Vietnam rejigs M&A rules to woo investment
M&A activity in Vietnam is set to get a big surge from July, as laws governing foreign investment in domestic companies will be relaxed by the government in a bid to attract more overseas investors, writes Rashmi Kumar.
The prospects of more debt and capital raisings to follow are high, but while international businesses are keen to expand their footprints in the southeast Asian country, finding the right targets will pose the biggest challenge.
Vietnam appears to be paving the way for more M&A. It is tweaking some of the rules under the Investment Law and as part of the changes, which will come into effect on July 1, foreign investors no longer need to undergo lengthy procedures to obtain an investment certificate (IC) when buying stakes in Vietnamese companies.
The IC, which is similar to registering a business, typically takes around 45 days to obtain, say legal experts. But in reality, investors wait between four to six months, or often longer, to be able to go ahead with the acquisition.
Vietnam now appears to have realised that this rule is holding back growth in the economy and is taking measures to rectify that.
“The big change now is that if a foreign investor makes an acquisition or a capital contribution into a Vietnamese company, it doesn’t require an investment certificate,” said Manfred Otto, a Ho Chi Minh City-based associate at law firm Duane Morris Vietnam. “Only if the investor makes a majority investment or invests in a company that is active in a ‘conditional sector’ will they have to register the investment with the authorities.
"But if it’s for less than 51% and not in a sector that the government deems sensitive, then they don’t need to register the investment.”
This, say market watchers, removes a big roadblock for companies eager to enter or expand their operations into the frontier economy, while also clamouring for shares in listed entities. The benefits are plenty, considering the performance of the country's capital markets in the recent past.
The Vietnam Ho Chi Minh Stock Index has returned close to 8% so far this year and it was one of the better performing indices among its southeast Asian counterparts last year. Meanwhile, the Vietnam Hanoi Exchange Stock Equity Index has made investors returns worth 3.2% so far this year, and close to 15% in the past 12 months.
The potential for growth is evident and foreign companies and investors are keen to capitalise on new opportunities, say bankers. The relaxation of M&A rules mean domestic companies will now increasingly be able to raise capital from outside Vietnam.
This could be either by form of equity raisings from overseas investors or by raising debt from international banks.
“I’m expecting more companies to seek private placements, because companies listed on the stock exchange are subject to a 49% foreign investment cap and many attractive [names] are already maxed out,” reckoned Otto.
With the new rules, there is also the possibility of more buyout situations in Vietnamese companies, which will be driven by either other international corporates or private equity funds, sources reckon. PE funds from China especially are keenly seeking outbound investment and have set their sights on southeast Asia, they say.
Not only that, but many local Chinese PE firms are starting to collaborate with their US counterparts to hunt out good opportunities in Vietnam.
“The country is pretty welcoming,” said a Hong Kong-based ECM banker. “And they seem to be taking slow but steady steps in opening themselves up. People are starting to not rely just on China for business and when they look at diversifying in southeast Asia, Vietnam offers a good enough solution.”
Buyout situations also mean that the need for loans will arise, which is where Japanese banks are likely to reign supreme. Otto reckons that because the funding costs for Japanese banks are very low, they are interested in lending more, especially to Vietnam.
Japanese banks are also keen to follow the country's corporates into Vietnam as they can then lend money at higher rates for overseas operations.
Potential sectors that will be attractive to investors include food and beverage, retail and agriculture, as well as infrastructure, real estate and power plants.
But while investors are keen to jump on board the Vietnam bandwagon, it isn’t going to be an easy task, say experts. This is down to a lack of transparency among the majority of companies in the country — both listed companies and state-owned firms.
“A lot of international companies are looking for acquisition targets in Vietnam,” said Otto. “But finding the right target is a problem. Firms want businesses that have a long track record, certain revenue and clean books, which is usually a challenge.”