Vietnam puts a dauntingly high price on state assets
24-APR-2008 Intellasia | Financial Times
Apr 24, 2008 - 7:00:00 AM
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When Vietnam's state-owned Vietcombank put out a call last year for potential strategic investors, big financial groups such as Goldman Sachs and GE Money of the US and Japan's Misuho and Nomura all queued up for the chance to buy into one of the largest commercial banks in one of Asia's fastest-growing economies.
With less than 10% of its 85 million people using modern financial services and both its economy and retail banking sector expanding rapidly, Communist-ruled Vietnam is seen as a promising market for international banks, whose activities had long been restricted.
Vietcombank hoped a tie-up with a respected international partner would help it command a high price in an initial public offering as well as improve operational efficiency amid competition from foreign banks entering the market. Yet neither the global players nor the Vietnamese bank achieved their ambitions. After looking at both the bank and the rules governing Vietnam's state enterprise sell-offs, all potential foreign bidders walked away.
In December, Vietcombank proceeded with a domestic flotation that raised US$625m ( UK pound 314m). Its failure to secure a partner reflects the problems of Hanoi's partial privatisation process, as the government seeks to modernise its state enterprises. The country's highly protected service industries will be opened to foreign competition as part of commitments to the World Trade Organisation, which Vietnam joined last year.
In a process it calls "equitisation" rather than the politically charged privatisation, Hanoi is scheduled to sell minority stakes in high-profile enterprises that also include including other commercial banks, mobile phone operators and Vietnam Airlines. Yet the Communist authorities' apparent emphasis on maximising profits from these sales rather than ensuring long-term benefits to the companies and the wider economy has hindered deals and deterred investors.
In particular, prospective foreign buyers have balked at a peculiar legal requirement. These buyers, who are supposed to be selected and announced before the domestic IPO, are legally bound to pay the average bid price achieved at the auction if that is higher than theirs. The average bid price is calculated following a Dutch auction for shares offered to domestic retail and institutional investors.
"They hope to get someone to commit to an unknown price," says Tony Foster of Freshfields, the law firm, who has advised global banks in several privatisation deals. "But no board in the world of a multinational company would go for that. It's like writing a blank cheque."
Tran Tien Cuong, the director of enterprise reform of Vietnam's Central Institute for Economic Management, agrees that Hanoi needs to rethink the reform process if it wants to attract global investors. A better balance is needed, he says, between maximising the value of the sale and finding sound partners who will generate long-term benefits through their investment.
In state enterprise reform, Vietnam's rulers are following in the footsteps of neighbouring China, which from the 1990s began selling off minority stakes, especially in its state banks, ahead of overseas listings.
The sales were seen as a means of subjecting enterprises to the discipline of shareholder and market accountability. The aim was to boost their transparency and efficiency without the state giving up ultimate control. International companies eagerly participated, seeing the purchases as a way to cosy up to authorities and gain a toehold in booming east Asian markets.
Hanoi hopes to achieve similar aims with its equitisations. Yet investors say the process is out of touch with the realities of business and share pricing is not the only problem. IPOs take place before the enterprises have been legally converted into shareholding companies, leaving uncertainties about which assets will be transferred to the new corporation. Often the new companies are not established until months after the IPO, the enterprises hold investors' money in the interim. "They are paying for something that doesn't exist," says Foster of Freshfields.
The flaws in the process became evident with the botched partial privatisation last year of Bao Viet Insurance, the country's largest insurer. While 11 leading names in global financial services including Swiss Re, Nippon Life and HSBC carried out due diligence on Bao Viet, all resisted the legal requirement that they commit to paying the average price to be reached at auction.
In May, Hanoi proceeded with an auction in which domestic investors bid an average 74,000 dong a share. When the shares began trading in the unregulated over-the-counter market which thrives because formal listings can take up to a year following IPOs they immediately dropped 13.5%. Some 29% of domestic investors walked away, forfeiting their deposits on the shares.
Afterwards, HSBC reopened talks with Hanoi, expressing a willingness to pay the average bid price or a total of US$254 million for a 10% stake in Bao Viet, which had profits of just US$27m in 2006. The deal was completed only after arduous negotiations in which HSBC secured the right to a 25% stake within five years, in addition to other pre-emptive rights that the UK-based bank said added significant value to the investment.
After the difficulties with Bao Viet and Vietcombank, Hanoi appears to have recognised the deficiencies of its privatisation process. "There is a significant shift in the government priority from price to the quality of the strategic investor," says Le Song Lai, deputy director general of Vietnam's State Capital Investment Corporation, which manages the government's interests in some state companies.
In the midst of the Bao Viet difficulties, Hanoi issued a decree giving the prime minister authority to permit a foreign investor to pay less than the average bid price in an IPO but foreign investors say officials would find it politically difficult to request such permission.
With Vietnam's equity markets now in the doldrums, the timing of future sales is uncertain. Yet without further changes to the legal framework, Lai says, "finding a strategic investor will not be impossible but it will be very difficult. If you ask the foreign strategic partner to give so many long-term commitments, they could reasonably expect to have a discount price."
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