201109261032212011StoxPlusMAReport_26Sep_2011_Final_EN

2011 Vietnam Deals Review 1

A Market

Vietnam Deals Review 2011Issue 1, September, 2011

Vietnam Deals Review 2011High Capital Inflows from Japanese Corporations

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Credit crunch and high interest rates amid economic and financial crises result in many distressed assets in Vietnam. This is a great opportunity for foreign industry players to penetrate into Vietnam through Mergers and Acquisitions (M&A) and private equity investments (PE).

We distinguish in this report M&A transactions where there is a controlling ownership or economic profit transfer while PE transactions may not.

We learned that economic difficulties have sent a number of enterprises into the brink of bankruptcy due to their weaknesses in corporate governance, lack of skillful management, deficiency in financial capability and diversification in non-core businesses. In the meantime, more and more overseas corporations and local corporations are now taking M&A as way of entering the market instead of creating a new business from scratch.

From macro perspectives, we believe boosting M&A activities in Vietnam is an immediate dose for geographical-based and fragmented sector development strategy for few recent decades in Vietnam including cement, aquaculture, steel and banking and securities recently.

StoxPlus will issue bi-annual and annual Vietnam Deals Activity Review under our data and intelligent information enrichment project and in collaboration with our partner Nexus Group specializing in Investor Relations and Deals Advisory. Our first review was issued in this September 2011 and the next will be in March 2012 so forth.

Introduction

The ultimate objectives of our M&A publication series are to:

• Make deals activities more transparent as far as possible through providing investors and business owners data and insightful information of M&A deals and influencing factors.

• Help business owners, corporate leaders and management to better understand M&A including its technical aspects as development options and opportunities rather than threat in many cases.

• Create a public awareness and governing bodies’ attention in appropriately placing an importance and benefits of M&A activities to the economy.

Vietnam deals data is inherently hard to collect and to ensure the completeness due to the lack of a specialized legal framework and disclosure regulations. In fact as you are well aware of, most deals are privately executed. However, we believe our Vietnam’s M&A data is the most comprehensive than any other in the market given our leading position in data and intelligent information business in Vietnam.

As always, we welcome your comments and feedback on our report to my email: [email protected]

Yours truly,

Thuan Nguyen, FCCACEO, StoxPlus Corporation


Executive Summary 4

1 Deals Activity Review in 9M2011 6

1.1 Overview and Data Analysis 7

2.2 Top 10 Deal Features 9

2.3 Top 10 Featured M&A Deals 17

2.4 Top 10 Featured Private Equity Deals 22

2 2012 Outlook 27

2.1 Business Environment 28

2.2 Key Growth Drivers 29

2.3 Obstacles and Challenges 34

3 M&A: a business strategy or a threat? 36

4.1 Why M&A? 37

4.2 Your business could be vulnerable to takeover 40

5 A case study: Beton 6 in post M&A era 43

6 The Basics of M&A in Vietnam 48

Table of contents


Executive Summary

Merge and Acquisition (M&A) and Private Equity Investments (P/E) in 2011 have been much more busier than we imagined till the completion of this report. Credit crunch and high interest rates amid economic and financial crises have led to many distressed assets in the country. This is a great opportunity for industry players and PE investors to penetrate into Vietnam through M&A.

Shares of many public companies are trading at very low valuation (P/E 2011 = 9x and PB = 1.5x) on the stock market, but behind the scene, there are great M&A deals of which some are considered to be biggest in the Vietnam M&A history.

M&A activities in 9M2011: total deal value amounted to US$2.67 billion.

The value of 63 deals we noticed has reached US$2.6 billion. Excluding the M&A deals among wholly foreign owned corporations, the size of inbound deals amounted to nearly US$2 billion in 9M2011. This is a significant amount of foreign currency inflows into Vietnam help easing Vietnam’s trade deficit and forex exchange tension. If deals between Vietinbank and The Bank of Nova Scotia; and Vietcombank and Mizuho are concluded this year, the size will reach more than US$3 billion. Please refer to page 6 for details.

Many high growth sectors in Vietnam attractive to Japanese corporations

Japanese Corporations are the largest investors in Vietnam via M&A with total investment of $236 million. These corporations mostly expand their business in Vietnam through buying controlling stakes in companies operating in consumer sector (foods & beverages, telecom, financial, etc). We believe that in the coming years, the trend will continue as signal of shifting production offshore to Southeast Asia and China, coping with uncertainties in Japan. Details are on page 11.

What sectors most active?

Consumer sector ranked first in total deals size with US$1.035 million (39%) and then Financials (US$453 million, 17%) and then real estates (US$251 million, 9%). Please, refer to page 12 for details.

2012 Outlook: many supportive factors for an active M&A market

There has been a shift of FDI flows to M&A by foreign industry players. Domestic companies with strong financial capability have seized the opportunity to realize their development plan through acquiring another business instead of starting from a scratch. Many enterprises now realise that their businesses should rely on big brand names to have advantage of business scale and management expertise. There are many domestic enterprises including the State-owned have publicly announced their concrete liquidation plans for their non-core investments. This is rather a new practice in Vietnam. Besides, Foreign and local funds are in their way to their divestments with total US$3 billion portfolio in Vietnam will provide a good source of supply for M&A. Please, refer to page 27 for further details.

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Executive Summary (cont’d)

The legal framework governing M&A activity is highly fragmented

M&A terms and provisions are currently mentioned in seven different sets of Laws. As in many other countries, the ultimate objectives of a legal framework governing M&A are (i) to avoid market disorders as a result of monopoly upon a particular M&A deal and (ii) to protect consumers. In fact, the market has witnessed several deals that could potentially result in monopoly. For example, C.P Vietnam was acquired by Chinese partner, at the same time, 77% market share of swine feeding, 30% of poultry industry and 20% of animal feedings have been given to a Chinese company. This causes a big concern on market recently since many agricultural products in Vietnam have been collected by Chinese entrepreneurs and corporations in large sizes and created a price war.

Individual investors should be very careful with the announcement of M & A valuation

We noticed recently that many public companies have announced the price of their deal transaction extraordinarily high premium to its price on stock market. However, the key provisions determining valuation are not disclosed to the public by its nature of private arrangements. Therefore, we recommend that retail and non-sophisticated investors should be very careful of the announcement. For example, a recent deal involves a foreign insurer announced a deal conclusion with a Vietnamese insurance company at a price which is 130% premium to its share price on the market. Many rumors on market with buy recommendation because of this high valuation of the stock. In fact, our sources have indicated that this is a synergy calculation as in many deals arrangements. The profit from re-insurance arrangements to the buyer could accounted for a majority of the 130% premium.

Our report also analyses a M&A case study in Part 4 with regard to HB Group acquiringBeton 6, a Vietnam leading precast concrete products.


Part 1: Deals Activity Review 9M2011This part provided data about the M&A deals and Private Equity investments in Vietnam in the first nine months of 2011 and examined top 10 M&A deals as well as top 10 private equity investments that we think will be very interesting references for corporations (sellers) and buyers in their development strategies. Data about deals was last updated on September 15th, 2011.


The value of 63 deals that have been concluded in the first nine months of 2011 reached $2.6 billion. This value is 1.5 times higher than the size of 2010. The total number of M&A deals was 73, including nine deals under negotiation and an unsuccessful deal.

The biggest deal closed at $ 609 million in the cattle food production sector. C.P.Pokland (CPP) in China bought 70.82% stake of C.P Vietnam from Charoen Pokphand Group in Thailand. However, this deal mainly related to foreign companies operating in Vietnam; hence, this amount was not directly used for businesses in Vietnam but was transferred to the seller in Thailand.

The second largest deal involves VinpelCom, a Russian Telecommunication Corporation, who paid $196 million to raise its stake in Gtel-Mobile to 49% from 40% . Gtel-Mobile, founded in 2004, is running Beeline, the 7th mobile network in Vietnam. VinpelCom intends to invest an extra 304 million USD to raise its ownership to 65% in 2013.

The next two biggest ones are private placements: the first one was the issuance of $159 million worth of shares (or 10% stake of Masan Consumers) to Kodlberg Kravis Roberts at $11/share or 1.53 times higher than the OTC market price of Masan Consumers at that time; and the second one was 10% stake of Vietinbank (or $186 million) sold to IFC at VND21,000 per share. CTG was last traded on HOSE at VND27,000 per share. From our point of view, Vietinbank accepted to sell shares to IFC at a discount to get $125 million, 10-year loan from IFC at low borrowing cost of LIBOR plus 1.5%. This interest rate is much lower than bond-issuance or commercial borrowings by other domestic corporations.

Figure 1: Total deal size from 2008 to 09/2011 (billion USD)

1.1 Overall and Data Analysis

M&A deals value totaled $2.6 billion in 9M2011

Source: StoxPlus, PwC

1.12 1.14

1.75

2.67

-

0.50

1.00

1.50

2.00

2.50

3.00

2008 2009 2010 9M2011


Relatively, Vietnam’s M&A market is no less active than China’s

M&A market in Vietnam is not small compared to that in China in relation to the scales of the two economies. According to the statistics of China Venture Group, the total value of M&A deals in China reached $70 billion, which is 20 times more than that in Vietnam, while China’s GDP is 60 times higher Vietnam’s.

US is the greatest investor overseas who bought 33 Chinese companies for 2.3 billion USD out of the total $9.6 billion. Meanwhile, the number of Vietnamese companies operating in other countries is very limited, therefore, hardly any M&A deal overseas was recorded. This year, we heard only Vietinbank’s plan to buy 30% stake in Lao Development Bank.


