While the intensity of deal-making may be lower compared to other Asian economies, Myanmar does have an active pipeline and many sectors are flush with opportunities, according to Yangon-based advisory firm Thura Swiss vice-president (business development) Nicholas Thibeault.
Some of the main hurdles to deal-making include lack of transparent information flow and policy frameworks. The M&A scene is expected to be more buoyant with the Companies Act amendment, that will define foreign-owned companies as those where foreign ownership exceeds 35 per cent. This will make it much more easier for local companies to attract international funding and expertise.
In an interview with DEALSTREETASIA, Thibeault talks about Myanmar’s M&A scene, challenges to deal-making and the importance of capacity building on valuation matrix.
Thura Swiss is in the process of helping Swiss-based startup enabler, Seedstars Group, in capital raising and market entry while it is also currently offering M&A advisory to foreign and local companies in the logistics, oil and gas and construction sectors.
Could you talk about the M&A deal making activity in Myanmar?
The intensity of deal making is obviously lower at the moment than that of other South East Asian countries. However, there are plenty of deals happening and plenty more in the pipeline. Many MNCs and investors are intrigued by Myanmar as a last frontier economy but are not necessarily ready to deploy capital here as they still see risk as too high. However, private equity with a larger risk appetite have opened offices in Myanmar along with an increasing number of local funds, who are much further along in the process and are able to effectively source deals. As an advisory firm, we are trying to increase the intensity by working with local companies that we think are attractive, while advising inbound investors on the opportunities available and supporting them through the process. Currently, there is a disconnect between what foreign entrants expect and what is realistic regarding ticket size, deal process and availability of information. This asymmetry of information is what we are trying to address at Thura Swiss. Without this kind of transparent market making, deal flow will struggle and remain selective and very sector specific.
It seems that foreign companies are cautious acquirers of assets in Myanmar. What are the major forces shaping the M&A deal making?
For me, the major force at the moment is transparency and information flow. In a developed M&A market, there are many advisers and brokers who are constantly pitching ideas to buy side clients and assessing sell-side opportunities. The market generally knows the maturity and valuations of different businesses as well as the private deals that are happening. This type of information is limited in Myanmar. (In Myanmar) Sometimes people are cautious to hold on to their relationships including contacts and ideas. This is completely understandable as relationships of course have value, but the more information sharing and introductions we can have among participants the greater the deal flow will be.
Another force is of course the regulation and general standards of business. Myanmar isn’t the easiest place to do business. Having early mover advantage compensates businesses and investors for this, however issues of accounting standards, corporate culture and regulatory issues can be big entry hurdles. For example, I think if the Companies Act hopefully goes through (currently under review at Parliament), and they are able to pass the 35 per cent ruling of acquiring local shares, it will have a huge impact on the M&A market. A lot of businesses would like exposure to Myanmar’s growth opportunities without committing to a complex JV structure or transaction vehicle. Acquiring local company shares means they can ‘dip their toe’ in the market with minority interest in a local company, build a relationship, share expertise and then acquire that company at a later, more mature stage when it makes sense.
What is driving the M&A transactions in the consumer sector?
Myanmar has a fascinating consumer goods market. As a result of being largely shut off from imports for over five decades, when you walk into a Myanmar home, into the kitchen or bathroom, you see a high share of Myanmar brands for soap, toothpaste, cleaning products and beer and snacks. These are brands that no one has heard of outside Myanmar, but here they wield tremendous brand loyalty and market power. Many of these brands are included in conglomerate companies and may not even be a core business. These can be very interesting opportunities for trade buyers, who can acquire the number one spot in the market, and begin to channel through and market their higher margin products through the local manufacturing capabilities. These are less interesting for private equity as these companies will tend to command a premium. However, if you look a little deeper, there are smaller players that still have significant market share without having implemented real marketing or growth strategies and are operating at full capacity. These companies become interesting for private equity players. We are continuing to map out the consumer goods sector aggressively at the moment as we see huge potential here. What can be a challenge in Myanmar is understanding the potential of the platform you want to acquire. This is again because of the lack of market data. Our research capabilities aim to help these companies make data driven market entry and growth decisions.
I suppose oil and gas sector is also busy with a few deals. Despite the downfall of prices, where do you think the sector is heading?
