M&As become the path of choice for investors

Vietnam’s development record over the past 30 years is remarkable. Economic and political reforms under the Doi moi policy, launched in 1986, attracted foreign investment to the country, which in turn led to sustained GDP growth reaching an average of 6 per cent annually and deeply transformed Vietnam. It is now one of the fastest-growing economies of Southeast Asia. Foreign investors are particularly attracted by low manufacturing costs and an emerging middle class in the national population.

This economic momentum is served by the willingness of Vietnamese authorities to develop an efficient market economy, which is reflected in the attractive tax rates for companies in some sectors and the (quasi) elimination of import/export trade barriers and tariffs against ASEAN nations and other countries, such as Japan, China, and South Korea. Vietnamese authorities remain eager to further open the national economy to foreign investment, as evidenced by Vietnam’s active role in the negotiations on new-generation free trade agreements, such as the much-anticipated free trade agreement with the European Union, the EUVFTA, which should enter into force in 2019.

As such, Vietnam offers a good business environment for the development of merger and acquisition (M&A) transactions. The number of M&A transactions as well as the volume of such transactions has consistently increased in recent years.

Examples of significant M&A deals in Vietnam

Foreign investors increasingly opt for M&A transactions as the right approach to enter the Vietnamese market or to expand their business. The value of M&A operations in Vietnam has turned a corner in recent years, as shown by the acquisition of Big C Vietnam – then a Vietnamese business of Groupe Casino – by Thai conglomerate Central Group, for an enterprise value of $1.24 billion. The purchase of Metro Cash and Carry Vietnam from German Metro Group by TCC Group, another Thai entity, is also worth quoting.

2017 has been promising with some interesting deals such as ThaiBev’s acquisition of a 54 per cent stake in the Saigon Beer, Alcohol, and Beverage Corporation (Sabeco), which was the largest transaction of the year with a value of $4.8 billion.

Other noteworthy deals include Shinhan Bank acquiring ANZ Vietnam’s retail division for $240 million, SCG acquiring 100 per cent of VCM for $156 million, Kohlberg Kravis Roberts acquiring a 7.5-per-cent stake in Masan Nutri-Science and a 4.2-per-cent stake in Masan Group for a total deal value of $250 million, Earth Chemical acquiring A My Gia for $89 million, and China Fortune Land Development acquiring Dai Phuoc Lotus at $64 million.

Key sectors for FDI in Vietnam

Retail, consumer goods manufacturing, and real estate are commonly considered sectors in which M&A activity has been the strongest in recent years.

As a matter of fact, real estate appears to be one of the most attractive sectors for foreign investors, thanks to public incentives. Indeed, the government is prioritising infrastructure development such as residential, offices, retail, hotel, and industrial parks, which have seen increased investment from foreign investors from Japan, South Korea, and Singapore.

Foreign investors in the real estate sector usually prefer joint ventures rather than acquisitions, as local players have land assets and are well connected with local authorities, while foreign investors have the much-needed capital and technical expertise.

In addition, the Vietnamese government has recently made significant new efforts to accelerate the equitisation and divestment of its state-owned enterprises (SOEs), which will undoubtedly create many more opportunities for foreign investors.

The Ministry of Planning and Investment published an SOE divestment plan until 2020 with divestment plans for Petrolimex – the country’s biggest petroleum distributor, from which the state will divest a 24.9-per-cent stake – but also the Airports Corporation of Vietnam (ACV), Vietnam Engine and Agricultural Machinery Corporation (VEAM), and Vietnam National Textile and Garment Group (Vinatex).

In 2017, the Vietnamese state’s investment arm, SCIC, divested 9 per cent of its capital from Vietnam Dairy Products JSC (Vinamilk), a leading dairy producer in Vietnam, with annual turnover in 2016 of about $1.7 billion.

In May, the government approved a blueprint for SOE restructuring for the 2016-2020 period, under which the government aims to equitise 137 more SOEs by 2020, most of which are large-scale entities.

These figures are expected to increase further in 2018, as many foreign investors try to position themselves in Vietnam in order to benefit fully from the free trade agreements expected to enter into force this year, leading to a simpler and more efficient legal framework for foreign investment in Vietnam.

Legal framework for investment

Vietnamese regulations for foreign investors are based on two main laws dated November 26, 2014: the Law on Enterprises (LOE) and the Law on Investment (LOI), which entered into force on July 1, 2015.

These laws represent significant milestones in the development of the legal framework for M&A activities in Vietnam. The implementing legislation issued pursuant to these new laws has also contributed to the simplification of the applicable administrative and regulatory procedures in Vietnam. The laws have brought clarity on a number of questions unresolved under the previous legal framework.

The LOI notably provides a definition of the foreign-invested companies deemed to be foreign investors in Vietnam – and consequently subject to the same conditions as foreign investors in Vietnam. Companies deemed to be foreign investors are (a) companies in which 51 per cent or more of the charter capital is held by foreign investors; (b) companies in which 51 per cent or more of the charter capital is held by companies referred to in point (a); and (c) companies in which 51 per cent or more of the charter capital is held by foreign investors and companies referred to in point (a).

Indeed, the regulations require foreign investors to apply for two different certificates to establish a company in Vietnam: first of all, an investment registration certificate (IRC), issued by the competent investment agency – this is most often the Department of Planning and Investment of the relevant province or city under central authority – and thereafter an enterprise registration certificate (ERC), which serves as the incorporation certificate and is issued by the Business Registration Office under the same Department of Planning and Investment.

The LOI also defines a framework for M&A transactions, allowing foreigners to invest in existing domestic companies either by way of acquisition of shares or contribution to charter capital. Such an investment does not require the foreign investor to apply for any IRC, but the investment must be registered if it is made in a conditional business sector or if it results in the foreigner owning more than 51 per cent of the share capital.

Thanks to this new legal framework, investors are more likely to commit capital in the Vietnamese market, which is evidenced by the growing number of M&A deals occurring lately in the country.

Although the legal framework has improved with the LOE and LOI, it is important to note that Vietnamese legislation includes restrictions in a number of sectors, notably including the retail sector. The LOI lists more than 200 conditional sectors related to national defence and security, social order and security, social ethics, or public health. The specific requirements applicable to each conditional sector are detailed in corresponding regulations. Relatively few sectors are still facing a cap on the ratio of foreign ownership, for example the banking sector – capped at 30 per cent for the acquisition of Vietnamese commercial banks – or the logistics sector. The authorities will also fix a cap for foreign shareholding regarding SOEs in the process of equitisation. Despite these remaining restrictions, the trend remains to further liberalise the economy.