1. Inbound M&A, or foreign corporations penetrating into Vietnam market through M&A, is very popular.

Foreign players accounted for 81.3% of the total $2.6 billion M&A deals . Please refer to Table 1 for details. The three biggest inbound deals were C.P Pokphand China taking part in Vietnam market by buying 70.8% of C.P Vietnam, VinpelCom increasing its stake in Gtel-Mobile to 49% and Vietinbank selling 10% to IFC.

Table 1: 9M2011 M&A deals by types

Source: StoxPlus

2. Outbound or Vietnamese companies investing overseas was almost silence

For the last few years, some of Vietnam corporations such as Vinamilk, Vital, BIDV, Hoang Anh Gia Lai have developed through outbound M&As. However, this year our data source has hardly recorded any outbound deals, except for Vietinbank’s plan to buy 30% in Lao Development Bank, which is scheduled to close at the end of this year.

This fact derives from Vietnam’ slowing down economy and credit crunch when companies are struggling to raise capital and run business at home.

1.2 Top 10 Deal Features

Billion VND Million USD %

Domestic 10,334.7 501.7 18.7%

Inbound 44,858.5 2,177.6 81.3%

Outbound - - 0.0%

55,193.1 2,679.3 100.0%


More than $1.4 billion (out of $2.1 billion deals related to foreign parties) flowed directly to Vietnamese companies. This amount included all the major deals such as Vietinbank ($300 million–$125 million loan included), Hoang Anh Gia Lai ($55 million), Masan Consumers ($159 million), Megastar ($73.6 million). The other $609 million flew to Charoen Pokphan Thai.

Total value of net Foreign Indirect Investment (FII) to Vietnam rose to $750 million in 2010 after negative numbers in 2008 and 2009, according to the statistic from the State Bank. For the first half of this year, FII continued to increase, of which FII from M&As and Private Equity Investments contributed a big part. This amount of foreign currency was crucial for solving balance of payment problems and cooling down exchange rate issue.

3. Over $1.4 billion M&A inflow helps easing tension of balance of payments and exchange rate


4. Highest deal amount named with corporations from China and US but inbound cash flows come from Japan

Among 11 countries and territories that have implemented PE investments and M&As in Vietnam, China is the largest investor while US ranked second with international financial institutions such as IFC. Nevertheless, Japan investors poured most cash to Vietnam. Japan investors sent a total of 236 million USD to Vietnam. They invested in the following industries:

Finance: SBI & FPTS: $25 million; Nikko Cordial – PSI: $6.9 million. If Mizuho –Vietcombank: $560 million deal closes this year, it will remark a year with a new record of cash flows from Japan to Vietnam.

Real Estate: Japan Asia Vietnam bought Centre Point Building in Phu Nhuan District, Hochiminh city in the first quarter of 2011.

Communications: NTT Docomo from Japan bought 25% stake of Vietnam Mobile Group for $18 million.

Consumer Goods: Kirin Holding bought 57% stake of Interfoods for $4.06 million; Daio Paper bought 48% stake of Saigon Paper for $10.7 million and Unicharm bought Diana Vietnam for $128 million.

According to our observation, Japan investors have higher interest in investing in Vietnam than any other ones. They are most interested in : Banking, Insurance, Construction and Materials including cement and structures; Logistics and Pharmaceutical.

Source: StoxPlus

Table 2: M&A classification by Buyers

Nation Billion VND Million USD %

China 12,545.4 609.0 22.7%

United States 11,799.7 572.8 21.4%

Japan 4,869.1 236.4 8.8%

Russia 4,037.6 196.0 7.3%

India 2,554.4 124.0 4.6%

Singapore 2,487.5 120.8 4.5%

Germany 2,430.8 118.0 4.4%

Korea 1,516.2 73.6 2.7%

England 1,444.1 70.1 2.6%

Taiwan 813.3 39.5 1.5%

Philippine 515.0 25.0 0.9%

Viet Nam 10,180.2 494.2 18.4%

55,193.1 2,679.3 100.0%

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5. Consumer and financials sectors have biggest deal value

Deals that involving IFC and Vietinbank, IFC and An Binh Bank, LienVietBank and VPSC; PVI and Tanlax and securities deals including: SBI and FPTS, Nikko Cordial and PSI, Vincom Securities and Xuan Thanh Corporation, Standard Securities and Maritimebank, KIS/EPS Securities, CitiGroup/Horizon Securities, etc, have created the activeness in Vietnam market.

Investors have also made several transactions of great value in the key sectors with high potential of growth of Vietnam consisting: Foods and Beverage, Animal Feeding, Travelling and Entertainment and Consumer Goods. Please refer to Table 3 for more information.

Source: StoxPlus

Table 3: M&A classification in terms of Seller

Financial industry, excepting for M&A deals of securities, rarely saw any real M&A deals in banking that involves foreign groups due to restriction in foreign ownership. Ownership transferring occurred mostly among big names in Vietnam.

Deals in banking sector this year are mostly private placements for foreign partners. This practice is the same for more than 20 transactions, our database showed, over the last 5 years. There have been no controlling stake transfer but rather “strategic” investments.

Sector Billion VND Million USD %

Consumer Goods 21,312.0 1,034.6 38.6%

Financials 9,339.6 453.4 16.9%

Real estate 5,169.6 251.0 9.4%

Leisure 4,787.4 232.4 8.7%

Travel 2,898.5 140.7 5.3%

IT 2,296.9 111.5 4.2%

Mining 2,060.0 100.0 3.7%

Media 1,516.2 73.6 2.7%

Medical 1,318.4 64.0 2.4%

Commodity Chemicals 1,133.0 55.0 2.1%

Sugar 1,071.2 52.0 1.9%

Industries 817.4 39.7 1.5%

Pharmaceuticals 737.5 35.8 1.3%

Restaurants & Bars 515.0 25.0 0.9%

Paper 220.4 10.7 0.4%

55,193.1 2,679.3 100.0%


6. Divestments from funds play a part in M&A this year

Vietnam Opportunity Fund (VOF) managed by Vinacapital sold 24.9% stakes in Halico to Diageo Beverage Corporation and sold 24%stake of Hoan My Corporation to Fortis are two good examples. Besides, Dragon Capital also sold 6.6% stake in Sacombank after staying with the bank for 10 years.

We expect the trend will continue in 2012 and years to come as the funds will be due to close after 5 years operation in Vietnam. Transforming into open-ended funds, in our view, is just a move help shareholders liquidate their position more easily.

7. Horizontal or Vertical M&A in Vietnam?

Investors seeking to expand product lines or markets will choose a horizontal M&A . For example, HungVuong Seafood company bought its competitor Ben Tre Seafood FBT to expand input production line. Meanwhile, investors seeking to add chain value of customer-company or company-supplier relationship will pick up vertical M&A. For example, Thien Minh Travelling Company bought Victoria hotel chain.

M&A statistics shows that there are more horizontal deals than vertical horizontal, especially when foreign corporations join Vietnam market basing on their core business in their countries.


In 2011, we have seen many domestic corporations converting shares among companies in the group or sub-companies with the parent companies as part of their corporate restructurings. Those deals included:

• FPT Trading, FPT Software and FPT FIS converted their shares into FPT shares in 2011. This was a part of the OneFPT plan to restructure sub- companies to cut down operation costs .

• HAPACO: Hapaco Corporation issued 1.5 million converted stocks for retail shareholders of Hapaco Hai Au (GHA) and Hapaco Yen Son (YSC) and delisted two stocks from HNX.

• VINPEARL: Vinpearl Corp issued total 25.6 million converted shares for three companies: VinPearl Danang, VinPearl Hoian and Vincharm and raised VPL’s chartered capital to VND2,055 billion from VND 1,800 billion earlier. After the merge, Vinpearl gained economy of scale with a system of luxurious hotels and resorts across the country from Da Nang to Hoi An and Nha Trang.

8. Many local companies do share mergers as part of their corporate restructurings.


9. Many M&A failures recorded.

The most remarkable M&A failure was the case that FPT withdrew from EVN Telecom in April of 2011. FPT blamed the withdrawal on lower-than-expected investment efficiency as it was allowed to buy only 49% stake instead of 60% as planned. FPT is still struggling to claim back their deposit of VND708 billion and looking for new opportunity to enter mobile information network through M&A or a new business license. EVN Telecom, meanwhile, is seeking for strategic foreign partners.

Another “well-known” acquisition attempt was that a group of investors accumulated Sacombank shares on hopes of controlling the bank. However, these investors failed to obtain a significant stake in Sacombank. The corporate raider only accumulated 3.34% stake.

Amid the activeness of M&A deals from early 2011, we take it for granted that many other M&A failures were undisclosed.


22 out of 73 deals from our data source belong to real estate industry with the total value of 250 million USD. We suppose that there are more existing deals which are not disclosed or we have not been updated. According to Savills Vietnam, in Hochiminh City, there have been 22 transactions since the early of 2011, most of which involve domestic seller and foreign buyers, including:

CapitaLand under the name of its subsidiaries bought the project in District 2, HCM from Khang Dien Saigon SJC (49 million USD), in Binh Chanh District from Quoc Cuong Saigon JSC (7.3 million USD); Somerset Central TD project, in Hai Phong from Thuy Duong Investment JSC.

