Vietnam M&A Case Study: ThaiBev and Sabeco (Part I) - English Version
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The article consists of four parts as follows:
Part I: Legal Structure Analysis
Part II: Capital Structure Analysis
Part III: Valuation of Sabeco
Part IV: Exit Strategy
PART I: LEGAL STRUCTURE ANALYSIS
On the afternoon of 18 December 2017, Ho Chi Minh Stock Exchange (HoSE) held the public auction of Sabeco's shares offered by the Vietnam Ministry of Industry & Trade. As the result of this auction, Vietnam Beverage Company Limited (VietBev) won with the bid price at 320,000 VND per share, acquired successfully a 53.6% stake of Sabeco at USD 4.8 Billion. By owning VietBev indirectly, ThaiBev gained the controlling stake in Sabeco.
The legal structure is illustrated as follows: Beerco Company Limited, the indirect wholly-owned by ThaiBev, joined with two Vietnamese investors to establish Vietnam F&B Alliance Investment Company Limited (Vietnam F&B ) in Vietnam on 29/07/2017, and Beerco held a 49% stake in the Vietnam F&B. In its turn, Vietnam F&B found the Vietnam Beverage Company Limited on 06/10/2017 in Vietnam and held a 100% stake of this company.
Why did ThaiBev establish two nominee companies in Vietnam to indirectly own the majority share of Sabeco?
The legal structure that ThaiBev own Sabeco indirectly
In 2017, the Law on Securities in Vietnam stipulated that foreign investors were not allowed to own above 49% (in aggregate) for those public companies that have conditional business lines (which is an activity that is subject to additional requirements such as a special business license). At that time, Sabeco was registering some conditional business lines including "wholesale of rice", "cane sugar" and "sugar beet" (registration code 4632), "appraisal service", "auctioning services" and "marketing services" (registration code 6820). Accordingly, only domestic investors were permitted to hold a majority stake in Sabeco.
Under the Investment Law 2014 in Vietnam, Vietnam F&B had a total foreign ownership percentage of less than a 51% stake so its associate company (VietBev) was treated as domestic investors and could conduct investment activities under the same condition as domestic investors. By applying the illustrated legal structure above, ThaiBev indirectly acquired Sabeco and gain a controlling stake in Sabeco.
Abstract from Article 23 of Investment Law 2014 in Vietnam
(Implementation of investment activities of economic organizations with foreign-owned capital)
1. An economic organization must satisfy the conditions and carry out investment procedures in accordance with regulations applicable to foreign investors upon investment for establishment of an economic organization; investment in the form of capital contribution or purchase of shares or portion of capital contribution to an economic organization; or investment on the basis of a BCC contract in any one of the following cases:
(a) 51% or more of its chapter capital is held by a foreign investor(s), or a partnership has a majority of partners being foreign individuals in respect of economic organizations being a partnership;
(b) 51% or more of its chapter capital is held by an economic organization(s) prescribed in paragraph (a) of this clause;
(c) 51% or more of its chapter capital is held by a foreign investor(s) and an economic organization(s) prescribed in paragraph (a) of this clause.
2. Economic organizations with foreign owned capital other than those prescribed in paragraphs (a), (b) and (c) of clause 1 of this article shall satisfy the conditions and carry out the investment procedures in accordance with regulations applicable to domestic investors upon investment for establishment of an economic organization; investment in the form of capital contribution or purchase of shares or portion of capital contribution to an economic organization; or investment on the basis of a BCC contract.
It is noticeable that ThaiBev had to rely on two Vietnamese investors to hold a 51% stake in Vietnam F&B. According to ThaiBev’s 22 December 2017 SGX filing, it revealed information of these Vietnamese investors as below:
“One of the Vietnamese investors in Vietnam F&B is a business person [who] is in the same group as the Company’s distributor of alcohol beverages in Vietnam. The other Vietnamese investor is the Company’s local business consultant [who advised] the Company in relation to the [Sabeco acquisition].”
What were potential risks emerging in the legal structure illustrated above and solutions to mitigate these risks?
