Vietnam: Equitisation of Mobifone 1 Briefing note December 2014 Vietnam: Equitisation of Mobifone Equitisation in Vietnam involves converting State Owned Enterprises ("SOE"s) into joint stock companies with a portion of the shares being sold at public auction or to strategic investors. Equitisation is an important component of the restructuring of the Vietnamese economy. This briefing provides an overview of equitisation in Vietnam and specifically looks at the equitisation of Mobifone with a focus on the key issues that potential investors should be aware of. communications sector as a established shareholding Mobifone spin-off telecom facilities based operator. company being retained by the In April 2014, the Prime Minister As such, whilst VMS would be State, with a small portion sold at instructed the preparation of a permitted to equitise up to 25% of public auction to public investors, restructuring plan to spin off Vietnam the company’s share capital, it is sold to employees of the SOE, Mobile Telecom Services Company not yet known what the size of and/or to selected strategic ("VMS" or "Mobifone") from Vietnam the sale to public investors will be, investors. Strategic investors are Ports and Telecommunications Group although it is expected that an defined broadly to mean ("VNPT") to be an independent offer to employees and private domestic and foreign investors company under the direct control of investors may be made prior to with financial capability, who are the Ministry of Information and the sale to strategic investor(s). committed to a long-term interest Communication ("MIC"). The spin-off In addition to the valuation, the and who can support the was completed on 10 July 2014 under equitisation plan would be equitised enterprises by new Decision 877/QD-BTTTT dated 27 expected to name the selection technology transfer, human June 2014 of the MIC. The second criteria and shortlisted strategic resource training, development of phase of the restructuring plan is to investor candidates, if any. financial capability, enterprise resume the equitisation process of management, supply of materials VMS. Equitisation in and/or development of consuming markets. Successful IPO in 2015 Vietnam precedent equitisations include those of the Vietnam Dairy Following the spin-off of VMS from Equitisation is the process of Products Joint Stock Company VNPT, the MIC is responsible for converting a 100% SOE into a ("Vinamilk"), Vietnam Insurance proposing the equitisation plan of joint stock public company with a Corporation ("Bao Viet"), Hanoi VMS to the Prime Minister for more diversified ownership base. Brewery Corporation, approval in 2014 and to arrange an The process of converting SOEs PetroVietnam Finance Company IPO in 2015. into shareholding companies is and Vietnam Bank for Foreign currently regulated by Decree 59 Trade ("Vietcombank"). Equitise up to 25% of the Vietnamese Government Although the equitisation plan dated 18 July 2011, as amended Attractive environment for has not been published by the by Decree 189 dated 20 strategic investors MIC, it appears from Decision November 2013 (collectively The issuance of Decree 59 in 37/2014 of the Prime Minister “Decree 59”). replacement of the earlier legislation that the State will hold more than To date, the equitisation process has provided a consistent legal 75% of the charter capital of VMS has generally involved the framework to create an attractive given its key role in the majority of shares in each newly 2 Vietnam: Equitisation of Mobifone environment for strategic investors. price agreed between the parties (in Notably, under Decree 59 only State- the case of an agreement) or the Key Issues for owned enterprises with State capital successful auction price (in the case exceeding VND500 billion (equivalent of an auction amongst strategic potential investors to US$23.58 million) and conducting investors). The price must not be Issues that need to be considered by business in specialised sectors (such lower than the commencement price potential investors include: as insurance, banking, approved by the body authorized to communications, aviation and rare make the decision on the equitization VMS related issues mineral exploitation) and who seek to plan. select a strategic investor in advance Increased competition from other After public auction of a public auction, are required to communications operators. report to the Prime Minister for For a sale of shares to strategic According to the official approval of the equitisation plan. In investors after the public auction, the information reported by MIC, the other cases, the relevant Ministries or sale price will be agreed by the market shares for 3G mobile People’s Committee levels approve parties but must not be lower than the phone service providers in 2013 the equitisation plan. Decree 59 also lowest successful bid at the public are respectively: Viettel (44.05%), sets out the mechanism for selection auction. Mobifone (21.4%), VinaPhone of investors even before the public (19.88%), Vietnammobile auction, whereby the Prime Minister Process