Japan Asia Vietnam bought Centre Point, commercial centre project that has been operated with the total investment of 40 million USD.

Dacin Holdings bought 80% KDC Tan Tao A project, in Hochiminh city, from Khang An Real Estate Corporation with total value of about 15 million USD.

A tendency to sell real estate assets of Vietnam enterprises was recorded since early of 2011, the highlight deals of which are: FPT sold 89 Lang Ha Project for USD20 million, Vinasun Corp sold Vinasun Tower project for USD145 million, Hoa Sen Group planned to sell a portfolio of real estate projects and International joint venture port Hoa Sen-Gemandept, etc.

10. M&A in Real Estates sector booming


We have picked up Top 10 M&A Deals based on deal value. We define M&A deals in this report as deals involve a transfer of controlling stakes which is normally 49% ownership threshold.

We analyze and provide insights on each of the top ten deals in following pages.

Table 4: Top 10 M&A deals for 9M2011

1.3: Top 10 Featured M&A Deals

Souce: StoxPlus

NoDate

AnnouncedTarget Name Sector Acquirer Name

AcquirerNation

Form % Value($mil)

1 7/6/2011 C.P Viet Nam Consumer Goods C.P Pokphand China Inbound70.8 609.0

2 26/4/2011 GTEL - Mobile Telecom VimpelCom Russia Inbound49.0 196.0

3 25/8/2011 Diana Viet Nam Consumer Goods Unicharm Japan Inbound95.0 128.0

4 12/7/2011 Megastar Media Media CJ CGV Korea Inbound73.8 73.6

5 10/8/2011 Hoan My Medical Group Medical Fortis HealthCare India Inbound 65.0 64.0

6 18/2/2011International Consumer Products Corporation (ICP)

Consumer Goods Marico India Inbound 85.0 60.0

7 20/4/2011 Tate & Lyte Nghe An Sugar TH Milk Viet nam Domestic100.0 52.0

8 29/7/2011Vietnam Postal Savings Service Company

Financials Lien Viet Bank Viet nam Domestic100.0 50.0

9 11/3/2011 Victoria Hotels& Resorts Travel & Hotel Thien Minh Tourist JSCViet nam

Domestic100.0 45.0

10 26/8/2011 Viet Thai International Restaurant Jollibee Foods Corp Philippine Inbound49.0 25.0


1. C.P Pokphand, China’s leading animal feed producer bought 70.8 % stake in C.P Vietnam Livestock Co, 100% owned by Thai Charoen Pokphand Group and one of the leading livestock and seafood companies in Vietnam, for $609 million to control Vietnam market.

C.P Vietnam, established in 1993, holds a 20% of animal feed market share, 77%of industrial pig farming market and 30% of chicken raising in Vietnam. Holding 70.8% stake in C.P Vietnam is a good opportunity for C.P. Pokphand Co to create an animal feed supply channel from Vietnam and make impact on the prices.

In 2010, C.P Vietnam made a net profit of $50 million on revenue of $1 billion revenue. Therefore, C.P. Pokphand Co deal was priced at 12x of C.P Vietnam ‘s EPS. In a broader view, the animal feed market in general is controlled by foreign corporations such as Cargill, Tomboy, Green Feed.

According to VASEP, prominence of these foreign players has led to the bankruptcy of over 30% of Vietnamese companies in the industry. From economic aspect, this forced Vietnamese entities to scale up their business size, enhance competitiveness and technology capability so as to survive . This story of either to keep developing or to actively find a partner or to go bankruptcy will come true in the future for many local companies in other sectors such as banking, securities, cement, steel, seafood, logistics with fragile business size, scattered and thin resources.

2. VimpelCom spent $196 million to raise its stake in Gtel- Mobile to 49%, to increase its controlling power and actively manage Beeline after 1 year of poor performance.

Gtel- Mobile is the developer of Beeline system worth $670 million of which 40% is owned by Vimpelcom and 60% by Gtel. After 1 year of operation, Gtel- Mobile had only 200,000 subscribers compared with the target of 1 million.

Vimpelcom decided to pay $196 million to raise its stake in GTel Mobile by 9% to 49% and became Beeline controlling party.

Vimpelcom has agreed to invest a further $304 million in GTel Mobile in 2013, raising its stake from 49% to 65%, an ownership that allows Vimpelcom to become exclusive manager of the joint venture.

3.Unicharm Corp. acquired a 95% stake of Diana Joint Stock Co for $128 million. Diana currently holds 30% disposable diaper and 40% toilet paper in Vietnam.

Unicharm, a Japanese producer of similar goods, targeted to invest in technology and expand production to become the biggest company in Vietnam in disposable diaper and toilet paper . The current market leader in the industry is 100% American owned Kimberly-Clark Co. Unicharm has 25% market share in the Asian but had not appeared in Vietnam before the deal.

Diana is a family-run company and the divestment worth $128 million after 15 years from establishment was a remarkable investment.


4. CJ CGV spent $73.6 million acquiring 80% Megastar Media Company (Megastar), Vietnam's leading cinema owner and film distributor with 300% annual revenue growth

The Seoul-based CJ-CGV Ltd, an operator of 75 multiplex movie theatres with 610 screens in Korea, a multiplex in Koreantown Los Angeles and five others in China, bought 80% stake of Megastar through acquiring 92% stake in Virgin Islands-registered Envoy Media Partners.

Buying Megastar was a part of CJ-CGV’s strategy to expand operation in Vietnam and India. The group planed to spend $23 million in expanding Megastar screen system in Vietnam.

This was considered a good deal for CJ-CGV to enter Vietnam’s entertainment market with high growth rate in recent years.

5. Fortis Healthcare International spent $64 million to buy 65% stake in Vietnam's Hoan My Medical Corp with nearly 1000 beds.

This was the Fortis Healthcare International 's sixth investment in Asia in the past eight months and an important step in consolidating its comprehensive healthcare service in Asia- Pacific.

Besides getting support in technology, technique and management skills from Fortis Healthcare International, Hoan My can take advantage of its size and prestige to sustainably develop through improving service quality.

Desmond Sheehy, Investment Manager of Duxton Asset Management, which invested in Hoan My in 2009, said “Fortis’ investment showed that Vietnam is still an attractive destination for foreigners.”

6. Marico, a leading consumer and service firm in India, bought 85% stake of International Consumer Products (ICP) for $62 million

Marico is on of the top consumer goods firms in India with annual revenue of $600 million, focusing on beauty and wellness products.

ICP, founded in 2001, has flagship brands such as X-men and L'ovite and generated $25 million revenue in 2010 with average CAGR growth of 23% in the past three years.

"The acquisition will give us a strong foothold in the fast growing consumer market of Vietnam (beside 25 other countries).... The buy will contribute 15%to our international revenues" Vijay Subramaniam, Marico’s chief executive, international business said.

Mekong Capital and BankInvest sold almost all their holdings in ICP to Marico.

7. TH Milk Food Joint Stock Company of Vietnam bought the Nghe An Tate & Lyle sugar company from the UK’s Tate & Lyle PLC for $52 million.

This is a vertical M&A with initiative from TH Milk, an emerging milk brand in Vietnam, competing with Vinamilk. The deal allowed TH true Milk to actively control materials for feed cows and sugar for milk production.


8. Lien Viet Post Bank: A Merger between Lien Viet Bank and Vietnam Postal Savings Service Company

The deal brought considerable synergy impacts for both two sides, especially for Lien Viet Bank. Vietnam Post (VNPost) had fund raising from the public but was not allowed to lend meanwhile Lien Viet Bank saved a huge amount of money using nearly 10,000 outlets of the postal company to expand its banking services. Its registered capital also rose to VND6.01 trillion from VND5.65 trillion and total assets rose to VND51 trillion ($2.5 billion) from previous VND41 trillion, 3 times as big as Tien Phong Bank, a lender was established in the same time.

9. Thien Minh Group bought Victoria Hotels from EEM Hong Kong for $45 million, biggest deal in tourism and hotel business in Vietnam.

Thien Minh Group, currently holding 5%stake in tourism and hotel business market , has bought the six Victoria hotels and resort in Vietnam from EEM Victoria Hong Kong for $45 million, a step towards increasing its revenue by 25% annually in the coming years. Victoria is a trademark of four- or five-star hotels in popular tourist destinations in Vietnam: Sapa, Hoi An, Phan Thiet, Can Tho, and Chau Doc.

10. Jollibee Foods bought 49% stake in Viet Thai International (VTI) which owns Highlands Coffee chain.

The agreement included VTI’s transferring 60% of its business in HongKong (the owner of Hard Rock Café) to Jollibee Foods and getting a $35 million loan from Jollibee Foods with an interest rate of 5% p.a., due in 2016.

After the deal, the joint venture was expected to own 139 stores including 118 ones in Vietnam and 21 in other 5 countries.


Top 10 M&A Deals

$93 million

73.8 %

$64 million

65 %

$60.9 million

70.8 %

$196 million

9 %

$128 million

95 %

$60 million

85%

$52 million

$50 million

100 %

100 %

$45 million

100 %

$25 million

49 %


We picked up top 10 private equity investments based on deal value. These investments normally have had above 5-percent stake transfer , but not yet involved a transfer of controlling.

Refer to Table 5 below for the list and deal insights on following pages.

Table 5: Top 10 Private Equity Investments in 9M2011

1.4: Top 10 Featured PE Deals

Source: StoxPlus

NoDate

AnnouncedTarget Name Listed Sector Acquirer Name

AcquirerNation

Form% of

SharesAcq.

