect science. However, KPMG Vietnam’s senior advisory manager Le Hoang is picking the next five years to deliver some exciting deals to revamp the business environment.
OVERVIEW OF THE VIETNAMESE M&A MARKET
The M&A market in Vietnam has experienced somewhat of a rollercoaster ride over the last several years. Despite the global financial crisis and domestic issues including high inflation, lower GDP growth rates, SOE productivity challenges, a fluctuating real estate market and significant non-performing loans in the banking sector, the M&A market saw increased activity. The number of M&A transactions, and the total value of transactions, increased sharply from 94 transactions with a total value of $1 billion in 2008 to 275 transactions with total value of $5.2 billion in 2012. This was, in part, due to a number of large transactions such as Mizuho acquiring a 15 per cent stake in Vietcombank for $567 million, Bank of Tokyo-Mitsubishi UFJ acquiring a 20 per cent interest in Vietinbank for $743 million and Sumitomo Life buying an 18 per cent stake in Bao Viet for $340 million. The higher lending rates and the credit tightening policy adopted by the government in 2011 and 2012 to combat high inflation also encouraged local companies to seek equity financing and to engage in M&A related activities rather than relying on bank financing. The more reasonable valuation of assets in 2011 and 2012, which was demonstrated by the lower VNIndex, was also a reason for the increased appetite for M&A in these years.
2013 signaled the slowdown of the M&A market with a total transaction value of only $2.4 billion for the year. There were many reasons for the slow down including the banking system’s ongoing issues, the slower global economic recovery, the slower domestic GDP growth and the lower level of domestic consumer confidence, but the main reason was a shortage of able and good quality assets for sale in Vietnam. There were 249 M&A transactions in 2013, a bit lower than the 275 transactions in 2012 and higher than the 229 transactions in 2011, but the total value was just $2.4 billion in 2013, compared to $5.2 billion in 2012 and $4.7 billion in 2011, meaning that the average transaction value in 2013 was much smaller than those in the two previous years.
The trend can be seen even more clearly in the first seven months of 2014 with only 67 M&A transactions being closed with a total value of approximately $200 million. The recent disputes in the East Sea with China, while adversely affecting the M&A appetite of investors from China and Taiwan, has not been a major factor in the year to date slowdown and neither China or Taiwan had been particularly active in the M&A market in Vietnam even before this year. The main reason for the continued slowdown has again been a lack of able quality assets for sale at reasonable prices.
During the period from 2008 to now, Japanese, US and Singaporean investors were the three largest players in the M&A market in Vietnam in terms of both the number of deals and the value of the transactions. While most investors from Japan have been strategic (industrial) investors who acquired interests in Vietnamese companies with a long term objective of participating in domestic growth in Vietnam, a large part of the US and Singaporean investors were financial investors, such as private equity firms, who tend to invest on a shorter term horizon.
Regarding sectors of interest, financial services, consumer goods and manufacturing have been the most attractive sectors for M&A activities in Vietnam. Although the absolute number of M&A transactions in the real estate and retail sectors has been small, it is observed that the number has been increasing and is expected to grow in the coming years.
MARKET OUTLOOK 2014-2018
Just as the shortage of quality and able assets for M&A in 2013 and the first half of 2014 largely explains the recent slowdown in M&A activity, an increase in the supply/availability of quality assets would help the M&A market to recover in the coming years or, as some people refer to it “The second M&A wave”. The forthcoming privatisations of SOE corporations, signified by Decree 15/NQ-CP issued in March 2014, will make available a number of able quality assets for M&A such as Vietnam Airlines, Vinatex, Mobifone and Satra. At the same time, the value of transactions into already-privatised SOEs such as PV Gas and BIDV, which are looking for strategic investors, could also be substantial.
The pending approval for the loosening of the foreign ownership limit in public companies (currently 49 per cent) and in financial institutions will not only make several quality assets available for M&A to foreign investors, but also increase liquidity and make it easier for foreign investors to exit, increasing the overall attractiveness of assets in Vietnam. Because there could be many legal and commercial implications of loosening the limit, the timing for the approval is still uncertain. In the longer-term, however, the loosening of the ownership limits may be difficult to avoid.
Vietnam’s participation in the TPP represents a significant opportunity for a number of industries in the country such as garments, furniture, seafood and agricultural products to grow through increasing export to TPP members, notably the US, Japan, Australia and Canada. Foreign investors have increasingly shown interest in acquiring assets in these sectors in Vietnam to benefit from the growth brought by Vietnam’s participation in the TPP.
The banking system consolidation and the merger of domestic companies to strengthen their competitiveness in the face of the opening up of the local market to the global market is also another impetus for the “second wave”. An example for this is the acquisition of Ninh Hoa Sugar (NHS) by Bien Hoa Sugar (BHS) to take advantage of each others strengths, the low cost of inputs of NHS and the brand name and extensive distribution network of BHS, to be able to compete when the import quota of sugar is removed in the near future. We will likely see more such cases in the coming years in a number of other sectors.
The second wave will also be supported by improvements in the global economy, especially in Japan and the US, the two most important M&A players in Vietnam besides Singapore; the increasing appetite for foreign assets by regional conglomerates and tycoons, and the booming global M&A activities since early 2014, which hit $1.7 trillion in the first half of 2014, a 50 per cent increase compared to 2013.
Talking about Japan, the outbound M&A growth in recent years by Japanese companies is expected to remain in coming years, supported by the growth of the Japanese economy and stock market, and the availability of cash and financing for Japanese companies brought by Abenomics, although this may be somewhat offset by a weakening Yen. Vietnam has been identified as a favorite M&A destination in Southeast Asia by Japanese companies. With deep pockets, Japanese corporations have been willing to pay attractive prices for their M&A targets. On the other hand, Vietnamese targets normally favour Japanese companies due to the long term view and the professionalism of Japanese buyers. In addition, the growing numbers of Japanese companies doing business in Vietnam will attract further Japanese companies to invest through M&A activities.
While the second wave (2014-2018) will be likely, whether it would be more robust than the first one (2008-2013) with the total transaction value estimated at $15 billion, will depend on numerous factors, of which the most important is the effective execution of the privatisation policy of the government until 2015 and beyond. It is estimated that if privatisation moves ahead as planned, and given no big or unexpected events increase the risk or reduce the attractiveness of investment in Vietnam, the second wave could be significantly stronger than the first.
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