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|Prime Minister Nguyen Xuan Phuc met with leaders of state-owned enterprises last week to find solutions to boost their equitisation process|
Major investors’ concerns
While there is significant interest by strategic investors to participate in the equitisation of various SOEs, investors have concerns:
- Clear and transparent process: Investors want comfort that they will be investing time and resources with a strong possibility of closing a transaction.
- Access to quality information: To convince investment committees or boards they need the right information on a timely basis.
- Ability to participate in management: A key focus of investors is to enhance the value of SOEs as well as reduce risks of investing in a developing country. They would therefore need some form of control over the business.
- Rights of strategic investors: Ability to have veto rights on special issues, especially on the business direction of companies.
- Valuation expectations: Investors generally base their value of the business on the income approach as this reflects the potential future value of the company. The timing, method and process should be clear and followed throughout.
To this day, many investors still hail the $5 billion purchase by ThaiBev for 54 per cent equity of Vietnam’s largest beer producer Sabeco as a milestone transaction in several significant ways.
“Initially it had been hard to sell the company’s stake, but the sale became feasible eventually. This was because all information of Sabeco was made transparent, which had not been the case beforehand,” said Prime Minister Nguyen Xuan Phuc at last week’s conference in Hanoi on improving the operational effectiveness of state-owned enterprises (SOEs). “However, many SOEs such as Sabeco have failed to be sold over the past few years because their information is not transparent, even as many investors express interest in purchasing stakes in many of them.”
Nguyen Lan Phuong, partner of Baker & McKenzie (Vietnam) Ltd., told VIR that the sale of Sabeco “reflects foreign investor confidence, in particular ThaiBev’s confidence, in the beer consumption ability of younger Vietnamese generations and their rising disposable incomes. In the bigger picture, the deal shows two things: foreign investors are committed long term to Vietnam’s growing market, and the Vietnamese government’s prevailing policy is to divest capital in non-core industries.”
Hong Sun, vice chairman of the Korea Chamber of Business in Vietnam, told VIR that the Vietnamese government is boosting SOE equitisation, and this reflects the government’s strong will and efforts in speeding up economic restructuring.
“Many South Korean businesses are seeking to purchase stakes from Vietnam’s big SOEs, but the process proves very difficult because the enterprises that the state wants to divest capital from do not reveal any information,” he said.
“Currently in Vietnam, it is often considered sensitive for an enterprise to reveal information before its stake can be sold,” he continued. “This has made it difficult to accurately assess the potential mergers and acquisitions (M&A) partner. Thus, SOE equitisation has not met the expectations of the government.”
Recently, some Indonesian investors sought to buy stakes from major SOEs operating in the sectors of railway, oil and gas, electricity, and agriculture. They have worked with state-run Vietnam Railway Corporation (VRC) about opportunities to buy stakes from it. However, the desired results could not be reached, though VRC was planning to divest some of its subsidiaries.
“Almost no information about the equitisation of these SOEs is revealed, though we continuously hear that the government wants to divest from the firms,” an Indonesian Embassy representative told VIR.
Nguyen Viet Ha, managing director of US-backed investment consultant BowerGroupAsia Inc.’s Vietnamese office, told VIR that in almost all cases when SOEs are about to begin equitisation, investors cannot access information from these firms. Almost no material about how they operate is provided for investors, and investors are often not allowed to visit their factory.
Last week, the Ministry of Finance (MoF) reported that in the first 11 months of this year, the pace of equitisation remained very slow. Only 12 SOEs were equitised, with total value of over VND29.747 trillion ($1.29 billion), including VND15.413 trillion ($670.1 million) worth of state capital. Meanwhile, the total number of SOEs needing to be completely equitised this year is 85.
As of late this month, only 35 out of a total 526 SOEs had their restructuring schemes approved by authorised agencies.
The MoF has also announced the names of many major SOEs that failed to complete their divestment plan for 2017 as requested by the state, meaning that delays will affect plans of SOEs this year, and private investors will continue to find it hard to purchase stakes in SOEs. Those named include Vietnam Engine and Agricultural Machinery Corporation, with total value of VND7 trillion ($304.3 million), Vietnam Pharmaceutical Corporation (VND829 billion or $36 million), eight under the Ministry of Construction (VND2.4 trillion or $104.35 million), and 17 under Hanoi’s management (VND526 billion or $22.87 million).
“The snail-paced divestment and equitisation of many SOEs prevents private businesses, especially foreign ones, from purchasing stakes, meaning that competitiveness will not be able to improve,” said Minister of Finance Dinh Tien Dung.
Currently around nine deals between large SOEs and strategic foreign investors have been completed. The largest one is the Sabeco deal, followed by the 2013 deal involving Japan’s Bank of Tokyo-Misubishi UFJ acquiring 20 per cent of VietinBank’s stake for $743 million.
The remaining deals have had a small stake sold to foreign investors, such as Carlsberg’s 17.08 per cent stake from Habeco, Mizuho’s 15 per cent stake from Vietcombank, ANA’s 8.77 per cent stake from Vietnam Airlines, HSBC’s 18 per cent stake from Bao Viet Insurance, JX Nippon & Energy’s 10 per cent stake from Petrolimex, and Itochu’s 5 per cent stake from Vinatex.
Momentum for equitisation
According to the MoF, results from the operation of SOEs which were equitised in 2015 showed that, compared to the pre-equitisation period, many indexes of these enterprises significantly increased, such as pre-tax profit (49 per cent), contribution to the state budget (27 per cent), charter capital (72 per cent), total assets (39 per cent), revenue (29 per cent), and average income for employees (33 per cent).
Vietnam National Seed JSC saw its revenue rise by 20 times, profits by 40 times, total assets by 22 times, and equity by 40 times. Meanwhile, Vinamilk had its revenue augmented 10-fold, contribution to the state budget grow six-fold, and equity climb 13-fold.
Andy Ho, chief investment officer of VinaCapital, told VIR that Vietnam’s equitisation programme has gained momentum, but room for improvement remains. “We have long been part of a large chorus calling for movement on the equitisation of SOEs, and we were among the first to call for equitisations to require larger stakes to be sold, thus we are gratified that the law now requires a minimum of 20 per cent.” VinaCapital partook in two of the January initial public offering (IPO), particularly in Binh Son Refining and Petrochemical JSC and PV Power.
It is expected that PM Phuc will next week issue a directive on boosting equitisation and divestment at SOEs and enterprises having state capital in the time to come. “Responsibility of all individuals and organisations in delaying equitisation, divestment, transaction registration, and listing in the stock market will be specified. All violators will be punished,” he stressed. “We will radically deal with all SOEs and investment projects with delay and losses. Any ineffective SOEs will face bankruptcy or transfer to investors of other economic sectors.”
The government will intensify inspections over not only all SOEs and state-funded projects, but also over the heads of these enterprises about how they have obeyed state regulations about equitisation and divestment, as well as performance of their businesses.
“Periodically, all information about equitisation and divestment must be openly publicised, so that the SOEs’ performance can be supervised,” the prime minister noted.