Value ($mil)

1 28/7/2011 Vietinbank HOSE Financials IFC US Inbound 10.0 186.0

2 24/3/2011 Masan Consumer OTC Consumer GoodsKohlberg Kravis Roberts

US Inbound 10.0 159.0

3 24/2/2011 Masan Resources OTC MiningMount Kellett Capital Management LP

US Inbound 20.0 100.0

4 17/8/2011Petrol VietnamInsurance Holdings

HOSE FinancialsGerling Industrie Versicherung AG

GermanyInbound 25.0 93.0

5 1/7/2011 Halico OTC Consumer GoodsStreetcar Investment Holding

England Inbound 30.0 62.0

6 07/9/2011MJ (diadiem.com & nhommua.com)

OTC ITIDG Ventures, Rebate Networks & RuNet Global

US Inbound n/a 60.0

7 23/5/2011 Pymepharco OTC Pharmaceuticals Stada Service Holding B.V

Germany Inbound 25.2 25.0

8 01/4/2011 FPT Securities OTC Financials SBI Holdings Inc Japan Inbound 20.0 25.0

9 16/6/2011 Yen Viet JSC OTC Consumer GoodsVietnam Opportunity Fund Limited

England Domestic 32.0 7.5

10 15/4/2011PetroVietnam Securities Inc.

HNX Financials Nikko Cordial Japan Inbound 14.9 6.9


1. Vietinbank issued 168.6 million shares or 10 % stake to IFC for $186 million

Vietinbank sold its 10% stake to the International Finance Corporation (IFC), the World Bank’s private sector affiliate, at VND21,000/share, close to market price on the announcement date The deal valued for $186 million.

Vietinbank could enhance its financial strength after the deal and also obtained a $125 million loan from IFC at 6-month Libor plus 1.5% p.a., due in 10 years.

With IFC as its partner, Vietinbank will be in a better bargaining power to negotiate a sales of 15% stake to Bank of Nova Scotia. We expect Vietinbank will sell at much higher price than VND21,000 for this share issue. With IFC the deal illustrated its commitment to support privatization of Vietnam’s State owned commercial banks.

2. KKR bought 10% equity in Masan Consumer for $159 million

The US-based investment fund KKR & Co., in a stunning deal, agreed to pay $159 million for 14.44 million shares or 10% stake in Vietnamese fish sauce maker Masan Consumer Corp, or VND220,000/share compared to OTC fair value of VND150,000/share.

Masan Consumer, formerly known as Masan Food, is the market leader in fish, soya and chili sauce and the second largest producer of branded instant noodles in Vietnam, Its profit tripled to 1.25 trillion dong ($60 million) in 2010 from 402 billion dong in 2008.

Masan Consumer is the market leader in fish, soya and chili sauce and the second largest producer of branded instant noodles in Vietnam. The company profit and revenue rose 89% and 41%, respectively in 2010 with EPS of VND9,800, a good reason for KKR to pay such a high price.

Masan Consumer has recently announced an open bid for 50.1% Vinacafé Bien Hoa JSC. (VCF) or 13.3 million shares. The deal is estimated at $63 million based on current market price of VCF ( VCF share closed at VND95,500/share on September 19, 2011). JPMorgan will be fund arranger ($108 million) for Masan Industry, mother company of Masan Consumer to carry out M&A activities in the next 3 years.

3. Mount Kellett Capital Management LP bought 20 % stake in Masan Resources (Nui Phao tungsten mine project) for $100 million

Mount Kellett Capital Management LP, a U.S. private equity group, spent $100 million for 20% stake in Masan Resources, a subsidiary of Vietnam’s Masan Group Corp. that owns a tungsten mine in Vietnam. Earlier, Masan Group bought Nui Phao tungsten mine from Dragon Capital for around $130 million in 2010, and planned to invest another $350 million to start mining in 2013 with estimated revenue of $300 million/year.

Masan Group now holds 64% of the company, while Tiberon Minerals Ltd. holds 16%. Masan Group said it has a call option to buy Tiberon’s stake over the next three years for about $60 million to $90 million.


4. Tanlax, Germany’s third-largest insurer and Europe’s eleventh-largest bought 25% stake of PVI Holdings, Vietnam’s second-largest listed insurer, for $93 million to enter South East Asia market. Why Tanlax pay 2.2 times higher than PVI’s market price?

Talanx bought 25% stake in PVI for $93 million, or VND36,000/share compared with market price of VND16,000/share at that time. Why did Tanlax paid such a high price premium for PVI? From our intelligent sources, in addition to the PVI’s high growth potential, the reinsurance contracts currently passed to Swiss Ree will be likely transferred to the new shareholder,Tanlax. Tanlax certainly compared the profit from this arrangement into account for the high premium to its fair price.

5. Streetcar Investment Holding spent $62 million to buy 25 % stake of Ha Noi Liquor Joint Stock Co (Halico) from VinaCapital and announced an open bid of over 1 million Halico shares at VND210,000s each.

Streetcar Investment Holdings, a Singapore-based subsidiary of UK drink maker Diageo holding popular brands including Johnnie Walker, Guiness, etc and Captain Morga spent $62 million or VND213,000/share to buy 25% stake of Halico with Vodka as the key brand of alcoholic. Our source indicated that the fair value of the Halico’s equity is calculated as high as VND400 thousand and the selling price to Streetcar is justifiable.

It is obvious that Diageo has chosen M&A to set foot on Vietnam drink market with over 90 million population.

VinaCapital made a significant profit after investing in Halico for 5 years. By the end of QI/2011, VOF recorded its investment in Halico at $18.9 million.

Streetcar offered to buy another million Halico shares at a price of VND213,600 ($10.40) per share to raise its holding from 24.93%to 30%, enabling them to participate in Halico's board of directors and influence company management.

6. American, German, Russian investors poured $60 million in MJ Group which owns diadiem.com and muachung.com

IDG Ventures Vietnam, Germany’s Rebate Networks and Ru-net of Russia announced their $60 million investment agreement in MJ Group, a new business group in Vietnam that promotes e-commerce and owns diadiem.com and muachung.com.

IDG Ventures Vietnam is the first technology venture capital fund in Vietnam, while Rebate Networks is the center of a global network of daily deal platforms, operating in 14 countries.

The deal showed development potential of e-commerce in Vietnam which is considered to be in the very first step, but estimated to boom in 2015. The similar deal was that Ebay bought 20% stake in Pacesoft to own chodientu.vn.


7. Germany’s STADA pharmaceutical company raised its stake in the Vietnamese pharmaceutical company Pymepharco Joint Stock Company to 49% from previous 23.7%.

STADA purchased 2.1 million shares or 25.29 % stake of Pymepharco from Thailand-based Wellite International Limited to raise its stake in the company to 49%. Pymepharco’s chartered capital is VND85 billion ($4.5 million), mainly produces and trades pharmaceutical products. In 2010, Pymopharco earned a revenue of VND780.7 billion and a net profit of VND81.6 billion with EPS of VND9.500.

In financial year 2010, STADA increased the shareholding in Pymepharco from 11.2% to 23.7%

8. SBI Securities Bought 20% stake in FPTS, Vietnam securities firm, for nearly $25 million, through private placement, 1 year share transfer limited.

Japanese SBI Securities Co., SBI Holdings Inc.’s subsidiary, bought 20% Stake in Vietnamese peer FPT Securities Joint Stock Co at VND45.000 per share, 3 times higher than FPTS’ OTC price. After the deal, FPTS’ chartered capital rose to VND550 billion ($27.5 million) and the capital surplus of VND385 billion ($19 million) will be used to improve the company’s technology capability, adding high-qualified staff to improve finance advisory and underwriting services.

9. Vietnam Opportunity Fund managed (VOF) by VinaCapital paid $7.5 million for a 32% stake in Yen Viet Joint Stock Company, leading edible bird’s nest producer in Vietnam

VinaCapital aimed to help the Yen Viet JSC restructure its business, build brand name, improve distribution system and expand operation. In 2010, the company made a net profit of nearly $6 million on revenue of 20 million.

This was a small disbursement of Vinacapital amid its net selling activities in 2011 including deals in Halico ($62 million); Hoan My hospital ($64 million) Ho Chi Minh International school.

10. PetroVietnam Securities (PSI) sold 14.9 % stake to foreign strategic partner Nikko Cordial Securities Inc – Japan for $6.9 million, 50% higher than the market price

PetroVietnam Securities Incorporated (PSI) sold 14.9% stake to its strategic foreign partner of Nikko Cordial Securities, third biggest securities company in Japan, a member of Sumitomo Banking Corporation, for $6.9 million or VND15,000/share, 50% higher than market price of VND10,000 each.

After the deal PSI’s chartered capital rose to VND598 billion ($30 million) from previous VND509 billion ($25 million) and also gets Nikko Cordial ‘s support in banking, securities, brokerage, analysis services, espeically in system risk management.


Top 10 Private Equity Deals

$7.5 million

32.5%

$6.9 million

14.9 %

10%

$186 million

$159 million

10%

$60 million

$25 million

20 %

$25 million

25.29 %

$100 million

20 %

30%

$62 million

$93 million

25%


Part 2: 2012 Outlook

In this section, StoxPlus analyzed factors affecting M&A outlook and trend in Vietnam in 2012, including macroeconomics, business environment based on our in-depth understanding about typical features of the deals.


