With a raft of free trade agreements on the way, a checklist of equitisations, and new legislation in place to support foreign investment, a new wave of M&As are forecast to sweep across Vietnam. Oliver Massmann, general director of Duane Morris Vietnam LLC, considers some of the likely outcomes.
The 2005 Law on Investment and Law on Enterprises laid the foundations for a new Vietnamese investment regime, and created a level playing field for foreign and local investors alike. Ever since then, the legal framework for the M&A sector in Vietnam has been developing at a rapid pace.
Currently, apart from some limitations under both Vietnamese law and Vietnam’s WTO commitments, foreign investors can freely acquire shares in Vietnamese enterprises. At present, a new wave of M&As is set to hit Vietnam, as the country is once again highlighted as an attractive investment market. The primary investors have been from Japan, Korea, Taiwan, and recently from other Asean member countries, particularly Singapore and Thailand.
Once the Trans-Pacific Partnership (TPP) and Free Trade Agreement between the EU and Vietnam (EVFTA) – which are now in their final rounds of negotiation – are concluded, they may also drive more interest in M&A activities in Vietnam.
The recent development of the 2014 Investment Law and Enterprise Law has highlighted the determination of the Vietnamese government to ease M&A procedures and set in place a regulatory framework to re-ignite M&A activity in Vietnam.
Recent M&A deals
M&A activities in Vietnam witnessed a steady growth after Vietnam officially became a member of the WTO in 2007. Vietnam saw its first M&A wave in the period between 2008 and 2013, with a reported total value of $15 billion. In 2012 alone, Japanese investors made about $1.2 billion worth of deals in Vietnam. Indeed, in terms of both quality and value, Japan is the leading nation bringing M&A deals to Vietnam. Their efforts in this regard helped Vietnam’s M&A market reach a peak of $5.1 billion in 2012.
According to statistics from Capital IQ, there were 92 successful M&A deals in 2008, 308 deals in 2012, and 182 deals in 2013. Fast-moving consumer goods is considered the most attractive sector, with the total M&A transaction value up to $1 billion, accounting for 25 per cent of the total M&A value in Vietnam. Of course, the retail and real estate sectors have always been robust sectors in M&A with big deal value.
Vietnam’s M&A market saw a strong uptrend in 2014 with six deals reportedly made every week. In total, 313 M&A deals were made in 2014, with a value of $2.5 billion, a 15 per cent increase compared with the previous year.
The most notable deals in 2014 include Vingroup, one of the biggest domestic private companies in Vietnam, acquiring 70 per cent of Ocean Retail Company’s capital; Mondelez International acquired 80 per cent of Kinh Do Joint Stock Company’s capital in their sweets manufacturing section at $370 million; and Standard Chartered Private Equity acquired a significant minority stake in An Giang Plant Protection Joint Stock Company at $90 million. The business community are hopeful that the total value of M&A deals could reach $20 billion during the second wave between 2014 and 2018.
Good news for M&As in Vietnam
Starting from July 1, 2015, foreign investors will not need to undergo lengthy investment certificate procedures when buying stakes in Vietnamese target companies. While this remains to be seen, the change, introduced by the new Investment Law, will hopefully end years of uncertainty and frustration faced by foreign investors eyeing Vietnam market entry or expansion via M&A.
We have seen a strong increase of interest from international investors, especially in the last months of 2014, and continuing into 2015. The TPP (which includes the US and Japan), the EVFTA as well as tariff reductions under the Asean Economic Community (AEC) are all scheduled for this year. These will increase market access for foreign investors in Vietnam and lower barriers to trade in goods and services.
Why is the investment certificate question so important?
Under current law, Vietnam has different licensing procedures for foreign and domestic investors. The Investment Certificate (IC) serves as a business registration for foreign investors. In practice, despite a 45 day maximum statutory time limit, the IC process can take four to six months or longer, while domestic business can be registered within a day.
Under the new Investment Law, the IC is replaced by an “investment registration certificate” (IRC) and an enterprise registration certificate (ERC). Obtaining ERCs should be straightforward, as they only contain basic business info and also apply to domestic investors. The IC process is due to take just 15 days, while ERCs are scheduled to be issued within three working days. The process may be longer in practice but it is better than before in terms of a clear application of time frame.
Explicitly, no IRC for M&A activity!
Foreign ownership in public companies, including listed companies or companies with 100 shareholders or more, and with a contributed equity of VND10 billion or more, cannot exceed 49 per cent. Although in principle enterprises with foreign ownership of up to 49 per cent are entitled to the same treatment as local companies, such rules appear to be disregarded in practice. For example, the Department of Planning and Investment (DPI) of HCM City refused to register the distribution of pharmaceutical products of a local company on the grounds that 4.3 per cent of its shares were then held by foreign investors. It is therefore very difficult for foreign investors to conclude an M&A deal.
Now, the new Investment Law expressly provides that no IRCs will be required for acquisitions of target companies. As a result, the time needed to complete purchase of stakes in Vietnamese entities is expected to be reduced tremendously. Buying into public companies listed on the Vietnamese stock exchanges will not require an IRC either, but foreign ownership of listed companies is still capped at 49 per cent (and maximum 30 per cent for financial institutions). Rumours have long abounded that the caps will soon be raised but, until that day, investors will need to buy unlisted companies to take control.
Provincial departments of planning and investment (DPI) will still have to “register” (read: “approve”) plans to acquire a majority of a target or stakes in a company that is active in a “conditional” sector. Conditional sectors for foreign investors include construction, urban planning, and education (Annex 4, new Investment Law). In practice, DPI officials have broad discretion to approve applications, but they should need much less paperwork then for an IRC application.
In addition, the business registration office will have to update ERCs to reflect changes in an unlisted company’s ownership, statutorily, in three working days.
New waves of M&A?
With positive changes brought about by the new Investment Law, together with a significant equitisation target of about 368 state-owned enterprises in 2015, the conclusion of the TPP and EVFTA as well as the formation of AEC by the end of this year, Vietnam will witness another wave of M&A. Banking and finance will attract main foreign investment as the number of commercial banks are required to be reduced to 13-15 in 2017, and smaller banks under the pressure of competition and capital requirements will look for new foreign investors to achieve expansion. In addition, consumer goods and real estate also remain attractive sectors.