Vincom Retail sets a record and a template

When is an IPO not an IPO? When a deal is done the Vietnamese way.

Vincom Retail entered the record books on Thursday following the completion of an equity deal that will rank as the country's largest ever initial public offering, although the country's tortuous capital market rules mean that it technically cannot be described as such. 

The country is well known for having its own way of doing things. In the case of the IPO market, Vietnam's back-to-front rules mean that companies typically file for regulatory approval only when they have completed their capital raising: a process that can take months. 

In this instance, the company, its syndicate and private equity owners crafted an ingenious and novel put-through structure to try and shorten investors exposure to market risk from a couple of months to a couple of weeks. If the formal listing and share crossing proceeds as planned, it should all work out and a new type of capital markets structure will be born - the initial equity offering (IEO).

The first stage was the pricing, this Thursday, of an upsized 396.5 million share institutional tranche (including cornerstone investors) at VN40,600 per share, the very top end of the indicative price range. This equates to proceeds of $708.5 million, or 20.838% of the company's issued share capital, up from 20% initially.

Once a prospective retail offering is completed next week, total deal proceeds are likely to climb to $742.49 million based on the sale of a further 1% of the company's issued share capital to local investors. 

Observers said an existing, but as yet un-named, individual selling shareholder sold more than initially planned, alongside a new individual shareholder. 

Neither of the selling shareholders were pre-IPO owners Warburg Pincus and Credit Suisse, which dropped from 15.2% to 4.9% and 5.1% to 1.6% respectively. The private equity group will also retain a board seat post IPO.

This was always a key comfort factor for fund managers who are typically very wary of deals where private equity investors sell out entirely. In Vincom Retail's case, they are also likely to view its ongoing presence as a safeguard against declining corporate governance standards. 

The put through

Vincom Retail will formally list on November 6 and existing shareholders will technically trade a few shares that day. However, the unusual structure of the deal means the equity placement will not cross the market until the following day at the earliest.

Investors will then receive and pay for their shares two days after the crossing using delivery versus payment (DVP) settlement. Bankers said they will need to buy the Vietnamese Dong to pay for their shares, but their local custodian will hold the amount.

However in one final quirk, there is a possibility the crossing will be delayed as shares can only be crossed within a 7% plus or minus trading band of the previous day’s closing share price. Non-syndicate bankers suggested this element means the new structure will not satisfy every prospective listing candidate since it entails execution risk.

The put-through structure has been used so the syndicate can pass off the IPO, or “IEO” as a secondary placement under Vietnam’s existing rules.

In Vincom Retail’s case, the deal is all secondary shares. But country experts say it might be possible to use the same structure for primary share offerings in the future: something akin to a Hong Kong style top up placement.

In order to complete the trade, the institutional order book was closed on Monday and a full list of prospective investors and all the relevant documentation was submitted to the Ho Chi Minh Stock Exchange (HOSE) on Tuesday. The HOSE has the power to approve IPOs within certain parameters that includes evidence that a group of buyers and sellers have come to an agreed price.

Once HOSE issued its written approval on Thursday, the deal was formally priced. 

Pricey valuation?

At VN40,600 per share, the deal has been valued at 23.9 times prospective forward earnings. This represents around a 20% discount to much bigger comparables including Thailand’s Central Pattana and the Philippines' SM Prime.

Vincom Retail has aspirations to achieve a similar scale, with plans to increase its mall footprint from 41 to 200 by 2021.

One expert, who has a long-standing relationship with the company, told FinanceAsia: “Vingroup is Vietnam’s largest real-estate developer and has plenty of experience building malls. It’s already shown it can scale up quickly as it only started with three completed malls four years ago.”

However, some fund managers say they remain wary, expressing doubts about a sudden increase in the company’s appraised value.

Other specialists countered that participating fund managers liked the deal for macro and company-specific reasons.

“There really aren’t that many frontier market countries with the kind of political stability that Vietnam enjoys,” said one. “The country also has some minimum corporate governance standards and investors liked using this company to play its favourable demographics and growing consumption.”

In total, about 90 investors participated in a deal, which closed with an oversubscription ratio in the mid single digits. Pre-pricing, a group of cornerstones had already committed to $382 million, or 53.9% of the institutional portion.

Observers said the top 20 investors (including cornerstones) were allocated 88%. About one third of all investors opted to buy stock through P-notes.

“Vietnam is not a market where investors can flip shares, so allocations were concentrated among long-only funds,” said one specialist. “But there was a real mix of frontier and emerging market investors, as well as regional and consumer-focused funds.”

When it lists, Vincom Retail will have a market capitalisation of $3.4 billion and add a highly liquid stock to a market famed for very small freefloats. As for Warburg Pincus, it has doubled its money after leading a $200 million investment round in 2013 and ploughing in a further $100 million one year later.

The group has previously told FinanceAsia that Vietnam and Indonesia are its top picks in South East Asia. It believes the former has the same potential China had just over a decade ago and shares many similarities from foreign investment rules to a willingness to open up.

Warburg Pincus typically holds its investments from five to seven years, so it is more of less selling out on schedule. Its original investment was structured so Vingroup could spin out its mall business on a stand-alone basis.

The private equity group has a similar deal in Indonesia after investing in mall operator Nirvana Wastu Pratama in 2015.

In Vietnam, it still has one other investment, having set up a fund with VinaCapital to focus on hotel development.

Joint global co-ordinators for Vincom Retail’s “IEO” were CitiCredit Suisse and Deutsche Bank, with SSI as domestic lead manager. 

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