Credit crunch and high interest rates amid economic and financial crises result in many distressed assets in Vietnam. This is a great opportunity for foreign industry players to penetrate into Vietnam through Mergers and Acquisitions (M&A) and private equity investments (PE).

The current business environment created a great environment ever for M&A:

The long-term outlook: Vietnam economy and key sectors are still seeing high growth rate with many advantages. Therefore, the current difficulties could bring sellers and buyers together and barriers of prices, business culture and negotiation will be easier.

Vietnam stock market fell10% from the beginning of 2011. Difficulties and challenges ahead coupling with the fact that 23% of total 680 companies listed on the HOSE and the HNX saw their share prices trading at under the book value are good conditions for price negotiation in share transfer deals. Finding or accepting a domestic or foreign partners are much easier to be approved than before because it is hard for corporate to raised fund amid conditions of stock market undervaluation and high borrowing costs.

Interest rate and borrowing cost: Although the State Bank of Vietnam has taken bold measures to pull the lending rates to below 20% in the last months of 2011, the targeted lending rate are still at high levels which in our opinion, are just suitable for high risk projects. Therefore, we believe that M &A transactions will continue to be an important channel to raise funds. These transactions have a higher success rate when many companies are ready to declare unwinding their portfolio or willing to cooperate with foreign partners.

Competition: Price is the key competitive factor in almost all industries in Vietnam. domestic companies have not yet paid much attention to gray matter or product quality while their business size is still fragile. Many industries such as securities, banking, or construction, seafood, transportation and logistics, . haven’t had the economy of scale. Therefore, this is a good condition for companies in Vietnam to carry out M&A to consolidate and improve their competitiveness.

2.1 Business Environment


1. Many foreign corporations set clear target of penetrating Vietnam's market through M&A: Inbound deals will continue to mushroom:

Representatives of foreign investors we met in 20 meetings in early this year, who are from financial and industrial corporations in Japan, Singapore, Taiwain and Hongkong, are optimistic about long term outlook of Vietnam’s economy and key sectors. Amid the current difficulties, it seems to be easier for both buyers and sellers to come closer together, especially Vietnamese parties who used to be “haughty” in meeting with foreign partners.

2. Some corporations declared to corporate restructurings: M&A transactions in forms of selling assets will be active.

Although the word financial crisis started in 2008, its negative affects were telling on Vietnam’s firms much clearer in 2011 with unfavorable macroeconomic conditions and credit crunch. Many companies have clear strategies or disclosed their list of portfolios unwinding, which has never happened in the M&A history in Vietnam before as corporate are ashamed to announce such a plan.

Some corporations opened their plans to restructure, to massively divest and offered to sell their portfolios, such as Hoa Sen Group, Vietnam National Chemical Group (Vinachem), Vietnam National Oil and Gas Group, Vietnam Shipbuilding Industry Group (Vinashin), etc.

3. Vietnamese government’s instruction of cutting non-core investments of the state-owned corporations would be a good catalyst for M&A activities.

The State Audit Office of Vietnam has released preliminary auditing results on 28 August 2011 revealing that many state-owned corporations had invested in non-core industries, especially in finance, banking insurance and securities . According to the current regulations (Decree 109/2009/ND-CP), the state-owned corporations and groups are not allowed to invest more than 30% of the company's charter capital into non-core industries. However, the draft Decree on the capital and financial management for state-owned enterprises still cut the rate down further to 15%. If the draft Decree is approved, there will have a stronger wave of capital withdrawals from stated-owned corporations such as Song Hong Corporation, Song Da Corporation, Lilama Corporation and Saigon Trading Group etc.

In fact, there were many state groups and corporations who opened their plans of trimming down their investments in non-core industries. When the new policies comes effective, it will create a big pressure on sellers in the M&A transactions or share transfer. VNPT is a typical case . The corporation has recently auctioned the right to purchase 25 million shares of Maritime Bank in the plan to raise lender chartered capital to VND8,000 billion; VNPT also reduced its ownership in VMG Media from 36 % to 29% after VMG Media sold 25% stake to Japanese partners NTT Docomo; VNPT's ownership in Saigon Postel also fell to 11% from previous 14.4%.

2.2 Key M&A Growth Drivers


(1) Vietnam Investment Review online dated 9/08/2011(2) Investment Newspaper dated 22/8/2011

4. Vietnam government and State bodies consider M&A activities as a solution to tackle with economic difficulties.

The phrases such as “ bankruptcy”, “ merger” and “special fund” are repeated by many representatives of the government, the State Bank of Vietnam and Vietnam Financial Supervisory Commission and other state bodies in recent seminars and policy messages. As we observed, the M&A activities have never been mentioned as frequently by both investment communities and policy makers. The phrase “M&A” was discussed and mentioned as a solution for both enterprises and the country’s economy.

Let’s take banking sector as an example. The discussion on small banks’ merger and acquisition existed for some decades but no bold measures have been taken to interfere in this group of interest. Now, small banks are to blame for current high interest rates and the message from policy makers on small bank merger and acquisition are pretty clear.

Nguyen Van Binh, the State Bank Governor, stressed “ by law, credit institutions wishing to have large capital to develop their businesses and expand services, they usually have to merge and consolidate. But it is their own decision. The SBV with its stimulating tools, will guide banks to merger but it will not force them to merge or do it for them” 1.

Vu Viet Ngoan, President of Vietnam Financial Supervisory Commission also said “ In case that banks are on verge of bankruptcy, the centre banks in the world usually take bold measure of acquiring them. Vietnam’s law on credit institutions ,passed in 2010, allows the State Bank of Vietnam to buy stake in the commercial banks to take the control to avoid collapse of banks” 2


5. Divestments by funds – great supply for M&A

Foreign funds in Vietnam, overseeing an estimated total asset of VND63 trillion ($3.1 billion), are scheduled to close from 2012-2015, StoxPlus data showed. This comes from the fact that most funds were founded in 2006, 2007 with a lifetime of 5 years.

Some funds including Vietnam Dragon Fund, Vietnam Enterprise Investments Limited managed by Dragon Capital, and Indochina Capital Vietnam Holdings Limited were forced to change into open-ended funds by their shareholders to create liquidity or to divest. Others had to change shareholders (or M&A in fund management sector) or change fund management company.

Foreign Indirect Investment into Vietnam in 2007 rose to $8 billion of which a big amount went to private equity as well as public equity and bonds. Low liquidity does not allow funds to sell big volume of shares on the local stock market, funds have to transfer shares for foreign or local partners, making a considerable value for M&A deals. The current FII value fell significantly from the $8 billion in 2007.

Vietnam M&A activities in 2011 saw some funds’ divestments such as VinaCapital selling stakes in Halico and Hoan My company, and Dragon Capital closing position in Sacombank.

We expect that M&A will continue to be active in the coming years when funds do not contribute much to corporate development meanwhile making changes and improvements in corporate businesses are strengths of foreign corporations seeking to enter Vietnam market. To do so, foreign corporate are willing to pay premium to market price to get share transfer from funds.


6. What types of M&A in 2012?

It is expected that inbound M&A activities will continue to dominate in Vietnam in the coming years, therefore, industries such as banking, food and drinks, consumer goods, retail, pharmaceutical, logistics, construction and materials are those getting interest from foreign investors.

Foreign corporations will continue to target Vietnam’s companies with good franchise, large market share or strong trademark (usually top 5 in the industry) or companies with certain niche. Our analysis showed that all inbound M&A deals were related to big-name or well-niche companies including: Diana, Masan Food (consumer goods), Interfoods and Halico (food).

Property is a promising M&A sector, especially for domestic deals. Savills data showed that Ho Chi Minh City already recorded 22 M&A property deals. “Vietnam property market is slowing down, mainly from banks’ credit restrict to property, therefore, it is expected that more M&A deals will occur in the next 12 months” Neil MacGregor wrote in a report dated 29/8/2011.

7. Local private corporations expanding through M&A: a fast growing trend

Vietnam has recently witnessed domestic private corporations buy other private companies or ineffective state-owned enterprises through IPO.

This is an emerging and positive trend for Vietnam’s economic development as most industries have too many small enterprises – a negative result of a local or province-based expansion for a long time, including cement, sugar, aquaculture and construction industries, etc.

Ocean Group, through its arm Ocean Hospitality, has bought Trang Tien Ice Cream JSC for its property development strategy. Trang Tien Ice Cream JSC owns 1500m2 golden land at 35 Trang Tien street, Hanoi, just hundreds of square meters away from the West Lake.

Ocean Group also used Ocean Hospitality to buy dominant stakes in other hotels: PDC (60.4%), Sunrise hotel in Nha Trang (51%), Phuong Dong (Orient) hotel in Nghe An (65%), Suoi Mo Tourism JSC (83%)

(1) Investment Newspaper dated 29/8/2011


8. A part of FDI shifting to M&A

It is likely that a part of FDI will be transferred to M&A in 2012 although FDI to Vietnam will remain high. While it takes time for FDI projects to get licenses and set up fresh new 100% foreign owned companies, many foreign companies see M&A as a strategy to fast penetrate Vietnam market and take advantage of bought Vietnam company’s infrastructure, distribution and branches network, and manpower.

The trend is clearly seen in securities industry including deals that Citi Group bought Horizon Securities, Nikko Cordial invested in PetroVietnam Securities, SBI invested in FPT Securities and other deals are underway. Pharmaceutical is another sector that sees active M&As.

