Why has the M&A landscape struggled to take off for renewables in Vietnam?

Surprisingly, this dynamism contrasts with a more challenging environment when it comes to the number of merger & acquisition (M&A) deals – both greenfield and brownfield projects – that have been effectively finalized.

From our experience, we identified recurrent gaps that can explain this ignition delay:

• • Covid-19: Many transactions that were well advanced early 2020 are in the best cases still pending, or in the worst ones have been cancelled because of the pandemic. This unexpected situation has forced many local groups and investors to reshape their strategies. We observe a strong desire from vendors to retain the assets for a longer time than initially planned, because offers are not meeting their expectations, or due to internal restructuring from international investors (re-focus on their home market rather than exploring new geographies, keep their cash as a buffer during this situation, etc.);
  • Discrepancies in return expectation: Covid-19 also reinforced the mismatch between investors’ capacity to pay high premiums for brownfield projects on the one hand, and sellers’ expectations on the other. Many local groups need additional development capital to deploy towards projects under development. Also, this exercise to set the so- called “right/fair” premium to offer is getting ever harder when it comes to premiums for greenfield projects (i.e. project rights, wind projects that are only included in the masterplan, solar projects that secured land and permits, but have not yet started construction, etc.);
  • Regulation uncertainty: Vietnam has demonstrated in a very short timeframe its capacity to democratize a sector that was so far very quiet. This comes with some uncertainties on the regulation side, where you only have visibility for a limited timeframe (i.e. feed-in-tariff programs not being renewed, C&I rooftop FIT after 2020, new circular models for the wind sector, etc.). In addition, even if a project has a signed PPA and is fully operational, it cannot be considered entirely de-risked from an investor point of view, as additional risks/uncertainties still exist mainly related to the PPA (unlimited curtailment, no “take or pay” clause, force majeure, etc.);
  • Environment & social (E&S): A few projects, especially hydro ones, are lacking robust documentation and due diligence on E&S aspects. These criteria are crucial for international institutional investors and this is quite often one of the main reasons why deals are not going further; and
  • Process: An underestimated reason is the absence of a clear and standard M&A process led by the sellers (teaser, Information Memorandum, related financial model, lack of readily accessible project documents in English in the data room, etc.). Leading the transaction via a standardized process would help to have a smoother process by reducing the effort and time spent on the transaction, hence reducing the various gaps between sellers and investors.

Having identified the gaps above, trying to bridge all of them would be very difficult. Indeed, the regulatory framework and Covid-19 situation amongst others naturally require some additional time and effort from the parties to build an even more robust environment for renewable energy transactions. Nevertheless, some of the above gaps, such as the E&S aspects and the process, are areas the parties can already start working on by reinforcing the due diligence upfront and working closely with professionals (technical, tax, financial advisors, etc.) to achieve a greater chance of success at closing.