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M&As on South Korean radars

Released at: 08:32, 31/12/2018

M&As on South Korean radars

Photo: Viet Tuan

South Korean investors have increasingly eyed Vietnam for possible M&A deals.

by Hong Nhung

A delegation of 15 South Korean firms paid a visit to Vietnam last month to explore potential M&A partners. Mr. Kim Hyeong Soo, Managing Director of the Korea Venture Capital Association (KVCA), revealed that buyers have shown an interest in a number of flourishing fields, including infrastructure, logistics, transportation, and retail. 

Thus, the association organized the Korea-Vietnam M&A Investment Conference to deepen the partnership between South Korean and Vietnamese companies, contributing to the development of the local M&A market. Vietnam’s M&A market, he said, is becoming increasingly more mature in light of the government’s efforts and the boom in deals, with Vietnam witnessing a significant rise in the number and value of M&A transactions by South Korean investors. 

High interest

Vietnam’s M&A market has witnessed substantial growth in the last few years and become one of the “most attractive M&A destinations in Southeast Asia,” according to Mr. Giles T. Cooper, Co-General Director of Duane Morris Vietnam. South Korean investment into Vietnam via M&A deals has also been heading upwards, as investors aim to penetrate rapidly and deeply into the country.

South Korean conglomerate the SK Group two months ago successfully acquired the largest foreign stake, of 9.5 per cent, in Vietnamese consumer giant the Masan Group Corporation for about $470 million. The SK Group is one of the largest corporate groups in South Korea, with a successful track record of building leading domestic and global businesses both organically and through acquisitions. It is now interested in growing its presence in the ASEAN region and sees Vietnam, the region’s fastest-growing economy, as a strategic base, Masan noted in a statement.

SK sees Masan is an ideal local strategic partner to accelerate its regional objectives while also benefiting from Masan’s promising growth story as a major shareholder. “Vietnam is an important foundation for our Southeast Asia strategy,” said Mr. Woncheol Park, Representative Director of SK’s Southeast Asia Investment. “We believe the partnership model is crucial to winning in this region and Masan is an ideal strategic partner for SK. We will actively work together to identify strategic opportunities to expand into attractive categories in the country, where SK can add significant value through our know-how and technology.”

Before the SK Group, another South Korean giant, Hanwha Asset Management, paid $400 million in August for 84 million preferential shares in Vingroup. The sale came after Hanwha’s unsuccessful attempt to join the $13.5 billion public debut of Vinhomes, the property arm of Vingroup, back in May. 

Most prominent recent South Korean deals

Source: Duane Morris Vietnam, 2018

These two recent deals from SK and Hanwha are just two of many between South Korean and Vietnamese enterprises over the last two years. Ms. Jiun Park, Deputy Director of the Global M&A Center at the Korea Trade - Investment Promotion Agency (KOTRA), said there has been an increase in the number of South Korean small and medium-sized companies (SMEs) becoming interested in Vietnam. South Korean investors put down $300 million in M&A capital last year and $200 million in the first half of this year.

South Korean private equity firm STIC Investments has also been active in Vietnam’s M&A market over the last few years. Managing Partner Mr. Daniel Lee told VET that the company is looking to acquire three businesses, two of which are from Vietnam. “Vietnam, along with other Asian countries, currently makes up 19 per cent of our investment portfolio and the country could create a 20-25 per cent internal rate of return (IRR),” he said.

In July, STIC agreed to invest $25 million in the Vietnam-based CammSys VINA JSC, a subsidiary of the CammSys Corp headquartered in South Korea. It has also poured $33 million into the Viet Uc Seafood Corporation, a leading supplier of shrimp products in Vietnam, and is considering taking over a Taiwanese company with existing operations in the country. These projects reflect the eagerness of STIC to invest in Vietnam as a broad strategy to increase its presence in the Asia-Pacific region. The fund has also poured money into Tiki, the Hoa Sen Group, and Nanogen Biopharmaceutical, among others.

Changing appetite

As of October, South Korea ranked top among countries and territories investing in Vietnam, with capital of $62.12 billion, or 18.5 per cent of the total. Japan followed, with $56.21 billion, then Singapore and Taiwan. The capital flow has changed a great deal over the years, according to KOTRA.

Initially South Korean companies concentrated on labor-intensive projects such as textiles and footwear, but by the mid-2000s had turned their attention to electronics. “Investment value changed, increasing and becoming more quality-intensive,” Mr. Michael DC Choi, Deputy General Director of KOTRA in Hanoi, told the Vietnam M&A Forum held in Ho Chi Minh City in July, adding that the third wave of South Korean investment is targeting the consumption and retail sectors. A fourth wave is likely to be seen in the fields of banking, finance, and fintechs. With this change, Mr. Choi explained, in the early stages, South Korean bosses came to Vietnam to take advantage of its manufacturing market, including cheap labor and investment incentives. But, gradually, they became convinced by the huge forecasted figures in consumption. 

In the first five months of this year, KOTRA welcomed and met with about 300 South Korean businesses seeking to invest in or expand their business in Vietnam. Ms. Jiun from KOTRA said that many South Korean SMEs have enquired about the process of conducting M&As in Vietnam and called this “the third wave of investment”. “A characteristic of this third wave is strategic alliances between South Korean and Vietnamese companies,” she explained. “The South Korean partner can provide modern technology, while the Vietnamese side can help with brand presence, market share, and product distribution.” 

The fourth wave was perhaps triggered by South Korea’s Mirae Asset Life scooping up a 50 per cent stake in Prevoir Vietnam Life Insurance last year for $52.6 million. Shinhan Card, in early January this year, acquired Prudential Finance for over $150 million. Following the trend, Lotte Card in March spent nearly $75 million on securing 100 per cent of Techcombank Finance and became the first South Korean credit card company to enter the local finance market. 

According to the Saigon-Hanoi Securities JSC (SHS), most M&As in the banking and finance sector have been conducted by domestic banks and financial institutions. South Korean firms are more involved in fintechs rather than traditional financial organizations. A report from AVM suggests that South Korean investors may still have opportunities to invest, since some banks are still open to strategic investors and other banking and finance institutions are looking for partners to ensure their competitiveness.

Barriers in place

Obstacles remain in attracting capital in M&As due to the lack of transparency in financial reporting, according to Mr. Cooper from Duane Morris. For instance, in the case of equitizing State-owned enterprises, investors are required to make substantial commitments in terms of time and money in the early stages of the bidding process. The selection process can thus be long and unclear.

Lack of publicly-available information is also a hindrance for South Korean investors, since it is difficult to gather a comprehensive list when identifying targets for acquisition. As a result, investors usually leverage their existing relationships to shortlist potential targets. The available pool of targets is thus reduced, making it difficult to select the right target at the right time, he said.

Regardless, the country regulatory and legal framework remain the most prominent challenge for M&A players. “This relates to the complicated nature of Vietnam’s tax, tariff, and administrative inspection regimes when entering the country,” Mr. Cooper said. “In particular, the issue of transfer pricing has been ill-handled by Vietnamese taxation authorities, with no specific evaluation criteria given to foreign investors.”

With respect to the expectations of buyers and sellers, asset valuation poses another challenge, as sellers tend to be overoptimistic about their companies. Investors have also identified challenges relating to management and accounting standards, he added.

Investing in Vietnam for two years, Mr. Simon Kang, CEO of BonAngels Venture Partners, a South Korean venture capital firm, said there are many lessons to learn in Vietnam and the company has established a broad network over time. “I hope the law becomes more open to foreign investment, by simplifying Department of Planning and Investment processes and regulations in order to capture more South Korean capital in Vietnam,” he said.

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