Saturday,  Mar 28, 2020,17:01 (GMT+7) 0 0
Local firms fearing a takeover
By Trieu Duong
Sunday,  Mar 22, 2020,13:49 (GMT+7)

Local firms fearing a takeover

By Trieu Duong

Nguyen Kim is the latest local corporation to be acquired by foreign investors - PHOTO: THANH HOA

News that Nguyen Kim, one of Vietnam’s biggest electronics retailers, has been acquired by Thailand’s Central Retail has captured the attention of market observers in recent days. It also shows that foreign investors are actively participating in Vietnam’s market for mergers and acquisitions (M&A).

The above deal was clinched in June 2019, but the news was only released with the decision by Central Retail Corporation (CRC), a member of Central Group, to launch an initial public offering (IPO) in Thailand on February 20, 2020. Since the third quarter of 2019, CRC has taken into account Nguyen Kim’s performance when assessing the group’s overall performance.  

Nguyen Kim is the latest local corporation to be acquired by foreign investors. Other major deals pertain to Kinh Do confectionery (sold to Mondelez International, from the U.S.), Pho 24 (sold to Jollibee, from the Philippines), Bibica (sold to Lotte, from Korea), Huda (sold to Carlsberg, from Denmark), Sabeco (sold to Thai Beverage, from Thailand), Binh Minh and Tien Phong plastics companies (sold to Siam Cement Group, from Thailand) and Hoan My Medical Corporation (with 65% of its stake sold to Fortis, from India).

The retail market will be bustling with M&A deals after its liberalization is complete. Many local supermarkets and retail outlets are plagued by the lack of professionalism in terms of supply chain management, distribution systems, goods display, prices, variety of products, quality control and networks. Their competitiveness has been adversely affected.

In reality, many retail chains have been sold to foreign investors or joined forces with them for survival. For example, Fivimart and Citimart have cooperated with Aeon from Japan while Family Mart, which boasts a relatively extensive network, has been taken over by Berli Jucker from Thailand and renamed B’s mart.

Meanwhile, many giant groups in Vietnam have actively poured capital into retail to retain the share of local enterprises. These include Vingroup, Mobile World and FPT. However, there are formidable challenges since these groups have entered a new sector, which is increasingly competitive with an influx of experienced and established foreign investors. Vingroup’s decision to merge VinCommerce into Masan and shut down Vinpro shows the ferocity of this market.

Rising trend

According to the General Statistics Office, the total value of capital contribution and share acquisition deals in 2018 was US$9.9 billion, up 59.8% year-on-year, with capital contribution deals that did not increase charter capital accounting for US$5.6 billion, or 57%. In 2019, the total value rose to US$15.5 billion, up 56.4%. Although the share of deals that did not increase charter capital fell to 40.6%, their absolute value remained significant at US$6.3 billion, up 12% year-on-year.

In the first two months of this year, among 1,483 rounds of capital contributions by foreign investors with a total value of over US$827 million, the number of deals that did not increase charter capital was 1,318 (83%). Their total value of US$544 million (66%, far higher than in previous years).

Capital contribution and stake acquisition deals that help enterprises increase charter capital are deemed as beneficial since they enhance firms’ financial capabilities and diversify the profile of stakeholders, especially strategic shareholders, to leverage on their governance capabilities, business ties and supply chains, thus boosting competitiveness. However, those that do not increase a firm’s charter capital often require local firms to withdraw capital or undergo acquisition.

This could be due to a firm’s dwindling competitiveness and a deal may be viewed as a coping mechanism before it is too late. Another possibility is that big shareholders do not believe in a firm’s potential for growth, so they gradually transfer capital to foreign investors, who, by virtue of their financial might, are willing to pay an acceptable price.

Nguyen Kim, established in 1996, was a pioneer in electronics retail and led the sector for almost 20 years. In 2015, when PowerBuy under Central Group bought a stake of 49%, Nguyen Kim was still a leading brand. However, since 2016, Dien May Xanh under Mobile World has overtaken Nguyen Kim, and the gap is widening, with Dien May Xanh achieving constant breakthroughs while Nguyen Kim struggled after the stake acquisition deal.

In 2019, Dien May Xanh reaped a revenue of more than US$58 trillion, almost 40% of the market, while Nguyen Kim’s earnings hovered from VND9 trillion to more than VND10 trillion.

It is worth noting that although the performance of firms such as Nguyen Kim has yet to soar, Thai enterprises stand to profit handsomely as they have more distribution channels in Vietnam, thus expanding their market share and revenue.

According to the General Statistics Office, Vietnam’s retail market was worth US$88 billion, but its value surged to US$130 billion in 2017 and is forecast at US$180 billion in 2020. Distribution and retail in Vietnam still abound in potential, with robust demand driven by a large and young population. The playing field has expanded to encompass ASEAN, with the establishment of the ASEAN Economic Community (AEC) on December 31, 2015, offering access to 666 million customers.

However, this means firms must compete not just locally, but regionally. This is one of the reasons why Thai firms have actively acquired companies in various countries in the region, with Vietnam as a focus.

Foreign enterprises entering Vietnam, directly or otherwise, can capitalize on opportunities offered by free trade agreements. Instead of setting up a new company, an administratively challenging process, acquiring an existing firm is quicker and enables investors to tap into its customer base, supply chain, human resources, market know-how and legal foundations. Capital from East Asian countries such as Korea, Japan and China remains dominant.

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