Vietnam inbound investment: Regional rivals

When Thailand-based Central Group was examining its expansion options for Southeast Asia, Indonesia and Malaysia ranked ahead of Vietnam on the list of priorities. These positions swapped around on further assessment of the competitive landscape. Vietnam is now primed as a “second home” for the conglomerate’s array of retail and hospitality interests.

“We realized that if everything went well from a macroeconomic perspective, we could bring our business in Vietnam to the level of Thailand in 10-15 years,” says Stanley Nguyen, head of property acquisition and business development at Central Group, noting that annual sales have already risen from $40 million in 2014 to around $1.5 billion, or over 10% of the company’s global total. “We’re really looking to build a massive scalable business to sell to 100 million people in this country, from rural to urban areas.”

M&A is a cornerstone of this expansion strategy. Central Group started with consumer electronics and food retail, purchasing 49% stakes in Nguyen Kim and Lan Chi Martin 2015. This was followed a year later by the $1.1 billion acquisition of Big C, a hypermarket and supermarket operator that also offered real estate exposure through its shopping mall properties. A later foray into e-commerce with fashion retailer Robins proved challenging, but Central Group is still looking at other opportunities in the space.

Big C is the second-largest inbound acquisition in Vietnam of the past decade, behind ThaiBev’s $4.7 billion purchase of beer maker Sabecco, which closed last year. These deals have propelled Thailand to the forefront of the surge in foreign M&A in Vietnam in recent years. Thai investors might not write as many checks as their counterparts from Korean and Japan, but they tend to be larger.

Between 2010 and 2014, overseas buyers deployed $1.39 trillion in the country, with Japan responsible for 22%, according to Mergermarket. Since 2015, the Japanese share has fallen into the single digits as the cumulative transaction value surpassed $3 trillion. Thailand contributed more than half of that, with Korea second on 11.5%. 

“Companies from Japan and Korea have generally been the most active investors, but we have observed significant interest from Thailand as well. They see opportunities everywhere, and they are more flexible than US and European investors when it comes to adapting to local culture and meeting the requires of local partners,” says Cong Ai Nguyen, a partner with KPMG in Vietnam. “There have been some big moves by Asian buyers in recent years but there are also more smaller companies chasing deals as well.”

Legacy investors

Japan and Korea remain the heavyweights in terms of foreign direct investment (FDI) in Vietnam, accounting for 44% of the $35.2 billion in approved projects last year. This involvement is built on longstanding trends in commodities trading and outsourced manufacturing. Japanese private equity firm Advantage Partners drew on this experience when launching its first Asia ex-Japan fund two years ago and bringing in Mitsui & Co. and Marubeni Corporation as anchor LPs.

“They have 50 years of history in Vietnam, hundreds of millions of dollars in revenue, and multiple business units,” says Emmett Thomas, Advantage’s head of Asia. “Most Japanese trading houses started trading commodities there, but now they have operating entities – IT businesses, factories. They are the tip of the spear for corporate Japan in a lot of these emerging markets, they meet all the people in government, they develop banking relationships. It is something we can leverage.”

Samsung is the best example of how significant Japanese and Korean influence in Vietnam has become. It has turned the country into its largest smart phone production base, investing more than $17 billion in eight factories and one R&D center. Exports from these facilities totaled $54 billion in 2017, one quarter of the national total. This reportedly made Samsung’s local subsidiary the largest company in Vietnam by revenue. LG Corporation is taking a similar approach, announcing last year that it would move all its smart phone production capacity from Korea to Vietnam.

The country offers a labor force that is relatively cheap and highly skilled. It serves as a helpful diversification option for companies that want to ease their dependency on China and is more politically stable than many Southeast Asian countries. Vietnam is also climbing the value chain. While textiles and footwear still make up nearly 20% of exports, the contribution from phones, computers, tools and machinery has risen from 12.4% to 39% over the last eight years.

However, it has begun to offer much more as well. Vietnam was Asia’s fast-growing economy in 2018, and GDP expansion is expected to remain above 6% for the foreseeable future, the debilitating effects of a real estate bust and a banking crisis in the first half of the decade now firmly in the past. The median age of the 96 million population is just 30.5 years, pointing to upward trends in household incomes and spending. 

Companies in Japan, Korea and Thailand don’t see this in their home markets. “I think the owners of many corporations know they’ve reached a stage where it is difficult to change their growth path,” says an executive at a regional conglomerate that has been active in Vietnam. “Without expansion into Vietnam, I don’t think there’s been any other growth story for them in recent years.” 

If the desire to tap Vietnam’s strong economic fundamentals represents a gradual evolution, it is also possible to pinpoint developments that have facilitated investor engagement. For several industry participants, 2014 is the key year. First, the country made substantial changes to its foreign investment legislation. These included moving from a “positive list” to a “negative list” model, which reduced the number of sectors in which overseas players couldn’t participate from 51 to six.

Second, the Trans-Pacific Partnership (TPP) initiative began to gather momentum, culminating in the announcement of an agreement in 2015. “As TPP became a likely scenario, foreign investors saw the potential and flocked in, our workload skyrocketed,” recalls one local transaction advisor. A modified accord, which excludes provisions solely favored by the US following its decision to drop out, has since come into effect, but there are still plenty of transactions to work on.

