Powerful gains behind Thaco-HAGL deal

As previously reported by VIR, Truong Hai Auto Corporation (Thaco) and Hoang Anh Gia Lai (HAGL) signed a historic strategic co-operation agreement. Accordingly, Thaco bought into two of HAGL’s subsidiaries, providing some much-needed capital to the ailing multi-sectoral giant and opening up new horizons for the domestic automobile manufacturer.

Thaco paid around VND3.8 trillion ($168.14 million) for the convertible bonds and shares of HAGL Agrico (HNG), the agricultural arm of HAGL. The total investment is equal to 35 per cent of HAGL Agrico’s charter capital. Thaco will also set aside VND12 trillion ($530.97 million) to fully restructure HAGL Agrico. At first glance, the move might be called a “rescue mission” by Thaco, as HAGL is heavily indebted and suffers from serious liquidity issues.

However, upon closer inspection, it becomes clear that Thaco is far from being an altruistic rescuer. The automaker actually has ulterior motives behind its generosity, as the partnership provides it with opportunities for growth in the fast-developing Cambodia, Laos, Myanmar, and Vietnam (CLMV) market.

According to a spokesperson of Thaco, upon shaking hands with HAGL, Thaco expects to increase its competitiveness in the CLMV market in agriculture and property development. HAGL has plenty of agricultural assets to offer in this partnership. Specifically, HAGL Agrico has 80,000 hectares of arable land in Cambodia, Laos, and Vietnam. The firm grows a variety of fruits, including banana, chili, and dragon fruit, and these fruits are sold on to South Korea, China, Japan, and other regional countries.

The fruits can be transported to ports in Vietnam before being shipped to overseas buyers. Thaco, with its port of Chu Lai, can take care of the shipping process. In addition, as an automaker, Thaco can also offer agricultural machinery products at competitive prices to HAGL, promoting automated farming in the CLMV region.

Thaco can also take advantage of HAGL’s rubber businesses to increase the localisation rate of its tires, thereby lowering the price of its vehicles.

Nguyen Hong Khanh, head of Research at Vietnam International Securities JSC (VIS), told VIR that the tie-up will bring long-term benefits to Thaco that are worth many times more than the amount it spends on it.

“Despite having a great debt burden, HAGL is renowned for its professionalism and responsibility, large land reserves, and process technology. Most of its projects were developed professionally. HAGL’s products also enjoy high competitiveness in the local and overseas markets,” Khanh explained Thaco’s rationale for the buy into HAGL.

Khanh added that Thaco is developing an agricultural machinery factory at Chu Lai Open Economic Zone in the central province of Quang Nam. Applying its agricultural machinery in upcoming projects will help Thaco complete its supply chain.

Regarding real estate development, Thaco, through its subsidiary Dai Quang Minh Real Estate Investment JSC, will take over the HAGL Myanmar Centre complex in downtown Yangon, which is running behind schedule. The firm bought a 51 per cent stake in the centre and is expected to increase its holdings to 65 per cent with the total investment of VND4 trillion ($177 million).

Thaco and Dai Quang Minh will be responsible for investing in the second phase of HAGL Myanmar Centre, with the total investment capital of $320 million, making their step into the regional real estate market.

Rise in domestic M&A

The deal between HAGL and Thaco, upon a closer look, is not just a transaction between two companies. In fact, it marks a significant milestone in Vietnam’s mergers and acquisitions (M&A) scene, as it is the largest deal in recent years between two major Vietnamese firms. Most of the time, large M&A transactions in Vietnam involve a Vietnamese company and a foreign investor, the majority of whom hail from Japan, South Korea, and Thailand.

According to the research report of Vietnam M&A Forum 2018, domestic investors are becoming more proactive in conducting M&A deals. The list of deep-pocketed Vietnamese buyers includes Vingroup, KIDO Group, Masan, REE Corporation, PAN Group, and now Thaco.

Out of these names, PAN Group stands out as the most enthusiastic buyer in agricultural deals, and is shaping up to be a potential rival to the Thaco-HAGL partnership in Vietnam.

Specifically, in just a few years, PAN Group has bought out Vinaseed, Southern Seed Corporation, Long An Food Company, Fimex Vietnam, and Aquatex Ben Tre as well as purchased a controlling stake at Bibica Corporation.

Nguyen Thi Tra My, deputy chairwoman at PAN Group, said that in general, M&A in agriculture is the way to go as it will save buyers lots of time and effort in developing seeds, laboratories, fields, distribution networks, and human resources.

“In agriculture, it would take a very long time to build an industry leader from scratch. That is why M&A is a much better route, and we expect half of our growth between now and 2022 to come from M&A,” said My.

When asked by VIR about the recent burst of domestic M&A deals, Fred Burke and Seck Yee Chung, partners at Baker McKenzie Vietnam, said that deals between Vietnamese companies are “really hitting their stride these days.”

According to the two lawyers, Vietnamese companies now realise that they can compete globally if they combine their resources, creating a larger entity with bigger distribution networks, economies of scale, and more talents at senior levels.

“The Vietnamese agricultural sector is long-standing, but is still some distance away from being a modernised and well-organised industry. […] Leading domestic players can position themselves to manage such risks with deep local knowledge and perhaps more tolerance where there are grey areas,” said Chung.

Both lawyers also forecast more M&A deals in the field in the near future.

Similarly, Nguyen Cong Ai, M&A partner at KPMG Vietnam, told VIR that in a domestic M&A deal, the two partners tend to understand each other and the Vietnamese market very well, thus cutting down on the negotiation process. Ai said that transactions between Vietnamese firms will help create a livelier M&A scene for the country, resulting in even higher interest among foreign investors.

Talking of foreign investors, Burke added that to do M&A, lots of Vietnamese buyers in fact rely on capital raised from foreign stockholders.

Indeed, My from PAN Group revealed that the company has pooled money from the International Finance Corporation, TAEL Two Partners, GIC Private Ltd and PYN Elite Fund, among other investors, to carry out its string of M&A deals.

Similarly, Thaco raised VND12.4 trillion ($548.67 million) last November via issuing preferential shares to existing investors. About 25.16 per cent of Thaco is owned by Jardine C&C. Jardine C&C, part of Hong Kong’s Jardine Matheson Group, also owns stocks in Vinamilk and REE Corporation – two more companies active in domestic M&A.

Khanh from VIS said that the HAGL-Thaco deal is a model for local companies wanting to use the M&A route. The transaction promises a win-win scenario for both sides, as Thaco can enter a new business sector quickly and HAGL can alleviate its huge debt burden.