Myanmar at the moment is in need of oil and gas for its own development and has huge potential for natural reserves. In 2013, there was the call for tender for platforms in the upstream space. Around that time we saw the global oil price fall which slowed down activity in the sector. Now the economy is opening up further, and the country is beginning to welcome international players in the downstream space as well (including Shell Brands International AG enter a license agreement with Max Energy). These companies see potential beyond just supplying gas to consumers, but can build up brands and businesses with convenience stores in the gas stations which is something that doesn’t exist here. It will be interesting to see more future partnerships and this sector develop further.
Would greenfield investment be a better option given that there is a shortage of acquirable businesses in Myanmar?
Its not that there are no acquirable businesses, it is that they can often be too small to move the needle for the acquirer. There are not a huge number of existing businesses that offer good value for the ticket size that many private equity firms are playing with. This means it makes sense to enter a larger greenfield project with the expertise of the local business and build the new platform together. The lack of key infrastructure in Myanmar means that it makes sense for trade businesses to enter greenfield projects, building businesses around the asset base and developing warehouses, breweries and manufacturing plants etc.
How do you assess the verticals foreign businesses are interested to invest in during the recent years and in the near term?
I think investors and businesses need to pay special attention to the structural building blocks of Myanmar. We hear a lot about leapfrog development, implying for example that a country like Myanmar will go from cash payment to mobile payment with no cards in between, however it is important to recognize the importance of the foundation sectors. Telecom has been a huge growth sector, and has of course been the foundation for the development of the thriving tech, and mobile payments industry here. However, other sectors desperately need to catch up. We believe delivery and logistics is a key growth sector, for example. A consumer can buy goods online from anywhere in the world with a few clicks on their phone but if the delivery system takes two weeks to get to you once it has arrived in Myanmar, the whole process falls apart.
Financial services is, of course, another key building block. It is relatively tricky to access for foreign companies at the moment but this looks set to change as the insurance market begins to open up and capital markets continue to improve. Consumer and retail is always interesting. Globally you have a situation where at the top of an economic cycle strategic players are looking to acquire and enter new markets to achieve much needed growth. In a lower growth environment, private equity comes and pick up bargains trying to turn businesses around so there is always demand in this sector. In Myanmar, the rising middle class with greater discretionary spending wants to access international brands and eat out at restaurants and coffee shops, and this is sure to drive the consumer and retail sector.
Do you find that local businesses are open to M&As?
Absolutely. There are some fantastic businesses here who are ready and certainly interested. But, it is important for us to advise and guide them through. They really require support on all aspects from business strategy and valuations to reaching the right potential partners and facilitating negotiations. We aim to make sure the accounting is working well, the growth forecasts are realistic and all their strengths are correctly put forward. We have to employ a less formal M&A process here, and the earlier we can get discussions going the better, because we need to understand the needs and desires of the foreign companies to be able to get a deal done.
How do you mitigate and address the valuation challenge in local companies?
I think it is important to educate them (local companies) in terms of the valuation procedure and metrics, what is realistic and what price the owners are willing to sell for. A lot of them are family businesses and they are not desperate to sell so they put a pretty significant premium on the business, which is fair enough. There are other companies that we have met who are keen to access capital and partner with foreign firms to achieve the next stage of growth but they have no idea about the valuation or what their business is worth from an M&A perspective. They don’t know the traditional matrix and there’s no transparency from precedent transactions. So, we try to help these businesses understand those, obviously with specific reference to Myanmar and the future growth of their company. On the foreign side, firms have to understand that it’s a different game here and while there may be negotiation challenges, they should not to be put off at the first hurdle. Those discussions, without an adviser in place, can fall through because there is a blatant mismatch but that is not necessarily the case in the end.
Are you currently engaged in advanced talks for M&As in Myanmar?
Yes, we are working with clients in the technology, courier and logistics, oil and gas and construction sectors. Three of those are international clients and one is local. Often, it is not a traditional M&A process as there are initial phases of market research and mapping that are essential to have an educated and accurate view of the market.
Does Thura Swiss plan to move beyond advisory and foray into its own investment?
Yes, we are definitely keeping our eyes and ears open. At the moment, it has not been an immediate focus because we are prioritizing growing our core business. We aim to continue to bring transparency to the market and bring players together to create a more active investment climate. Having said that, we are certainly in a good position to be at the forefront of excellent investment opportunities in the future.