In 2010, the M&A activities happened in the dark when many foreign corporations tried to buy or cooperate with a local company to get license to establish local companies and then selling stake to foreign partners instead of registering projects or establish 100% foreign owned companies from scratch.

The Departments of Planning And Investment in Hanoi and Ho Chi Minh city – the authority in charge of granting business licenses and shareholder registration- have issued documents to temporarily regulate the practice in the absence of legal law on the issue. Accordingly, all private placement issuance with evidences of M&A are suspended.


We analyse below main challenges and obstacles for M&A deals in Vietnam despite the fact that supportive and positive factors dominating the trend for 2012 outlook.

1. Legal framework affecting M&A are scattered in different laws and regulations

Firstly, legal framework affecting M&A are scattered in different laws and regulations including laws on competitiveness, investment, enterprises and securities. Enterprise Law is the main legal framework while other laws also have related regulations.

Approving M&A deals in Vietnam is complicated, said Indochine consultancy. In Vietnam, the first step in approving M&A deals related to foreign partners is to determining if the deal is legally feasible from different aspects before assessing financial capacity, pursuing, negotiation, etc . If these steps are not fully implemented, any changes in business licenses might be rejected and all the efforts were wasted. Meanwhile, in other countries, authorities must only consider anti-monopoly and protection of sensitive sectors before approving M&A deals.

2. Foreign ownership restriction in many industries is a big obstacle for M&A

While Inbound M&A is the most active, it has many legal barriers.

After Vietnam entered WTO, limits on foreign ownership has been loosening, but it is slow and there are still many other obstacles.

Retail industry is an example. Although Vietnam committed to remove limits on foreign ownership from 2009, retail industry in Vietnam still has many barriers such as pharmaceutical retail and distribution. A typical example of this is Mekophar (MKP) which is banned from adding “pharmaceutical whole sale, retail sale” as foreigners bought 4.3% stake in the company on HOSE. MKP had to hold AGM to seek approval to delist from HOSE and close foreign room to continue operation.

2.3 Challenges and Obstacles


3. Unbalance of deal supply and demand in some industries

We see unbalance of supply and demand in many industries such as property, steel, aquaculture, fund management and securities where investors want to divest to switch to other industries but they cannot get enough interest from foreigners.

In these industries, many companies want to sell projects but there are few buyers. The reasons lie in the fact that these projects are too small to catch foreigners’ interests while overseas funds are main capital source of Vietnam M&A deals. Therefore, most M&A deals are conducted among domestic companies.

4. M&A is often understood as “acquisition” or “hostile”

The most important obstacle is that Vietnamese business owners still consider M&A is hostile. M&A is commonly understood with negative meaning rather than the positive one, especially deals related to State-owned enterprises or family-run companies. State-owned enterprises are often sold when they are “out of date” and had management scandals such as Intimex Vietnam, Cosevco.

However, we also saw “market sense” of M&A activity in emerging industries such as internet, e-commerce. Many companies or websites worth tens of million of dollars like ebay.vn, vatgia.vn have been built with a clear vision of selling to domestic and foreign partners.

5. Financing M&A deals is an issue?

Most M&A deals are backed by a financial institution who provided loans for buyer. Current liquidity drain has resulted in many distressed assets but it also makes it difficult for buyers to arrange capital for their M&A plan.

In the deal that Thien Minh bought Victoria hotel system in Vietnam, IFC, a member of World Bank, provided loans for Thien Minh to support its target of developing travel and hotel industry in Vietnam and in the region.


Part 3: M&A: A strategy or a threat?This section analyzed reasons and benefits of M&A that companies can use as reference for their development strategy. We also analyzed some evidences showing that your company is an M&A target and measures to take to reverse the condition.


1. “Buy and build” strategy or establish a new company

Whenever you have a business idea, you have 2 choices either to buy an existing company or establish a fresh new one. The former is becoming more popular in Vietnam especially after the appearance of venture and mutual funds in the country. The fact that number of foreign corporations acquiring Vietnamese companies instead of establishing 100% foreigner owned companies is an illustration for the effectiveness of “buy and build” strategy.

2. M&A to achieve critical mass .

Achieving critical mass through M&A is important in many industries in Vietnam as most enterprises are small in size and fragile. Like the economy of scale for manufacturers, a company will make fundamental changes when they achieve critical mass. For example, North Kinh Do Corporation merged with Kido company to form Kinh Do Corporation or HungVuongPanga bought and offered to buy a number of firms in fishery industry such as FBT, AGF in order to consolidate the raw material resources. Vietnamese Fishery Industry developed well and was great source of foreign currency but it had low profitability due to scattered raw materials and small scale businesses.

3. M&A to enter market and raise market share

The trend is most clearly reflected in deals that foreign firms set food in Vietnam through buying existing companies or private equity. Unicharm bought Diana at the price of $128 million to enter Vietnam’s diaper and toilet paper market where Diana has 40% market share. Vietnam is a must-enter market for Unicharm meanwhile the group already holds 25% of Asian market. It was rumored in 2009 that Vinamilk would buy Hanoimilk. Although Hanoimilk felt to 5th position from the 3rd one in the industry, it is still a promising target for any companies who are able to recover it.

4. Buying brand names or asset patents

We observed that brand name has significant impacts on pricing of many M&A deals. Investors were surprised when Diego - Johnny Walker’s brand owner bought Halico at 213,000 VND per share – doubling the market price. One of the most important reasons behind the deal was Halico’s brand name Volka.

3.1: Why M&A?We analyzed the most 8 practical reasons for considering M&A as a strategy for development. These principals should be applied for both sellers and buyers. In fact, all of these reasons were investigated from M&A deals analyzed in part 1.3.


5. Value chain added

Thien Minh Travel, a travel services company in Vietnam, has bought Victoria Hotels and Resorts for $45 million. This is a typical case in value chain expansion in business models. Thien Minh would able to provide the most competitive services for customers, and most importantly a package tour service from traveling, accommodation and other 5-6 star facilities that Victoria is supplying.

There are many other successful M&As like HVG buying AGF to improve their raw material input, refrigeration facilities, fish food, processing factories; Trung Nguyen buying Saigon café factory from Vinamilk to raise instant coffee productivity by 3 times; TH Milk Food JSC buying the Nghe An Tate & Lyle sugar company from the UK’s Tate & Lyle PLC for $52 million to actively manage materials for feed cows and sugar for milk production and Thanh Thanh Cong bought the series of sugarcane manufactures such as Ninh Hoa Sugar, Bien Hoa Sugar, Western Bourbon, etc.

6. Business activity diversification

This is a popular strategy for cash rich companies who want to diversify business activities in some sectors, even in non-related industries. For example, Ocean Corporation bough THT Vietnam JSC which runs businesses in computing –software development, internet – web design and programming.

7. Defensive strategy

Sometimes, M&A is used as a tool against acquisition. Two classic strategies applied in the world are (i) White Knight strategy: A target company welcomes a friendly partner to buy them instead of being acquired by a separate hostile competitor and (ii) Pac-Man Defense strategy: the target firm turns around and tries to acquire the other company that has made the hostile takeover attempt.

In Vietnam, our observation showed that M&As were used as a tool to avoid being acquired. To some extent, they are used successfully in a very Vietnamese way. Vien Dong Pharmaceutical (DVD) failing to acquire Ha Tay Pharmaceutical was a typical example. Some people said DVD bankruptcy might be the result of unsuccessful acquisition on HaTay Pharmaceutical.

There are various deals using M&A as a tool to fight against acquisition in Vietnam. For example, company A which is in the danger of being taken over has applied M&A strategy by buying company B from their relatives. Successful deal increases the A company existing owner equity, while diluting shares of hostile acquirer, as a result, reducing chance of being acquired.

3.1: Why M&A?


3.1: Why M&A?

8. Synergy gain

Merger between Lien Viet Bank and Vietnam Postal Savings Service (VPSC) created an enormous synergy. VPSC had a widespread fund raising network but they are not allowed to lend money. Meanwhile, Lien Viet Bank was a young bank and wanted to invest and develop their branches and transaction office network. Synergy gain was roughly estimated at thousands of billion dongs that Lien Viet Bank saved from not having to develop the such a network.

Mr. Nguyen Duc Huong, Deputy Chairman of Lien Viet Post Bank said: “Without the merger and consolidation, it takes a hundred of years to develop our present branch network at the current pace of development. Moreover, most post offices were located in the centre or “ Zero km” of localities, and most importantly, the system was widespread to isolated and off-the-road areas”.

Mathematical equation 1+1=2 failed to demonstrate synergy value from such M&A deals. We believe that the value of Lien Viet Post bank are much higher than the total separate values of the previous entities at VND 6.070 billion (Lien Viet bank: VND 5.610 billion; VPSC: VND 360 billion– in term of the chartered capitals). Simply calculating that the system of about 10 thousand transaction offices of VPSC is operated with full banking functions under the new strategy with VND500 million each, the total synergy value would be VND 5.000 billion.

(1) Thời Báo Kinh tế Việt Nam, ngày 20/7/2011, Bài “LienVietPostBank và đích ngắm 10.000 điểm giao dịch ở "Km số O“” – Ban Mai


3.2: Your company could be vulnerable to takeover

Your company could be a target of a hostile takeover or positively interested by a friendly partner to mutually support each other. Analyzing recent deals, we found the first criteria was industry. Enterprise is only attractive when it operates in the high growth sectors in Vietnam. Based on our subjective opinion and experiences from working with buy side partners, descending top favor industry is: consumer goods, finance, construction and material, pharmaceuticals, logistics and transportation.

