Foreign investment in equitised SOEs in Vietnam: opportunities and challenges
August 2018 | EXPERT BRIEFING | FINANCE & INVESTMENT
Vietnam has been an attractive destination for foreign investors, particularly from Japan, Korea and Association of Southeast Asian Nations (ASEAN) countries, with the GDP growth expected to accelerate from 6.81 percent in 2017 to 7.1 percent in 2018. In recent years, Thailand, Japan and Singapore have been leading buyers by volume in the Vietnam M&A market, particularly in large-scale strategic investment in equitised state-owned enterprises (SOEs).
From both the legal and strategic investment perspectives, some of the recent giant deals, such as Thaibev (through its Vietnamese subsidiary) investing in Sai Gon Beer Alcohol Beverage Corporation (SABECO), JX Nippon investing in Vietnam National Petroleum Group (Petrolimex) and All Nippon Holdings investing in Vietnam Airlines, have been seen as models for strategic foreign investors for coming deals when Vietnam has been accelerating its equitisation and divestment policies.
Opportunities for strategic foreign investors investing in SOEs
Before 2017, the names of the equitised SOEs and the remaining percentage that Vietnam’s government would continue to hold in such SOEs after equitisation would only be available to the investors when the competent authority (e.g., the prime minister or the relevant minister for a large-scale SOE) issued the decision approving the equitisation plan of the subject SOE. This means that investors would only be informed of the exact percentage that they could buy after this decision was published, which was often too late, since it would take a considerable amount of time for them to conduct due diligence on the subject SOE.
This problem has been completely lifted since early 2017 when the prime minister issued: (i) Decision 58/2016/QD-TTg listing the names of the SOEs to be equitised during 2016 to 2020 and the remaining state ownership percentage after equitisation; and (ii) Decision 1232/2017/QD-TTg listing the names of the already-equitised SOEs in which the state will further divest its ownership during 2017 to 2020 and the remaining state ownership percentage, if any, after such divestment. SOEs operating in highly restrictive and conditional business sectors, such as cable television, petroleum distribution, tobacco manufacturing, water supply and transportation, are all on the lists.
New regulations expected to ease procedures
In addition, the newly issued equitisation regulations, such as Decree 126/2017/ND-CP of the government dated 16 November 2017 on equitisation (replacing Decree 59/2011/ND-CP governing the same sector) and Circular 40/2018/TT-BTC of the Ministry of Finance dated 4 May 2018 guiding Decree 126/2017/ND-CP, are expected to ease equitisation procedures. Notably, the new regulations shorten the legal lock-up period applicable to strategic investors from five to three years, which is recognised as a positive change.
Another major improvement is that an initial public offering could be conducted by the book-building method, in addition to the three traditional methods of public auction, issuance underwriting, and direct negotiation. Although further guidance from the Ministry of Finance is yet to be issued, the introduction of the book-building method is expected to move the price expectation from the state closer to actual market demand.
However, there are still some drawbacks. For example, the increase of the deposit that a strategic investor is required to make from 10 percent to 20 percent of the total value of the shares subscribed under equitisation could be a real obstacle for foreign investors. Additionally, although the deadline for completion of the a shares sale under the equitisation process was extended from three to four months from the date on which the equitisation plan is approved, it is still difficult for foreign investors to complete a share subscription in four months. Because of such a short period under the regulations, only a few foreign investors, who investigated the subject SOE long before the official kick-off of the equitisation process, have successfully completed the investment in the equitised SOEs during equitisation.
Becoming the strategic foreign investor during equitisation
Foreign strategic investors acquiring shares in an SOE during equitisation may be able to negotiate for certain special rights, such as veto rights over certain ‘reserved matters’ or the right to have a number of board seats or other executive positions. Such rights may be included directly in the share subscription agreement, which is binding on an equitised SOE and a state shareholder, as the case may be. In return, an equitised SOE and a state shareholder may ask for technical support from a foreign strategic investor.
Previously, a foreign strategic investor could also ask for right of first refusal to buy additional shares from the state shareholder. However, a state shareholder is now less willing to give this right to a foreign strategic shareholder due to the concern that the foreign shareholder may use this right to make it commercially difficult for a state shareholder to further divest shares in the equitised SOE.
One of the critical issues for a foreign investor to consider when acquiring shares in an SOE during the equitisation process is the revaluation of the assets of the SOE. The assets of the SOE will be valued at the beginning of the equitisation process, and then revaluated at the completion of the equitisation process (i.e., when the SOE is converted into a joint-stock company). In practice, the revaluation often results in an increase in the value of the equitised SOE and the surplus amount must be remitted to the enterprises development fund. This may cause an adverse effect on the business operation of the equitised SOE because the increase in asset value does not always translate into an increase in cash. Taking this issue into consideration, a foreign investor should agree with the state shareholder on a mechanism to retain the surplus amount resulting from the revaluation process for the purpose of increasing the charter capital (equity capital) of the equitised SOE, rather than having to pay the same back to the state.
Becoming a strategic foreign investor after equitisation
There are two options for a foreign investor to acquire the shares in an equitised SOE which has completed the equitisation process and become a public company: public auction or private share placement.
The acquisition of Thaibev (through its Vietnamese subsidiary) of 343,642,587 shares (equivalent to 53.6 percent) in SABECO for nearly $5bn (at a price of VND320,000 per share), which has been the biggest and most complicated deal so far, was structured as a public auction through the stock exchange without any legal or financial due diligence or a complicated share purchase agreement. The advantage of this structure is that it is relatively straightforward and fast. However, the downside is that a foreign investor may not be able to negotiate for special rights due to the time constraints of the deal. Not being able to conduct legal and financial due diligence could be another problem for this structure, as the investor would have limited information about a target company before it invests. Despite those shortcomings, in practice, certain divestments by the state are only effected under this structure.
On the contrary, a private share placement structure could be a better option since this may allow a foreign investor to mitigate risks under both the equitisation process and the public auction structure. Under this structure, a foreign investor negotiates with the equitised SOE for a private share placement under a share subscription agreement, which normally includes the right to conduct legal and financial due diligence, and negotiate for special rights as a strategic foreign investor. In return, a foreign investor may be required to satisfy certain conditions and give certain undertakings to support the equitised SOE as if it is a strategic investor participating in the equitisation process. Both the Petrolimex and Vietnam Airlines deals were conducted under this structure. This method, nonetheless, often takes longer to complete.
It is expected that foreign investor participation in state divestment, either under the public auction or private share placement, will be more exciting in the last quarter of 2018, 2019 and 2020, when government divestment from big equitised SOEs, such as Petrolimex (where the state will divest at least 24.86 percent), Vietnam Airlines (at least 20 percent) and Vinapharma (at least 29.98 percent), are scheduled.
Bui Ngoc Anh is a partner and Pham Thuy Anh is a senior associate at Vilaf. Mr Ngoc Anh can be contacted by email: firstname.lastname@example.org. Mr Thuy Anh can be contacted by email: email@example.com.
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Bui Ngoc Anh and Pham Thuy Anh