Mergers and acquisitions would continue in Vietnam this year, with interest among Japanese, South Korean and other Asian investors remaining very high, Stephen Gaskill, deputy general director of advisory and auditing firm PricewaterhouseCoopers Vietnam (PwC Vietnam), tells Vietweek.
Vietweek: 2011 was an eventful year for mergers and acquisitions (M&A), especially in banking and real estate. Will the trend continue this year?
Stephen Gaskill: 2011 was an eventful year for the economy and in particular for the two sectors highlighted. However, in terms of reported M&A, we did not see a great deal of activity in either sector. The major deals were Japanese bank Mizuho's purchase of a 15 percent stake in Vietcombank and Commonwealth Bank's purchase of another 5 percent in Vietnam International Bank.
However, in 2012, we would expect to see a lot more activity in the banking sector as smaller players either voluntarily merge, are subject to forced mergers, or are acquired by the stronger banks.
We also expect to see further proposed acquisitions of minority stakes in local banks by foreign banks. In all cases, these deals take time to develop and to close and we may not therefore see significant numbers of closed deals by December 31, since many will spill over into 2013.
In the real estate sector, the combined difficulties for developers of extremely high interest rates and a slowdown in demand for houses and apartments, especially in the south, forced many to exit projects and refocus on those assets which were already operating or were at an advanced stage of completion. Many foreign companies are now watching the market closely, hoping to pick up distressed assets at relatively low prices compared to those seen over the past five years and hence further activity in this sector is likely in 2012.
In general, the trend in 2012 observed by PwC has been for ongoing high levels of M&A with interest from Japanese, South Korean, and other Asian investors still at very high levels.
M&A could attract more interest from foreign investors because it is a good time to buy Vietnamese assets at low prices due to the economic recession?
Stephen Gaskill, deputy general director of advisory and auditing firm PricewaterhouseCoopers Vietnam.
Prices are more reasonable than in the past, but we would not say they are low at present with many deals being done at earnings multiples of 10 to 20 times. However, these multiples are lower on average than we observed in 2007-2008, and are more in line with or even lower than those in the rest of the region including China.
The cost of borrowing from the banks has meant that vendors are more willing to be flexible on pricing in order to get deals done.
We have also noted that vendors are more flexible than in the past in terms of selling a majority equity stake in their businesses as some entrepreneurs are finding it difficult to take their business to the next level or simply choose to cash out by selling to other foreign and local investors.
At the same time, the slowdown in the economy and the current high interest rates has led to some distressed sales with certain companies no longer able to access sufficient funding at the right levels to support the ongoing operations of their business.
Many securities companies want to sell stakes to foreign investors or investment funds. Can they do it this year?
There are too many securities companies in Vietnam, and, as with the banking sector, there is a need for consolidation, which has been recognized for some time. The brokerage market is very small. With approximately 100 securities companies in existence, many of these entities have a very small number of regular customers and rely instead on proprietary trading and other activities for their revenues. The situation is unsustainable and clearly a number of these companies are suffering losses accordingly. We therefore believe that a significant proportion of these companies will disappear over the next few years either through liquidation or merger with other domestic companies.
Interest from overseas is not so strong at present since again many of the companies looking to sell equity do not have a strong and sustainable platform for their business. We would only expect a small number of deals involving foreign buyers in 2012 therefore.
What are the concerns of foreign investors in Vietnam?
Many investors are concerned over poor corporate governance at Vietnamese companies as well as poor financial record keeping. This makes the process of due diligence and getting comfortable with the financial and legal position of the target company extremely difficult and raises concerns for minority investors over what level of influence they will be able to wield post-transaction.
Contingent liabilities such as unprovided potential tax liabilities are frequently a concern also along with poorly drafted legal agreements which leave target companies heavily exposed and which leave potential investors very uncertain as to the trading and legal position of the targets.
Investors look for as much certainty as possible when concluding a deal and hence if sellers can clean up both their accounting records and their legal documentation it is likely to lead to more M&A deals and a shortened average period for deal execution in Vietnam.
Is it right to say foreign firms are interested in M&A in Vietnam but cannot find local companies big enough to invest in?
Certainly there is a lack of sizeable targets in Vietnam, especially in the fast-moving consumer goods (FMCG) sector, which is of huge interest to companies outside of Vietnam, and this affects both deal volumes and values.
Many large international private equity funds are looking for minority or majority stakes with a minimum value of US$20-25 million, others look at minimum deal sizes of $50-100 million and this means that their target list is very short in Vietnam.
For corporate investors looking for a shortcut to accessing the market, size is also important since they are often looking for a strong distribution network, a fairly high market share, and growing sales which generally translate into a larger company with a relatively high valuation. Vietnam has yet to go through significant local consolidation in any sector and hence many companies are young and relatively small.
What should Vietnam do to create a good M&A market?
An acceleration in the speed of equitization of some of the larger state-owned companies would certainly lead to an increase in M&A activity since one of the key issues facing interested investors is the lack of targets of a suitable size.
Many large private equity firms and strategic investors look for a minimum deal size of $20 million upwards, some even as high as $100 million hence a significant proportion of the Vietnamese private companies are too small to attract interest.
The state-owned companies are generally going to be larger in size and therefore may attract significant interest from overseas. The other issue potentially inhibiting M&A is the cap on ownership in certain business sectors and the 49 percent cap on foreign investment in public companies.
Ultimately, stabilization of the economy, which has been achieved to a large extent already, will be critical to attracting foreign buyers since there has been considerable concern over the past year amongst investors over the high inflation and interest rates and the prospects for the economy going forward.