Vietnam SOEs: Shifting ground

For investors operating in Vietnam’s shrinking universe of state-owned enterprises (SOEs), the biggest challenge is often staying out of the spotlight. Firms that see the government’s privatization efforts – or equitization in official terminology – as an opportunity aim for deals that can be kept as confidential as possible.

“We don’t really participate in equitizations that are followed by everyone and their sister, on the international scene or the domestic scene – those businesses tend to be overvalued. We focus on equitizations that can be done quietly, where we can negotiate good terms and help the business grow,” says Andy Ho, managing director and CIO of VinaCapital.

While this low-key approach is productive for those with the resources and connections to find and close deals quietly, most investors continue to find Vietnam’s SOEs challenging. The government’s enthusiasm for privatization remains high, but corresponding concerns about prospective owners and for protecting its own interests continue to raise stumbling blocks, particularly for private equity firms. With the pool of available SOEs likely to increase these concerns rather than lower them, investors must be prepared for high levels of scrutiny and careful negotiation when pursuing these deals.

Because the process was so successful in turning these companies into more thriving corporates with better corporate governance, the government felt that they had sold too cheap – Trinh Nguyen

When Vietnam’s government last published official records on SOEs in its 2015 statistical yearbook, it recorded more than 402,000 enterprises nationwide as of December 2014. Just 3,048 were SOEs, defined as companies in which the government controls more than 50% of the capital. By contrast, there were more than 388,000 non-state enterprises, in which the government controls less than 50% of the capital, and 11,000 enterprises that were either 100% foreign-owned or joint ventures between foreign and domestic investors.

These figures represent a significant decline in the number of SOEs – 10 years prior there were 4,086, representing 3.6% of the country’s total enterprises. Only 105,000 enterprises were non-state owned, and fewer than 4,000 were foreign invested. Five years before that, there were 5,759 SOEs, 35,000 non-state, and 1,500 foreign.

Reform agenda

Industry players see this trend as the payoff of Vietnam’s Doi Moi reforms, begun in the 1980s. Policymakers at the time hoped to shift the burdens of overseeing the planned economy to the private sector, freeing up the government to focus on other priorities and improving corporate governance at the companies themselves.

“It hopefully puts an appropriate amount of money into the government’s pockets that can then be redeployed to areas where the government does have funding responsibilities, such as social and physical infrastructure,” says John Ditty, managing partner for KPMG’s deal advisory practice in Vietnam and Cambodia. “The secondary, longer-term effect is that the country gets a better-functioning, more productive business.”

The reforms have generally been seen as a success. The Asian Development Bank noted that over 3,700 SOEs were fully or partially privatized between 1999 and 2013 and many non-privatized SOEs had divested non-core operations and improved transparency. There have been a few stand-out performers as well: dairy producer Vinamilk listed on the Ho Chi Minh Stock Exchange in 2003 and reached a valuation of VND182 trillion ($8 billion) last year. VinaCapital and fellow domestic GP Dragon Capital continue to hold stakes in the company.

While the overall outlook for SOE reform is positive, industry observers say investors hoping to participate in further privatizations need to be prepared for a challenging environment. The nature of the remaining SOEs means that the government is likely to drive harder bargains both before and after letting go of its stakes.

The decline of SOEs in absolute numbers belies their continued importance to the economy. They were worth more than non-state and foreign invested companies combined until 2006, and while non-state enterprise valuations have regularly surpassed those of SOEs since 2009, SOEs were still collectively worth VND6.3 trillion ($275 billion) at the end of 2014. This is more than foreign-invested firms and over two thirds the value of non-state enterprises.

The fact that SOEs retain such a large share of the country’s capital suggests that the government has held back on privatizing larger businesses. At some point, however, the supply of small companies that can be sold off for relatively small amounts will run low and the government will need to bring out the bigger candidates to keep the process going – and it will look for tougher terms on pricing as well.

“There were some very successful cases early on, like Vinamilk, which proved that privatization was the right step forward to improve efficiency of SOEs. But because the process was so successful in turning these companies into more thriving corporates with better governance and efficient operation, the government felt that it had sold too cheap,” says Trinh Nguyen, senior economist for emerging Asia at Natixis. “As a result, the government has been rather cautious with equitization and the state ownership of the economy remains sizeable.”