No Industry Why?

1 Consumer goods

It was the industry having the largest number of M&A deals in 2011. If enterprise belongs to top 10 in the industry or has a certain advantage (such as having a large percentage of exported goods, having group of customer in specific segment , etc), it is not hard for them to find a foreign partner . Foreign investors still see big potentials in consumer goods. On average, the liter of beer and milk per capital in Vietnam is only 17 liter and 15 liter per person per year, respectively, etc.

2 Real estateThe only catalyst, the domestic capital for implementing real estate projects, has drained. If a project is in the center of a city or big enough (in the suburbs)or especially “clean “ etc, the owner will have high possibility of finding a partner.

3 Banking-finance

Banking is extremely surrounded by difficulties but it is impossible to get a business license in banking, securities or insurance industries in Vietnam. More importantly, the foreign investors still see strongly development prospect of retail banking services, consumption lending, credit card etc, as “profit zones” of the banking system in the coming years. If a bank or organization has this strategy and implement it drastically, we believe that sooner or later big financial institutions such as Macquirie (Australia), Nomura, Mitsubitshi (Japan)… which haven’t participated in this market would be very interested.

4Construction and materials

The industry is considered to be very attractive and are continuously growing at fast pace along with urbanization in Vietnam as long as small-scaled and scattered problems are solved. Although there are a lot of difficulties but all segments in the industry such as civil construction, infrastructure construction, building materials like brick, cement etc. are all attractive. Taking cement industry as an example, although the media coverage says that the supply of this industry exceeds the demand for now, but in reality, no company dares to build new cement factory and therefore, the demand will soon exceed the supply in next 2-3 years

5 Pharmaceuticals

The demand of investment in pharmaceuticals has been as hot as it was for many years. However, after Mekongkar was blocked from medicine retail distribution due to foreigners’ ownership of 4.7% stake, legal barrier remains the key obstacle reducing the attractiveness of this industry .

6 LogisticsLogistics and relevant services have been attractive industry because it depends on the growth of Vietnam’s trades though the industry has many problems in productivity and management efficiency.

Table 6: Top M&A sectors of M&A interests in 2012



Besides operating in an attractive industry, a company is probably a target of an M&A if it meets one or more of the following popular criteria. We highlighted that the most important criteria is1.3: holding large assets but managing them inefficiently and bringing small value to shareholders. In fact, the other criteria are relevant to valuations (P/E and P/B) which only work in negotiating price.

Recently, 200 enterprises listed in 3 stock exchanges HOSE, HNX and UPCOM have market prices below their book values. However, we would like to point out that many of these enterprises possess one single asset that already has higher value than the company’s market capitalization. On one hand, it is the stock market’s problem and corporate poor IR and information disclosure activities. On the other hand, it shows high possibility of being taken over if shareholder structure is too weak to prevent actions from attackers. In reality, the story already happened to some real estate companies in Vietnam.

Group of criteria

Criteria Explanations

Group 1: Valuation

1.1 Low P/E ratio The enterprises have low market capitalization and especially has “sink” assets or having large assets but ineffectively managed could bring temptation or be targets of other organizations to participate and develop them.

1.2 Low P/B ratio

1.3 Having large asset base but inefficient utilisation

Group 2: Financial conditions

2.1 Low borrowings In most of M&A target searching orders, investors are interested in companies with “lean and clean” financial condition. In a different term, low borrowings and high net cash (calculated by amount of idle cash subtract to short-term loan) are most preferred.

2.2 Big net cash

Group 3: Operating conditions

3.1 Loss of key personnel In many case, the key personnel (CEO) leaves company or market share is sharply decreased, leading to worse financial conditions are catalysts for organization interesting in M&A

3.2 Loss of market share

Group 4: Ownership structure

4.1 Low free-float The characteristic of ownership structure might be the key factors determining the possibility of successfully implementing M&A. If company has no big holder who has ability to against M&A activities, the possibility of being acquired is significantly high.

4.2 Lack of big shareholders

4.3 Smaller number of shareholders

Table 7: What makes your business most vulnerable to takeover?



Taking one of many criteria indicating high possibility of being interested and acquired as an example, we choose criteria to filter a database of StockPlus’s listed company:

1. Enterprise with a lot of cash. High net cash( cash and cash equivalents minus short-term borrowings) and accounts for more than 50% of market value. It implies that if you invested 100 VND to acquire a company, you could get 50 VND in cash which belongs to that company.

2. Low borrowings: The acquirers would be afraid of taking over a company having high level of leverage

3. Low market valuation : P/B (only calculated base on book value of physical assets) is below 1 times.

4. Industry: not financial industry

We get the list of companies meetings the M&A criteria above:

Table 8: The most likely companies being taken over

Ticker Sector Cal Price MarketCapital

P/E P/B Net Cash Net cash D/E Free-float

VND VNDB VNDB % %

HVX Construction & Materials TTM 4,000 74 9.50 0.39 82 111% 0.89 18%

PGT Travel & Leisure TTM 5,400 50 6.44 0.51 54 109% 0.18 52%

EBS Media TTM 6,400 64 5.54 0.59 66 103% 0.59 80%

TAG Industrial Goods & Services TTM 20,700 168 3.26 0.82 161 96% 0.48 30%

HTP Media TTM 4,100 7 4.19 0.35 7 95% 0.24 78%

PJT Industrial Goods & Services TTM 6,000 50 4.35 0.50 40 80% 0.57 49%

VFC Industrial Goods & Services LAG 9,000 180 7.49 0.58 141 78% 0.96 38%

NHC Construction & Materials TTM 25,300 37 2.00 0.99 27 71% 0.22 63%

HAS Construction & Materials TTM 5,100 40 4.48 0.26 25 62% 0.50 61%

VHH Construction & Materials MRY 3,900 23 7.65 0.32 14 60% 0.80 27%

SCD Food & Beverage TTM 16,300 138 6.49 0.89 82 59% 0.23 2%

DAC Construction & Materials TTM 15,700 16 3.26 0.58 8 52% 0.90 32%

There are 5 companies including HVX, PGT, EBS, TAG and HTP that have amount of cash is equal to market value. They are probably “ good baits”. Of course, it is theoretically situation based on principals. To implement these deals, there are a lot of factors that have to concern including the future of industry in which they operate, the quality of assets, infrastructure, technology, etc.. and obviously the ownership or free-float is large enough to accumulate the adequate percentage of ownership.

Source: StoxPlus


Part 4: A Case Study:

Beton 6 – in post M&A eraIn this session we analyze the deal between HB Group and Beton 6 Corporation (BT6) done in 2009 in details to point out restructuring measures taken after M&A and what M&A brings to add value for shareholders.


4.1: A Case Study: BT6 in post M&A era

Beton 6 Corporation (BT6 - HOSE) is a typical case for a state-owned company which struggled hard after IPO but gained great success after M&A.

After 10 years from its IPO, Beton 6 had stable development without any break-through despite the appearance of Dragon Capital with 37% stake. However, Beton has entered a new life after it was bought by HB Group with dominating shares (buying all Dragon Capital stake).

.• Beton 6 Corporation was established in 1958 by American RMK

corporation, and became Vietnam’s state-own company after the war. The company produced precast concrete elements . There are few companies in the industry therefore, Benton 6 had almost all market shares with an average profit growth of 15% per year before being IPO in 2000.

• Dragon Capital is a financial institution and its target is profit from divestment from Beton 6 instead of the company’s long-term development and size break-through. Dragon Capital has good reason to investment in Beton 6 with 60% market share and 15% profit growth/year, the question remains is to find a buyer to divest in a properly time .

• Two years after IPO, Benton 6 was 30% owned by the state, 40% by financial institutions and the firm had no motivation to boost development. Benton 6 expanded its business into work construction but the strategy was not fully implemented due to high labor cost, increasing material costs, time consuming construction process. By 2009, precast concrete elements production still contributed 70% to Benton 6 revenue.

Development History

• Beton 6 Corporation was established in 1958 by American RMK corporation, and had its IPO in 2000.

• After privatization, no break-through from 2000-2009

• Work Construction expansion brought only 30% revenue

The following information about BT6 was extracted from article in the Nhip Cau Dau Tu (investment bridge) issued on August 8, 2011 by Tran Trong Tu.



• As more and more new companies appeared in the industry, Beton 6 competition pressure rose but its capacity prevented the firm from expanding businesses to meet customers’ new demands. Beton 6 needed a break-through in strategy to ensure its stable development, and it is when HB Group took action.

• HB Group invested in Beton 6 from 2006, but with less than 50% stake, HB Group could not decide Beton 6 development strategy. In 2009, HB Group bought 37% stake in Beton from Dragon Capital to renovate the company from Q2/2009. Though the deal was undisclosed, HB Group is said to pay premium to the market price.

