Vietnam set to lead strong M&A activity
With companies expanding, the focus seems to be more on inorganic growth by way of mergers and acquisitions
Singapore
THE Asean growth story has revolutionised the mergers and acquisitions (M&A) landscape, with Asian powerhouses dominating more Western companies and whetting appetites for deal-making.
As Asean economies continue to expand, observers are placing their bets on Vietnam in the coming year, which seems set in the forefront for strong M&A activity.
Srividya Gopalakrishnan, managing director of Duff & Phelps, told The Business Times recently that she is seeing more activity in Vietnam and Myanmar, adding that the former is "very promising" as it starts to attract the attention of more foreign investors.
In December, mainboard-listed Thai Beverage, through its associated company Vietnam Beverage, announced that it had a winning bid for a 53.6 per cent stake in Sabeco, the largest state-owned brewer in Vietnam, for about 109.97 trillion Vietnamese dong (S$6.5 billion). The move could spark a series of deals involving the privatisation of state-owned enterprises in the next year.
David Biller, Citi's Asean corporate and investment banking head, is also upbeat about Vietnam in 2018. Referring to the Sabeco deal, he said: "(If) the privatisation goes well, then I think you have a long list of follow-on privatisations and, of course, all of those should be big and relevant enough to require foreign investments and, therefore, Vietnam does become a target rich environment." He added that there could be eight to 10 sizeable privatisations waiting in the pipeline for Vietnam.
In November, mainboard-listed Jardine Cycle & Carriage announced that it invested close to US$617 million for a 5.53 per cent stake in Vinamilk, known to be Vietnam's largest listed company by market capitalisation, with a value of about US$10.9 billion. The Vinamilk deal is part of its strategy in investing in market-leading South-east Asian firms, Jardine C&C told the Singapore Exchange.
According to Baker McKenzie's Global Transactions Forecast 2018 report, dealmaking in Vietnam has suffered from "a number of knocks to confidence in its economy", including weaker oil prices and the new US administration's rejection of the Trans-Pacific Partnership.
"But domestic drivers are solid, and the programme of economic liberalisation, privatisation of state enterprises and new investment in the energy sector should support a recovery in M&A activity," it said.
The report forecasts a total of 331 and 338 domestic and cross-border transactions in Vietnam for 2018 and 2019 respectively. Rob Subbaraman, head of Emerging Markets Economics, Nomura, pointed out that inbound deals for Asean and India, which he calls the "new foreign direct investment magnet", are averaging about US$100 billion per year, but could hit US$240 billion by 2025.
"A lot of that M&A activity is going to come from within Asia. Companies in Japan or even China (are) starting to do more in Asean. I think the North-east Asia flow of M&A to the South will be a big thing. We're particularly positive on Indonesia, Vietnam, and the Philippines," he said.
The positive outlook, however, is not limited to Vietnam, as Citi's Mr Biller highlighted that in Asean, Malaysia could spring a surprise. "In terms of M&A and capital market activity, I expect Malaysia could be the dark horse from the region in 2018 which people have forgotten about because of 1MDB."
And as companies continue to expand, the focus seems to be more on inorganic growth by way of M&A. Duff & Phelps' Ms Gopalakrishnan said that the focus on inorganic growth is due to the restriction in organic growth in Singapore and other emerging markets as well. A significant change in the M&A landscape she has seen is that more Asian businesses are acquiring Western businesses, as compared to the past when Western firms swooped up Asian enterprises.
"The confidence level of Asian companies has definitely increased compared to what it was a decade back. (Asian companies think) the world is our market, we go and acquire."
She attributed this confidence to the shortening of business cycles in the last few years like the Global Financial Crisis, when cash-rich Asian companies saw assets in the US and Europe available at "fairly good prices", and snapped them up because companies including those in Singapore, China and India see the US as a key market.
Moreover, valuations in the West are dropping and as Asia grows in size, exports to the West have increased in a few sectors like technology, pharmaceuticals, and research-oriented industries, she said.
Governments making progress on reforms
Nomura's Mr Subbaraman said: "Compared to North-east Asia . . . Asean is the region we're seeing governments actually making progress on reforms, (such as) opening economies to foreign direct investments. Also, macro policies have become a lot more prudent. They haven't just gone quickly for growth that leads to problems later on like inflation or current account deficits or budget deficits. The overall landscape is much more positive for M&A."
For the first three quarters of 2017, the values of 290 M&A deals in South-east Asia, including Singapore, Malaysia, Vietnam and Philippines, hit US$53.5 billion, up 23.1 per cent from the values recorded from Q1-Q3 2016 across 315 deals, according to a South-east Asia trend report by Mergemarket.
Choo Oi Yee, head of corporate client solutions for Singapore, UBS Wealth Management, attributes the increase in M&A activity to several factors, including "constructive" capital markets and low financing costs. "Corporates (are) looking to diversify and have more financial and strategic imperatives to execute on M&A," she said.
Baker McKenzie's Global Transactions Forecast 2018 is expecting M&A activity in Asia-Pacific to rise over 30 per cent from US$534 billion in 2017 to US$710 billion in 2018, before peaking at US$750 billion in 2019.
The report pointed out that building on a series of megadeals in 2017, global M&A activity in the consumer goods and finance industries will continue to generate the highest total deal values in 2018.
It forecast a gradual slowdown in the energy sector, as well as a rebound in the pharmaceuticals and healthcare, and technology and telecom sectors following "disappointing" levels of activity in 2017.
When it comes to Singapore, the technology sector is a rising star in the coming year, although Duff & Phelps' Ms Gopalakrishnan said the Republic still needs real estate to drive values since investors will continue to buy and sell property.