Capturing the consumer

Approximately 150 inbound M&A deals have been announced since 2015 – a 50% increase on the preceding five years – with Japanese and Korean buyers involved in about 30 each and Thai investors in half that number. Five of the 10 largest transactions have been in the consumer sector, including SK Group’s acquisition of a 9.5% stake in Masan Group for $474 million last year. The Korean giant set up a dedicated holding company in Singapore to pursue deals in Southeast Asia and is said to be working on a bumper investment in Vingroup, Vietnam’s largest conglomerate.

Within the consumer sphere, mainstays such as retail and fast-moving consumer goods are increasingly joined by healthcare, education, and technology verticals like e-commerce and mobile gaming. Real estate and financial services are also popular as proxies for consumer growth.

Jeff Olson, the office managing partner for Hogan Lovells in Ho Chi Minh City (HCMC), has represented Japanese industrial conglomerate Sojitz Corporation on several deals. Historically, the company focused on agrochemicals and energy before entering the food industry value chain with investments in milling, wholesale distribution and then convenience stores. While recent M&A activity follows this pattern, Olson notes that Sojitz is considering broader consumer opportunities.

The company has completed two investments in the past 12 months: the purchase of a 10% stake in food processing business Pan Group for $36 million and a majority acquisition of tissue and industrial paper producer Saigon Paper Corporation for $91 million. The willingness to assume control of targets from the outset – as opposed to taking a minority stake and working towards a majority position over time – reflects a level of comfort with Vietnam born of familiarity.

This is not shared by all corporates, however. Sojitz has a market capitalization of JPY440 billion, annual revenue of JPY1.8 trillion, and three decades of experience in Vietnam. Japan-based fund manager ACA Investments is working with an Osaka-based real estate developer that has domestic clout but recognizes it is ill-equipped to enter overseas markets on its own. The company is participating alongside other investors in a $70 million fund that will back projects operated by local developers in Vietnam. ACA will source deals and serve as the on-the-ground interface.

“An increasing number of mid-tier Japanese companies are looking to penetrate Vietnam,” says Hiroyuki Ono, a partner at ACA. “It is clear the country is shifting from being a manufacturing hub to more of a consumer market. Companies used to look at Thailand and Indonesia after China, but Vietnam is now challenging them. It is restaurants, services, retail – anything that captures future growth from that 90 million-plus population. They are also getting used to cross-border M&A.”

Friends and rivals

Numerous private equity investors see themselves as natural partners for mid-size corporates that have little experience with outbound deals. Having bought into Vietnamese apparel company Elise Fashion last year, Advantage was quick to leverage its networks within Japan to provide operational input. At the same time, the GP’s Asia team is constantly looking for ways in which its Japanese companies – in its network and portfolio – can pursue expansion opportunities in the country.

“We can help make the deal work, help them with integration. Most things we work on, we have early discussions with Japanese corporates to see if they want to co-invest or enter into a business alliance,” says Advantage’s Thomas. The right positioning on entry could ultimately pay dividends on exit, with Advantage targeting assets that could appeal to Japanese buyers. Not long before the Elise acquisition, a smaller Vietnamese player in the space was sold to a Japanese company.

There are the makings of a track record in terms of Asian strategic investors buying from private equity in Vietnam. Last year, Mekong Capital generated a 6.3x gross multiple from the sale of local pharmaceuticals player Traphaco to Mirae Asset Financial Group and Daewoong Pharma. They overcame competition from Japanese and Korean trade buyers as well as private equity firms.

“Pharmaceutical companies wanted to acquire Traphaco’s distribution network because it’s the second largest in the country. It sells directly to pharmacies, which makes it strategically viable,” says Chris Freund, a partner at Mekong. “We had a lot of inquiries over the years and eventually ran a process. It’s relatively easy to exit in Vietnam, because the market is strategically important enough that a lot of regional players have an intention to become major players here.”

Freund expects growing interest in Vietnam from Asian investors to translate into more LP commitments from within the region when Mekong raises its next fund. Other private equity investors – especially pan-regional GPs doing mid to large-cap deals – might regard this interest as a double-edged sword. It can be difficult for a financial investor to outflank a Japanese, Korean or Thai strategic player in a competitive process when the latter factors synergies into its acquisition price.

And Vietnam, without question, is becoming more competitive. This is already apparent in the terms that sellers are willing to accept. As recently as four years ago, private equity investors got most of the items on their wish lists for growth deals: minimum return guarantees, board seats, veto rights, most favored nation clauses. Those days have passed.

“If you want to put in $40 million, you would be lucky to get a simple liquidation preference,” says Olson of Hogan Lovells. “Companies don’t need your investment because there are several other groups lined up that might be able to offer more favorable terms. I’m not seeing frothy markets where people pay stupid multiples for businesses because they must win, but there are fewer bells and whistles on deals than before.”   

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• Topics
• Southeast Asia
• Buyouts
• Consumer
• Vietnam
• Advantage Partners
• Mekong Capital
• M&A
• Thailand
• Japan
• South Korea