HB Group obtained controlling stake through M&A

• HB Group appeared to make a milestone for Beton 6

• HB Group raised its stake in Beton 6 to 80% after buying 37% stake from Dragon Capital

Founded by American RMK

IPO in 2000 with a capital of VND58 billion Dragon Capital holds 37% stake

2000 2002 20071959 2009 2010 xx

HB Group bought 37% stake from Dragon Capital

Targeting 40% increase in revenue to $70 million

Raising charter capital to VND109 billion

2009Keeping innovating after M&A with a target of 50% annual increase in revenue

BT6 Listed on HOSE

2011

Revenue rose 37% from 2009



BT6 Restructuring post M&A

• HB Group set 5 big targets after holding 80% Beton 6: : (i) stabilizing human resource, (ii) introducing new trademark, new strategy (iii) adding high-qualified managing staff (iv) improving work practice and productivity (v) developing R&D

• Stabilizing human resource: HB Group announced to keep chairman Nguyen Hung (who used to be chairman & CEO) and majority of key staff to clear suspicions that the company will completely change

• New brand name, new strategy: Beton 6 decided to change its trademark and expandedbusiness into infrastructure, a sector that is expected to see strong growth in the next 20-30 years in Vietnam. Nguyen Trung Hau, CEO, said : before 2010 our revenue structure was heavily weighed by precast concrete elements but in the next 5 years, the revenue ratio will be 70% from work construction and 30% from precast concrete elements. Hau had 13 year experience in big multi-national corporations such as Ha Tien cenment, Holcim cement, Vietnam building materials and he was appointed as Beton 6’s CEO by HB Group.

Product Profit margin Market share

Growth

Girder 27% 37% 20%

Sheet pile 18% 45% 25%

Square pile 20% 40% 20%

Spun pile 8% 15% 30%

Infrastructure Construction 14% -

1. BT6 Dung Quat2. BT6 Tan Uyen3. BT6 Binh Duong4. BT6 Head Office5. BT6 Long An6. BT6 Nghi Son

• Recruiting high-qualified managers: To reach the targets, HB Group added key staff with tens of high-qualified engineers to takeover key operation management positions and to prepare for the next generation. Beton 6 also develop labor forces in the project- located areas.

• Improving efficiency and productivity: Beton 6 used consulting services to improve its work practice and productivity, introduced Key Performance Indicator (KPI), an industry jargon term for a type of Measure of Performance, to assess staff’ performance. Beton 6 also raised 50% total income for all of its employees.

• Investing in R&D and new products: The company also developed its own R&D to develop new products, technology solutions and work solutions. Beton 6 is working with other local contractors to expand construction works and cooperate with foreign partners in technology transfer.

Table 9: Market shares of BT6’s key products in Vietnam

Source: Beton 6



Initial positive results after M&A:

After a year of making changes, Beton 6 has seen initial positive improvements partly reflected in financial numbers, however, the company can achieve bigger targets in the future.

• Improved profit margin: After HB Group buying Beton stake from Dragon Capital, the company’s profit had positive changes: in 2010, Beton 6 made a net profit of VND135 billion on revenue of VND1.113 trillion compared with corresponding numbers of VND47 billion profit on VND844 billion revenue in 2008.

Source: StoxPlus

4.8%

6.7%5.4%

4.3%

9.7%9.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2005 2006 2007 2008 2009 2010

13 17 24 26 37 44 40 56 62

95 125

177

243

343

-

50

100

150

200

250

300

350

400

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

• Doubling capacity and expanding into infrastructure construction works: The company’s expansion into infrastructure focusing on projects using precast concrete elements such as bridge & road, underground works has brought certain positive results. The company expected construction revenue to increase from 30% in 2010 to 45% in 2011, and 60% in 2015. BT6 has a list of under-going projects and will bid for more to reach its target.

Source: StoxPlus

Figure 2: Higher after-tax profit margin (%)

Figure 3: BT6’s Revenue targets in 2012-2016 ($ million)


Part 5: The basics of M&AThis session provided basic knowledge of M&A and in Vietnam conditions.


M&A is an acronym of Mergers and Acquisitions. Article 17 in the Competition Law defined a merger is “ a company or a number of companies transfer all its/their assets, rights, liabilities and legal interests to another company and ended the former existence” while an acquisition is “one company purchase the whole or a part of another enough to take control, exclusively manage all or one business activity in the bought company”

In the market, some small deals of transferring shares are also mentioned as a M&A deal, but in our opinion, an M&A deal must include transfer of company’s share and control.

$Fund provider

LawyerDue Diligence

Buyer Seller

Consultant

Blah blah

Figure 4: Parties involving in an M&A deal

What is M&A?

Parties in M&A deal In a typical M&A deal, besides the buyers and sellers, there are also: deal maker, legal advisor, financial advisor doing due diligence (mainly international auditing companies) and fund provider (funds or banks). Please refer to Figure 4 below.

The typical M&A deal is mainly applied for foreign related deals. Domestic M&A, to our observation, buyers mostly do all steps in the deals and do it fast.

5.1: M&A Basics


Inbound Deals = overseas corporations entering Vietnam market through investing in or buying local company

Domestic Deals = deals occurred between local companies or foreign owned companies doing business in Vietnam

Outbound Deals = Vietnam companies invest in offshore through buying overseas company.

M&A activities in Vietnam are classified as (i) Inbound Deals meaning overseas corporations entering Vietnam market through investing in or buying local company; (ii) Domestic Deals are deals occurred between local companies or foreign owned companies doing business in Vietnam; and (III) Outbound Deals meaning Vietnam companies invest in offshore through buying overseas company.

Share transfer sometimes are mentioned as M&A due to blur between private placement and M&A. In many cases, to our observation, buyer only own 9% stake but buyer has control in the company and economic profit belongs to buyer.

To expand business in Vietnam, an overseas corporation can (i) open branch/ representative office; (ii) establish 100% foreign owned company or joint-venture; (iii) buy local company or buy stakes in local company through M&A and other cooperation such as BCC, BOT, etc.

Entering Vietnam through M&A has been considered the first choice by many overseas corporations as representative office and branch have limits of not being legible to arrange production and business while FDI is falling.

Many big local companies have opened their budget of billions of dollars to expand businesses, including buying other domestic companies in the industries such as: Lien Viet Bank buying Vietnam Postal Savings Service Company (VPSC), a member of VNPT and Xuan Thanh Group buying Vincom Securities, etc.

Besides, deals between foreign owned corporations running businesses in Vietnam are also put in this category.

We already saw Viettel, Vinamilk, Hoang Anh Gia Lai, BIDV and many other corporation investing offshore through buying majority stake in overseas companies to make foundation for their businesses. This trend is expected to continue in the process of “internationalization” of Vietnam’s big groups.

5.2: Types of M&A activities in Vietnam


5.3: Differences between M&A and financial investments

Opinions of investors in the targeted companies

Investors in M&A deals associate financial investment in the targeted company with positive changes in the company’s strategy and management and focus on cooperation between the two sides after the deal. Meanwhile, financial investors are interested in current profitability of the company and more importantly, in the liquidity of their investment.

Observing M&A deals in Vietnam in the past years, we found basic differences between M&A activity (new practice) and financial investment (popular over 10 years) as follows:

Time and procedure of the deal

It often takes 1 year to investigate and negotiate an average M&A deal, and 2-3 years for a big deal while it takes from 3 to 6 months to decide a financial investment.

Both two kinds of investment have to carry out Due Diligence. However, M&A deals focus on legal review, company’s operation, customers, etc while financial investors look at company’s fundamentals such as ownership structure, financials and liquidity.

M&A investors often have to pay premium to market price

Normally, M&A investors pay a significant premium compared with market price of the targeted company such as: Diego offered to buy Halico at VND213,000/share; Tanlax paid for PIV at 150% higher than the market price. This reflects expectation of M&A investor in cooperation between the two side after the deal to create big changes in targeted company’s size and operation or other agreements in the M&A deal between the two sides.

Meanwhile, financial investors evaluate the targeted company’s price in the principle of “mark-to-the-market” based on its fundamentals such as financials and growth prospects


Call us today to find out how our services can benefit you

Tuan NguyenAnalystEquity Research

StoxPlus Corporation5th Floor, Indovina Building36 Hoang Cau, Dong DaHanoi, Vietnam

Tel: + 84 (4) 3562 6962Fax:+84 (4) 3562 [email protected]

London Office7 Dawlish AvenueLondon N13 4HPUnited Kingdom+44 (0) 791201 3738

Harry Hoan Tran CFAResearch Director , StoxPlus Corporation

We are pleased to bring you this report on Vietnam M&A activity in the first 9 months of 2011. This first issue focuses on : (i) M&A deals and (ii) Private Equity investments in Jan-Sept, 2011..

The objectives of this report are to:

• Make Vietnam’s M&A activities more transparent through providing investors and corporate with information and data of M&A deals as well as economic, financial and technical factors around the deals.

• Communicate to help business owners, corporate leaders to better understand M&A as an opportunity or a business development strategy rather than a threat.

• Help relevant governing bodies appropriately rate the importance of M&A activities in the economy.

Vietnam M&A activities are hard to collect fully by nature due to unclear legal framework and the fact that most M&A deals are over-the-counter and undisclosed. However, being a provider of data and intelligent information with a wide network of experts and partners onshore and offshore, StoxPlus is confident that our Vietnam’s M&A data is more comprehensive than any others in the market.

As always, please kindly send your comments and feedback on our research to my email at [email protected]

Regard,

Thuan Nguyen, FCCACEO, StoxPlus Corporation

Harry Hoan Tran is an expert with 15 years of experiences in banking and finance. He was a Investment Director in Lehman Brothers , Lloyds Banking Group and senior manager in Investment Banking and Capital Market Advisory of PwC London. In the past, he worked for PwC Vietnam from 1996 to 2001 with experiences of financial advisory and management for many local banks in Vietnam.

He is a CFA chartered holder, a worldwide recognised and reputable certificate from USA for a finance expert. He is a membership of International Investment Association in UK and a member of ACCA UK.

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