for the (10.74%), GMobile (3.93%) and will decide the criteria to select the SFone (0.01%). strategic investors, sales method and equitisation of Separation of its activities and number of shares to be sold to assets from the State's. strategic investors, applicable to Mobifone According to public unofficial SOEs with capital of more than reports, VinaPhone may hold up VND500 billion in certain specific Equitisation will see VMS converted to 20% of the shares of VMS sectors (including, among others, from a wholly State-owned enterprise after equitisation. It should be telecommunications services). The to a shareholding company (a joint noted that, after the split, number of strategic investors in each stock company). The Prime Minister VinaPhone will also be a equitised SOE is now limited to three, has decided that the State will hold 75% competitor to VMS in the who are subject to a 5-year lock-up charter capital of major enterprises in telecommunications service period, except to the extent a transfer the telecommunications sector, sector. therefore 25% will be sold at public of shares is approved by the General Shares of VMS will likely be auction, sold to VMS’s employees, Meeting of Shareholders of the considered as blue chip on and/or to strategic investors. The equitised SOE. For the purpose of Vietnamese stock exchange. The equitisation of VMS will be governed equitisation, most of the SOEs must competition between potential by Vietnamese law and specifically be evaluated by licensed valuation investors might be stiff. organisations. Decree 59 and its implementing Circular 127 of the MOF dated 5 The Vietnamese stock markets The sale price for strategic investors September 2014. have fallen since May 2014. The will be determined subject to the IPO of Mobifone at the offering particular sales mechanism as Circular 127 details the steps required price of VND22,500 per share explained below. for conducting the equitisation might not attract stock investors, process. The Prime Minister has which might result in a decrease Before public auction directed the MIC to propose the VMS of the stock price after the IPO. In the case of a direct agreement equitisation plan for approval in 2014. General issues before a public auction, or an auction Although the MIC appears to have not amongst strategic investors satisfying proposed the equitisation plan to the The State’s continuing control the criteria and registered to purchase Prime Minister, it is understood that and whether VMS’s management shares prior to the conduct of the the current intention is for the will act solely on a commercial public auction, the price shall be the equitisation to be completed in 2015. 500986-4-4386-v0.22 Region-8000-EC Vietnam: Equitisation of Mobifone 3 basis or be subject to political control of Vietnam Posts and VND41 trillion (approximately factors. Telecommunications Group (VNPT) US$1.95). (since 1993). It was the first mobile The State’s intention regarding its If you have any questions in relation communication operator of GMS controlling interest. to the issues raised in this briefing 900/1800 under the brand Mobifone. The equitisation agenda has not please contact the authors below. yet been published. VMS is Vietnam’s second largest mobile communication operator, The equitisation process is holding a 21.04% share of the market. complicated (e.g. the registration procedure for the amendment of In 2009, Mobifone was valued at investment certificates/business US$2 billion by Credit Suisse in the registration certificates arising initial effort of equitisation, which did from an assignment of an equity not go through. This value is believed interest is not clear). Transparency (especially in terms of company valuation and Table of the VMS the availability of information). (Mobifone) We note that the valuation of Equitisation process Vietnam Airlines for equitisation by two valuers resulted in two Prime Minister different values. In this case, the Government will have the power In Principle Approval for to decide the enterprise value for Equitisation (2014) equitisation. Potential for the process to stall Selection of financial advisor Decision – Establishment of Steering Committee Equitisation Steering MOF or fail. Committee MIC Competition Law: MPI VMS Communication services activities are subject to the Equitisation Plan (with Competition Law, which criteria for Strategic Investor legislates against dominant Candidates) and Valuation Proposal for Submission to market positions and monopolies MOT and the Government “Economic concentration”, as a consequence of a merger, Decisions - Approval of consolidation, acquisition of or Equitisation Plan and joint venture between enterprises Valuation or other forms of economic concentration is prohibited if it Prior Sale of Shares via results in the new entities Auction or Negotiation with combined market accounting for Strategic Investor Candidates more than 50% of the relevant market. Approval must be sought from the MOIT if it results in a 30% to 50% share of the relevant to have increased due to the profits market.