Strategic considerations are also expected to play a larger part going forward. Many state-controlled firms have dealings in areas that are considered sensitive either from a defense or social standpoint, such as food supply, transportation and education, and scrutiny of deals involving these businesses is likely to be high. The government has already identified 103 SOEs in which it will retain full ownership, across 11 sectors including electricity distribution, air traffic services, and explosives manufacturing. A further 31 require at least 50% state ownership.

Even when no vital strategic interests are at stake, policymakers are sensitive to the optics of selling well-known businesses. For example, Saigon Beer, Alcohol and Beverages Corporation (Sabeco) and the Hanoi Beer, Alcohol and Beverages Corporation (Habeco) have been slated for public listing for years but there has yet to be any movement. Vietnam’s Prime Minister has spoken on the importance of the companies protecting their iconic brands.

In some cases the government will continue to enforce its interests after privatization through the State Capital Investment Corporation (SCIC), founded in 2006 to take stakes in Vietnamese companies and act as the government’s representative; in practice the government usually transfers its shares to the SCIC.

While investors who have participated in privatizations say the SCIC is no different than other investors in most regards, it can be difficult to buy its shares because the corporation’s mandate is focused on maximizing returns to the government.

“They have to keep it for a certain period and maximize the sale price, because the money goes into the treasury,” says Hans Christian Jacobsen, managing partner at PENM Partners. “We can try to convince them that having us invest would be good for the company, but that doesn’t really appeal to them because they are bound by a simple principle. Like it or not, that’s the way it is.”

The SCIC has begun to put a higher priority on internal improvements, however. At the end of last year it announced a partnership with the International Finance Corporation (IFC) aimed at improving corporate governance in its portfolio companies. Kyle Kelhofer, country head of Vietnam for IFC, says the SCIC’s willingness to implement such a program indicates it understands the benefits that improved governance can bring to all stakeholders.

Mixed bag

For private equity investors, Vietnam’s SOEs offer a mixed bag. VinaCapital has made privatization a key pillar of its strategy, and continues to seek out deals such as last year’s VND1.1 trillion IPO of Airports Corporation of Vietnam. Other GPs, such as PENM, say that while they will pursue a state-owned company if they see potential for improvements, they do not consider the sector a major part of their planning.

Industry professionals say financial investors need to be prepared for difficult negotiations if they go after a state-owned company. A GP might need to bid in partnership with a strategic investor that can demonstrate its own sector expertise to have a chance of success.

“What the Vietnamese government is looking for is partners who can bring benefits from their operations elsewhere in the world in terms of transfers of technology or expertise,” says Amy Beckingham, a corporate partner at Latham and Watkins. “While a private equity firm may have experience running other, similar businesses, and may be able to bring with them a kind of key management team, they will need to demonstrate in real terms the value that they can bring to the SOE. In a competitive scenario where there are multiple bidders, teaming up with a strategic which has business synergies and an existing management team in place may put the PE firm at a distinct advantage in this regard. While these factors obviously present PE firms with more challenges than what they typically might see in the more mature PE markets, there are definite opportunities in Vietnam for PE firms with the right advice and structure.”

Also challenging for PE investors is the five-year lockup period after privatization, which would delay exits. The government is reportedly considering lowering this period to three years, but no official announcement has been made. In addition, such a change may not be retroactive, meaning that investments made earlier could still be subject to the full five-year lockup.

Despite these concerns, industry observers note that SOE reform continues to enjoy strong support from policymakers. While the pace of privatization will likely continue to be affected by concerns over strategic and financial issues, all agree that opportunities will continue to arise.

“The current government is more committed to the equitization process than we have seen for quite some time,” says KPMG’s Ditty. “The businesses that are being equitized are sizable businesses, they’re challenging businesses, but the government is committed to bringing partners into those businesses and allowing private sector participation.”

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• Topics
• Southeast Asia
• Expansion
• Restructuring
• Regulation
• Vietnam
• VinaCapital
• PENM Partners