Vietnam vetoes Morgan Stanley deal

Nothing of the sort happened. There have been only three significant IPOs of state companies since then: Bao Viet Insurance, which after a troubled process began trading in May; Vietcombank, which again after considerable delays finally got away at the end of the year; and Saigon Brewery Company (Sabeco) in January. In only one of these, Bao Viet, has the anchor strategic investor, considered a vital component of an equitisation, been secured. In all of them, there have been profound challenges in valuation and listing method. And not one of them is yet trading on one of the recognised main boards of Hanoi or Ho Chi Minh City, instead trading on unofficial markets.

Understanding these deals first requires a recap on the curious ways equitisations are handled in Vietnam. Firstly, rather than a bookbuild, a Dutch auction system is used; the state sets a minimum bid, and people bid above that level. This sets the price above which bidders are successful (and, in a further twist, successful bidders pay what they bid, not the median or mean figure). Then, if a strategic investor comes in, they must pay the same price as the one set in the auction. Furthermore, there is then a long and undefined gap between the IPO and the stock actually trading on either Hanoi or Ho Chi Minh’s stock exchanges, when it instead trades on unofficial OTC markets.

Bao Viet Insurance, a leading state-run insurer, was an eagerly awaited privatisation which illustrated some of the problems of the auction process. In this case, the ardour of retail bidders – some of whom were bidding the equivalent of around 25 times book  – pushed the price up dramatically above the levels most foreign investors had been bidding at. When the shares began trading on the over-the-counter markets, they fell sharply. Many retail investors, who had only paid a 10% deposit for their shares, simply abandoned them. Consequently a second auction was held to place the unclaimed stocks – about a quarter of the offer – but that too struck a problem: the minimum price had to be at least the level of the first auction, leaving little incentive to participate, and only 10% of this chunk changed hands. The subsequent decision of HSBC to take a 10% stake in the insurer helped create more of a feeling of success but there was little denying this had been a troubled route to market.

Next came the real trophy: Bank of Foreign Trade of Vietnam, more widely known as Vietcombank. This was the first of the big four state-owned banks to be sold. The sale was postponed twice in 2007 before finally going through in late December, raising $652 million through the sale of 6.5% of the bank. Again, though, high valuation was an issue:  the minimum bid was set at D100,000 and the average bid was D107,800, well above previous market talk of around D80,000, and equivalent to 87 times 2007 earnings, according to equity strategist Garry Evans at HSBC. Some exuberant fool pitched D250,000.

Once again, there has been a problem with investors deciding not to pay for the remainder of their shares, although this time the shortfall is believed to be a more modest 10%. And once again shares have traded lower since launch. That creates a big problem, because any strategic investor in one of these IPO companies must, as a matter of fairness and transparency, pay the same amount as everyone else. Furthermore, although Asiamoney believes GE Capital had been all but secured as a strategic investor before the sale, the government insisted that the investment take place after the IPO, so that the pricing was transparent. A laudable commitment to fairness perhaps, but since anyone paying D107,800 a share today would be instantly out of the money, GE has dropped out and Vietcombank is back to square one in finding a new investor.

Finally, Saigon Brewery Company, or Sabeco, raised $341 million in January – less than two thirds of its target. Tellingly, overseas investors bought only 6.9 million of the 128.3 million shares on offer, despite the fact they were entitled to take up to 49% of the offer. Valuation was, once again, the problem, with the starting price for bids set at D70,000, or 72 times 2007 earnings. In the wake of Sabeco, the State Securities Commission has told companies to delay plans for public offerings unless they are vital.

That means that, although the pipeline of future issues is full, there’s still no obvious timetable for their arrival on the domestic markets. Two other state-owned banks, BIDV and Incombank, appointed advisors on their own privatisations last July (Morgan Stanley and JP Morgan respectively), and the mobile phone company Mobifone is holding beauty parades as you read this. But it could still be a year or more before these deals hit the markets.

Besides, it’s important to be clear on what the parameters of investment bank mandates actually are. Credit Suisse has been mocked in some quarters for its role as advisor on the Bao Viet and Vietcombank transactions, both of which are seen to have been flawed. “Credit Suisse was not even on the roadshow for Vietcombank,” says one banker. “What does that tell you? When in the history of banking has a company’s advisor not even made it onto the roadshow?”

But that’s not entirely fair: in neither case did the Credit Suisse mandate involve the domestic sale. Instead, it was appointed to find strategic advisors and, in Vietcombank’s case, to advise on a foreign listing of the stock in future. “We wouldn’t have added any value to the arrangement of a domestic roadshow,” says Helman Sitohang, vice chairman of the investment banking department for non-Japan Asia at Credit Suisse. “Our role is to make sure that we coordinate with the domestic advisors in the overall privatisation programme.” Indeed, one could argue that getting HSBC to commit to taking a 10% stake in Bao Viet at the same price that exuberant retail investors had bid the stock up to was an achievement.

But if the foreign banks don’t have a role to play on domestic sale shares, where are they going to make their fees? The strategic sale is part of it but most of them are more optimistic about getting involved when Vietnam’s biggest corporates start listing in Singapore, Hong Kong, London or New York. And since that cannot be contemplated before successful local listings take place, it seems an awful long time before revenues start kicking in.

One banker says fees in Vietnam are “OK for privatisation work. Privatisation is never all that profitable, but it’s decent, and if you want to be in Vietnam, there’s no big private companies.” Morgan Stanley is believed to have won the BIDV mandate with a pitch of $1.8 million for finding a buyer for a strategic stake and advising on the IPO – involving the restructuring of a big, complex, state-owned bank. That’s considerably less than the bonuses of several individual Morgan Stanley bankers. (The bank declined to comment.) Banks do this in the hope of then getting on more lucrative IPOs sometime in the future, China-style, but there’s nothing in the mandates to guarantee that they’ll get them, and who knows when they’ll come anyway?