The detailed documents of the legal structure have not been available in public yet. However, this structure raised a number of potential legal risks that ThaiBev had to deal with.
How did ThaiBev control the VietBev with a minority stake of 49%?
What if Vietnamese investors sell Vietnam F&B's stake to other investors or competitors?
What if Vietnamese investors sell Sabeco's stake to other investors?
How did dividends received from Sabeco distribute to VietBev shareholders?
For the first question, there was likely an agreement between Beerco and Vietnamese investors that allow Beerco to gain more control in VietBev. In addition, there were some adjustments in the corporate charter of VietBev that permit Beerco increases its voting rights in VietBev.
Abstract from ThaiBev’s 22 December 2017 SGX filing
"As agreed with two Vietnamese investors in Vietnam F&B, the company, with its financial strength and good relationship, secured the initial financing to fund the Acquisition, with a plan to arrange for appropriate refinancing post-acquisition"
For the second question, the Vietnam F&B was found in form of a limited liability company with two or more members so the assignment of shares of capital is limited to the company member, according to article 53 in Law on Enterprise 2014 in Vietnam.
Abstract from article 53 in Law on Enterprise 2014 in Vietnam
1. Except in the cases stipulated in articles 52.3, 54.5 and 54.6 of this Law, a member of a limited liability company with two or more members has the right to assign a part or all of its share of capital contribution to other persons in accordance with the following provisions:
(a) [A member wishing to assign a part or all of its share of capital contribution] must offer to sell such share of capital contribution to all other members in proportion to their respective shares of capital contribution in the company on equal terms;
(b) Assignment to non-members on the same conditions for offer applicable to other members as stipulated in sub-clause (a) of this clause shall be permitted only where the other members of the company do not purchase or do not purchase in full within thirty (30) days from the date of offer
In addition, the Vietnam F&B registered the charter capital of VND 681 Billion (USD 29.3 Million). It was likely that ThaiBev provided loans to Vietnamese investors to contribute their capital to Vietnam F&B. In exchange, all the Vietnamese investors' stake severed as collateral for Beerco. Whereby the Vietnamese investors could not assign their capital to other non-members without paying off the loan.
Regarding the third risk, the charter capital of VietBev of VND 681 Billion (USD 29.3 Million) made up only approximately 1% of the total amount that ThaiBev paid to acquire a 53.6% stake of Sabeco (USD 4.8 Billion). Accordingly, in order to have enough money to pursue this transaction, ThaiBev provided loans of USD 4.8 Billion to VietBev through Beerco. In exchange, the VietBev had to pledge all the Sabeco's stake as collateral for loans provided by Beerco. By which the Vietnam F&B could sell the Sabeco' stake if only all the loans are paid off. This helps to mitigate the risk of assigning capital from Vietnamese investors to others.
Abstract from ThaiBev’s 22 December 2017 SGX filing
"Sabeco' share to be acquired by Vietnam Beverage will also serve as strong and valuable collateral for the loan provided by Beerco to Vietnam Beverage"
In respect of the fourth risk, as illustrated above, most capital used to acquire Sabeco's stake was financed by Beerco and the loans bear interest rate in a range from 2.4% to 3% per annum. Therefore, cash dividends received from Sabeco were used to pay the interest expense before being distributed to VietBev's shareholders. This helps mitigate the risk that VietBev distributes cash dividends to its shareholders.
Abstract from ThaiBev’s 22 December 2017 SGX filing
"There will be interest chargeable on the loans by Beerco to Vietnam Beverage, which is higher than the cost-of-funds of Beerco"
The loans that ThaiBev borrowed to finance the acquisition
It is noticeable that the ThaiBev structure verified the legal structure for cases that foreign investors desire to hold a controlling stake in public companies limited to domestic investors. This helps to enable more foreign investors to make more acquisitions in the future by applying the same legal structure.
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Author
Huynh Nhat Trinh (M.Econ, CFA Level 3 Candidates)
Head of Investment Banking Dept, Funan Securities
More information about the author at here