Insurance, Finance and Trading Poised for Acquisitions in the Wake of the New Companies Law
Myanmar’s economy is already quite open to foreign investment, but the few areas previously entirely closed to foreign ownership have just – nearly all- been opened as well. The new Companies Law 2017 allows, as the reader will by now already know, up to 35% foreign shareholding in any company with Myanmar national shareholders without that company losing its status as a “Myanmar company”, thereby effectively opening up previously closed parts of the economy to foreign minority ownership.This new possibility will the most immediate be felt in the insurance, the finance and the distribution sectors. Let us take a look at each one of these industries to assess if Myanmar is indeed on the verge of an M&A wave.
Having opened the market to nationally owned privately held insurance companies after decades of state-owned monopoly through Myanma Insurance, the industry is still in its infancy. The Government has announced it would allow foreign insurance companies to operate in the whole of Myanmar (a small exception in the Thilawa SEZ having been allowed in 2015 but the expectation is that joint ventures with local insurers would be required for general insurance (non-life), which is in fact the bulk of the revenue of the sector in Myanmar today. The 13 existing local insurance companies on their part would welcome fresh capital and international know how, but they also require a more liberal regulation of their own products and operations.
Foreign insurance companies or other shareholders were to date not allowed to buy a stake in a Myanmar insurance company, and they are not permitted to operate in (or with) Myanmar without going through the monopolist Myanma Insurance. The 2017 Companies Law brings that situation to an end. Effective immediately, so it seems, a foreigner would now be allowed to buy up to 35% in any insurance company. Given that they cannot access the market without a JV, at least, that seems to be the plan, there may indeed be quite some interest in negotiating JVs with the local players in this space. Even without a legal requirement to have a local partner, some foreign insurance companies will prefer to partner up, we believe.
In theory, the same applies to Myanmar’s private banks. With close to 25 nationally owned private banks in operation, there have been a number of non-definitive tie-ups discussed between local and foreign players. In theory, the Companies Law 2017 also applies to them, just as to any other Myanmar nationally owned company. Is a wave of bank JVs just around the corner? Perhaps, but the situation is more sensitive even than for insurance. In the insurance sector, promised of increased foreign access to the sector have been made from years ago. And, more importantly, the Government ran two processes to grant local branch licenses to a total of 13 foreign banks. It has been a different strategy from the one we saw in the insurance sector, which was just opened to private sector involvement in 2013. The Companies Law will certainly trigger some renewed questions and perhaps a renewed lobby effort in favour of foreign ownership in Myanmar banks, that is clear. But perhaps the decision has not yet been made whether this moment is the right one.
There is, we believe, likely less sensitivity with respect to finance companies. Over 20 companies have been licensed as a non-bank financial institution with the activity of a finance company, but not all are active. Also here, foreigners have showed an interest to insert equity to find their remarkable expansion, but they were not permitted to proceed. Until now, that is. It seems likely to us that foreigners can now purchase existing shares or subscribe to new shares of finance companies as per the Companies Law 2017.
The largest industry sectors that are still closed off to foreign ownership (with a few exceptions) are wholesale and retail. In fact, a company carrying on any trading activity whatsoever is, or was, not permitted to have foreign shareholders. Any foreign shareholding at all. This exclusion has triggered a wide range of structures in Myanmar, some more fanciful than others, where foreign joint venture partners somehow someway get around this regulatory restriction without being in breach of it.
So, this will be the largest beneficiary of a fresh wave of M&A activity. Existing structures, setup when the foreign partner could not hold any shares at all in the trading company, which can now be revisited and cleaned up with an actual equity participation. Or, perhaps more importantly, new entrants seeking to team up with local partners to import and distribute a wide range of products and goods. Fuel and FMCG are high on the list of sought after trading businesses, but there are of course many more.
To many foreigners, 35% may still not be enough, but that is not the point. The M&A activity we see developing in the next year will not be led by those investors. It will be driven by those foreigners who want to get into the market one way or another, but who previously felt that holding 0% equity is not secure enough. There is a huge difference in risk between having no shares at all, and having 1%, let alone 35%. You are a shareholder, that is what matters, and no one can kick you out. You can use the flexibility of the Companies Law 2017 (the old Act did not so bad either) to shape profit shares and voting rights however you want. But you can’t do that if you are not a shareholder to begin with.