Given this situation, some bankers privately express an unwillingness to commit too many resources to Vietnam today.  “That market is just not happening right now,” says someone at a bank that has largely chosen to stay out. “Not in the capital markets. The fee pool is just not big enough.”

And even for those that get the mandates, there is some question about whether they are really listened to yet. “I would argue that nobody at this point has really used an outside advisor,” says one banker.

There is hope that attitudes towards investments banks are changing. “The time is slowly coming for securities houses and investment bankers, where we can have a far greater value in the eyes of issuers,” says Kelvin Lee, CEO of VinaSecurities, a new securities house active since July. For his part, Sitohang reckons the dialogue with the government is positive. “They tell us what they need to achieve and see in the process. A lot of those factors are less capital market technical and more to do with the country’s overall development; we as an advisor say yes, these are important, but here are the constraints and let’s find some middle ground solutions. In our discussions with officials I am very impressed: there is serious intent all the way to the Prime Minister.”

There is no shortage of deals to come to market: the three other state-owned banks, dozens of joint-stock banks, telcos, another brewery. But the pace has been desperately slow and many argue that changes need to be made to the way privatisations are approached to get more of them away with greater success.

At the top of the list is the valuation debate. “People realised Vietcombank would take a long time, and it did, but there was a lot of expectation that once you got it done, other people could follow the same model: cut and paste and go to market,” says Lee. “Unfortunately that did not happen.” Partly, he says, that’s because of global conditions; partly, it’s the length of time involved in the decision making process on IPO candidates. “But the other thing that has slowed things down is that the pricing mechanism seems to be wrong,” he says. “There is no regard to forward earnings.”

Don Lam, CEO of VinaCapital, says he is pleased to see the blue chips of Vietnam now reaching the market, but is concerned that “privatisation valuations are taking a different tack from before,” and specifically, are aiming for the full value of a business rather than a little below it. “What needs to be done really is to leave some on the table for investors, so that if I’m coming in I can see some upside. If it’s at full value, there’s no upside, so I’m not going to participate.”

Thuy Damn, CEO for Vietnam at ANZ, adds: “We need to have a look at what we want to achieve from privatisation. Is price all we want, or a good partner who can bring technology to help the company to be more competitive? If you want just money, you get a different set of investors, and totally different behaviour in terms of what they are looking for.”

Then there’s the difficulty of valuing businesses in the first place. “For many companies transparency is very bad, not just for current year, but also knowing what happened in previous years,” says Chris Freund, managing director at fund manager Mekong Capital. “And often the investment thesis [by investors in IPOs] is that there’s hidden profit in these companies.” This is how deals get away at 80 times earnings. “It’s hard to justify if that PE is a real indicator of something’s true earnings power. The only way investors can justify that is if they believe there is going to be huge profit growth for the next few years because all the profits are not being reported, or it’s been intentionally kept low.

“That’s not very viable. It doesn’t really work as a systematic way to conduct privatisation deals.”

The opacity of these assets is acknowledged even within the banking sector. “You cannot know exactly the value of the banks,” says Dam Van Tuan, executive vice president and head of strategic planning at Asia Commercial Bank. “Even middle or senior managers of those banks, they cannot know every detail. Vietcombank owns a lot of companies and investments in entities and there are many factors hidden that truly influence the value of the company.”

Then there’s the auction structure, the paragon of democracy (ironically in a communist state) but little loved by the financial services industry. “In the noble aim of transparency they continue to feel that the auction style of equitisation is the right way to go,” says Lee. “I would have thought that they could have learned from some of their early mistakes and let more proven technology take over. Most, if not all, large privatisation IPOs are done on a book building basis. Chinese banks are able to raise $10 to 20 billion in one pop on a bookbuilding basis.”

Dominic Scriven, long an ardent supporter of Vietnam, says Dragon Capital has “been recommending for a while that that should be changed. It relates to a time with no confidence that anybody was competent enough to value a business. There are more than enough competent entities in and outside Vietnam to move the process towards a book building approach, with a fixed price public offer.” Charly Madan, country CEO at Citi, says the “entire investment banking community is advising and pressing for these changes.”

Then there’s the strategic investors. “If you want a strategic partner, not many will want to come in after you have a public auction,” says Thuy at ANZ. “They want to come in with a certain set of terms that are known in advance, not leave it to chance.” It would also help if there was a finite period of time, ideally no more than a month, between an IPO and a formal trading debt on a main board.

Not all of the challenges of recent deals are about structure or price. It is fair to point out that Vietcombank and Sabeco in particular launched into the teeth of a very difficult market, combining a US slowdown, falling local stock market and inflation. “These factors are keeping primary equity issuance subdued, both in Vietnam and globally,” says Tom Nguyen, a director in Deutsche’s global markets division in Vietnam. “It’s this, rather than the assets themselves, that is the issue,” although he too suggests a need for different structures in new issues. “The biggest challenges real investors have with Vietnam relate to liquidity, transparency and valuation.”

If all this seems unremittingly negative, there’s two important points in mitigation. One, that this is early days in a long and complex process; and two, that there is a dialogue with a government which appears willing to listen. Thuy at ANZ describes “a very healthy debate” with policymakers.

Scriven says: “It’s a big program, not a one-off, with probably $40 billion of enterprise value. And over the process the government will learn.”

This is the original text for the Asiamoney cover story of March 2008. To see the published version, which differs from this one, go to http://www.asiamoney.com/Article/2055720/COVER-STORY-Why-the-market-opposed-Morgan-Stanleys-tie-up.html