Following a muted 2018 and first half of 2019, experts are pining for a new surge in state divestments and equitisations, buoyed by new regulatory frameworks.

Earmarking major SOEs for equitisation may revitalise the M&A market.
(Photo:VIR) 

As the market enters the second half of 2019, efforts to push state withdrawals and first-time sales of state-owned enterprises (SOEs) are picking up speed. This is considered very important to drum up interest in Vietnam’s mergers and acquisitions (M&A) market, which depends on the availability of companies being put on sale.

At last week’s Vietnam M&A Forum in Ho Chi Minh City organised by VIR and AVM Vietnam, policymakers and industry experts talked at length about legal reforms that can push the M&A market forward.

Dang Quyet Tien, head of the Corporate Finance Department at the Ministry of Finance (MoF), said that new regulations have been introduced, including Circular No.21/2019/TT-BTC dated April 11, 2019, providing a framework for book building. The method, which gauges investor interest and purchase power prior to a transaction, is particularly helpful when it comes to major auctions that involve foreign investors.

Moreover, from May 2019, overseas investors are allowed to make a deposit in foreign currency when they sign up for SOE auctions, according to Circular No.03/2019/TT-NHNN dated March 29, 2019 on restricting the use of foreign currencies. This applies to both first-time sales of SOEs and state divestments, and the transaction can be carried out at all approved banks.

“We’re addressing these issues in the revised Law on Securities,” said Tien. “We’re also revamping the process of hiring valuators for M&A transactions, most notably on the issue of land usage. Not stopping there, before 2025 we will require major companies in Vietnam to use international standards in financial reporting.”

Last month, the Ministry of Planning and Investment released a new list of 93 SOEs that will be put up for equitisation and state withdrawals. These SOEs are expected to finalise their sales by the end of 2020, including major names such as Agribank, VNPT Group, Vietnam Northern Food Corporation, and Vietnam National Coal-Mineral Industries Group (Vinacomin). 

At the same time, State Capital Investment Corporation (SCIC) also issued names of 108 SOEs that it hopes to sell the stakes of this year, many of which were delayed from previous years. Notable companies include Bao Minh Insurance, Vietnam Vegetable Oils Industry Corporation, Lam Dong Pharmaceutical, Licogi, and Vietnam Book. 

It is hoped the lists will drum up attention on the SOEs, after the market went through a lull in the first half of 2019, which affected the vibrancy of Vietnam’s M&A market. According to experts, market conditions in the past six months were not supportive, marked by strong volatilities in the VN-Index and negative external forces such as the ongoing US-China trade war, as well as regional uncertainties.

When asked about the delays that are plaguing SOE equitisation in Vietnam, SCIC deputy general director Le Song Lai explained that the state investor wants to follow international standards, and improve transparency. Companies also want foreign investors with experience in their field, which also delays the process.

Last month, major SOEs such as VietinBank, MobiFone, PetroVietnam, Agribank, and BIDV joined the MoF in an investment promotion conference in London, following similar events in the United States, Japan, and South Korea in previous years. As part of the trip, the Ho Chi Minh City and Hanoi stock exchanges signed a partnership agreement with their London counterparts in order to develop new financial products including derivatives.

 Efforts to push Vietnam’s M&A market via SOE divestments are clear, but investors and experts at the Vietnam M&A Forum continued to voice their concerns about the success rate of these deals.

Specifically, interest groups and some SOE leaders are reluctant to let go of their lucrative business or their powerful position. To welcome investors in M&A deals through SOEs, Vietnam should make sure that illicit agreements will not take place, because they put the transaction value at a significant discount to the SOE’s real worth.

Tien from the MoF acknowledged that information disclosure remains an issue at Vietnamese SOEs – partly because of differences between Vietnamese accounting standards and the International Financial Reporting Standards. The lack of quality information can discourage investors from doing M&A with the companies.

 Another sensitive issue, according to banking expert Can Van Luc, is the valuation process of SOEs’ land usage. Previous scandals on the improper use of land, such as Vinafilm Film Studio Corporation in Hanoi and Sabeco in Ho Chi Minh City, also require SOEs to be more careful with how they evaluate the massive amounts of land under their control. Specifically, new regulations state that SOEs must now take into account their land-use rights, preventing any under-valuation of the company.

 In general, pricing is a bone of contention for Vietnamese SOEs, which the book building method aspires to solve. Partnership deals between Vietcombank and Singapore’s sovereign wealth fund GIC, or BIDV and South Korea’s KEB Hana Bank, were postponed for a year due to disagreements on pricing.

 State divestments and equitisations in Vietnam are usually delayed due to various factors, including unfavourable market conditions. In contrast, some deals are carried out in such a hasty manner that foreign investors did not have time to conduct due diligence or negotiate pricing.

The research team for the 2019 Vietnam M&A Forum also pointed out the discrepancies between Vietnamese and international accounting standards and practices. The differences make it difficult for foreign investors to assess the financial health of SOEs prior to an M&A deal.

“Cultural clashes and language barriers between SOE leaders and foreign investors can break an M&A partnership. Many SOEs also have a slow adoption of Industry 4.0 technologies and low productivity. These issues should be looked at if we want a more robust M&A market in the coming years,” wrote the researchers.