There will be major value deals in the real estate market in the last 2 quarters

21st June 2020

Asia Business Builders – Vietnam.

Many assumed that M&A of the real estate sector will be vibrant after the pandemic. What do you think?

I think the real estate market has been very resilient.

In the current context what is the purpose of the consulting entity?

The consulting entities now have a more important role in modelling the expected cash flows from a given real estate asset as Covid-19 is likely to impact consumer behavior in the longer run (perhaps less crowded retail outlets as a result of consumers being more socially distanced / slower growth in purchasing power and financial capability of tenants which impact on rental rates etc.). In particular, the consulting firms must pay attention and advise their clients on cash flow ‘scenario analysis’ which was less important pre-Covid19 when the outlook for Vietnamese businesses in 2020-2022 was more certain.

Could you please share more details about the role of the consulting entity in order to perform an M&A deal?

As different consulting entities have different approaches, I would like to introduce the process ABB Merchant Banking is following.

ABB Merchant Banking is involved at a very early stage with clients in order to perform a successful M&A deal.

At the initial stage ABB spends the time to understand the aspirations of the owner of the company and what kind of M&A transaction would be strategically suitable. After that is done, ABB spends considerable time to analyze the financial and operational performance of the business in order to be able to solicit foreign investors in a professionally controlled and confidential selling process. This requires presenting the attractions of the business in a way that investors understand and to determine what is the underlying real profitability and EBITDA of the business.

ABB works with the company to prepare a financial and operational data room and ABB arranges investor meetings and conversations and manages the timeline for obtaining an indicative investment offer. ABB works alongside the seller to negotiate and tailor the offer so that it is fair for both sides and achieves the long term objectives determined at the outset.

Subject to agreeing the indicative offer, ABB manages an exclusive bilateral process which includes due diligence and transaction documentation. After the signing, ABB will assist with all the procedures in order to close the transaction by way of getting the regulatory approval and satisfying all the conditions precedent to closure.

Post-closure, ABB most often stays involved with the company to support the post-transaction integration including the ability of the company to achieve any earnout targets that were agreed as part of the transaction.

What do you think are the obstacles making it difficult, even impossible, to perform the deal?

There are a number of obstacles to deal making which means that successfully closing an M&A deal is very challenging.

Valuation is effectively a function of risk and return. However, sellers often do not see the risk in the same way as investors. Hence there may be a valuation gap. There is often a gap that needs to be bridged for investors in order to understand the peculiarities of the Vietnamese market with respect to ownership limitations, tax practices and transparency.

Oftentimes investors have a learning curve with respect to Vietnam market practices. In addition, investors often have very rigid guidelines for the types of targets they look for and the process which they are willing to enter into.

At the same time investors often need the full financial and operational information up front whereas this may not always be available and often requires a period of discovery.

And to address the aforementioned difference, what is the solution?

The consultant entity should be able to bridge the valuation gap between buyer and seller. For example, if a seller expects 10x EV / EBITDA but the buyer has a valuation cap of 7x EV / EBITDA, the entity should utilize its many tools in its consultant tool box to bridge the expectations between the seller and buyer and to structure a deal.

What are your assessments about the market tastes post-Covid?

We expect seeing a flight to safety in all asset classes. In real estate we are seeing a preference from investors for prime located assets and for Grade A quality buildings with stable yields.

In the hospitality industry which is mostly negatively hit by Covid-19, sellers are looking for investors across the board (e.g. low quality resorts) whereas foreign investors prefer proven chain concepts, 5-star hotels and historical prime assets.

What are your expectation of the market for the upcoming time?

We expect more restructuring of companies and for the stronger domestic Vietnamese corporate champions to take advantage of their relative stronger position to carry out M&A.

Foreign investors from Japan, Korea, Thailand, Europe will put some decisions on hold as they deal with domestic issues but we expect the foreign M&A demand to come back strongly in Q2/Q4 of 2020.

For further information, contact our member Peter Sorensen

The original source article can be found here.

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