Real estate firms are now facing three options including “hibernation”, expansion into other sectors and capital attraction for renewing business model. The third preference is what Nguyen Ba Duong, chair of Board of directors of Cotec Construction JSC (Coteccons-CTD) favours for tackling existing problems and future development.
Recently, this leading private construction firm has joined a M&A deal with Kusto Group, a large international corporation from Middle Asia that specialises in mining and real estate, which was officially released in late March 2012 in the context of property market woes.
The motive could lie in the necessity of scaling up capital for competition in the construction market that is currently overwhelmed by foreign companies. What is more, residential property construction segment have no longer been lucrative, which propelled this local firm to modernise the business model.
Although the deal took place within three months both parties have known each other for a long time, said Nguyen Quoc Toan, chair of management board of TNK Capital Partners, the consulting firm. They have found their way out of the quickly changing and unstable market by working together rather than surviving by themselves.
The share selling price is VND 50,000 per share, much higher than the market price (around VND 38,000 per share) driving the total transaction value up to above 525 billion dong (USD 25 million), equivalent to 24.7pct of chartered capital.
The appearance of this strategic partner has marked a turning point in renewing Coteccons’s business model which aims at business expansion and affiliate consolidation.
Currently, Coteccons that briefly concentrates on residential construction projects as the main contractor with more than 30 projects nationwide would be stick to this core business for stable cash flows. Moreover, this local business is about to participate in large property projects that are expected to be profitable in three and five years’ time. Also, infrastructure construction of manufacturing plants, roads, bridges and the like with stable revenue which has long been foundation for development of large international construction companies would be another target.
In fact, infrastructure development has seen more encouraging profitability ratio than the average percentage of property industry in the context of economic difficulties, Duong assumed. For instance, real estate industry’s average net profit grew 37pct in 2010 whereas that of HCM City Infrastructure Investment JSC (CII) alone reached 190pct, Construction Investment and Development JSC 63pct, Becamex Binh Duong 62pct and Song Da Urban and Industrial Zone Investment and Development JSC 45pct.
Despite profound contracting capacity in residential construction projects, the most outstanding of which is Tram Lake Strip project, Conteccons would opt to be subcontractor for foreign main contractors in terms of infrastructure construction for this fledging stage, said Duong citing the requirement on sophisticated technique and management method that are international firms’ expertise.
Also, the manager unveiled intention to join hands with other firms for contracting capacity enhancement. Other peers such as Unicons and Phu Hung Gia are now holding roughly 30pct stake in Coteccons, which could mount further so as to merge with Coteccons in the near future.
The deal has brought to mind the case of Masan Group which purchased Vinacafe to become the leading firm in food industry following the capital injection from the US’s KKR Investment Fund. In all likelihood, additional M&A deals with other assembly and electronmachenical companies would come so as for Conteccons to establish a new empire in construction sector. Yet, the senior manager of this group declined to comment further.