While most bankers were on holiday in late December 2014, a bidding war was wrapping up to acquire Club Méditerranée SA. Better known as Club Med, it is one of the biggest international vacation and resort operators.
American private equity giant KKR & Co. and its partner Italian businessman Andrea Bonomi lost out. The winning bid came from Fosun International Ltd., a Chinese investment holding company that, until recently, was little known in the West.
With total assets of 313 billion yuan ($51 billion), Fosun is China’s largest privately owned conglomerate. At first glance, Fosun resembles a diversified investment holding company such as Berkshire Hathaway, or on a much smaller scale, Ronald Perelman’s MacAndrews & Forbes.
Upon closer inspection, Fosun appeared to owe much of its early success to the Chinese Communist Party regime. But in more recent years—as the Party grapples with internal strife and economic uncertainty—Fosun has increasingly shed its reliance on Party dealmaking.
It’s in the middle of executing an aggressive capital flight out of China, acquiring foreign companies and real estate, in a bid to secure its future regardless of the Party’s eventual fate.
Club Med and Chinese Big Spenders
Fosun’s final bid was 24.60 euros ($29.8) per share, which valued Club Med at around 939 million euros ($1.1 billion). KKR declined to raise its offer above 24 euros per share, which concluded an 18-month-long bidding process for the struggling vacation resort operator.
Club Med has a sprawling portfolio of resorts spanning across the Caribbean, Europe, and Asia. Its recent push to move upmarket hasn’t paid dividends, with revenues falling to 1.38 billion euros in 2014 from 1.41 billion euros in 2013. The company reported a net loss of 9 million euros during each of the last two years. Club Med’s recent profitability challenges, coupled with a stagnant European economy, led Paris-based brokerage firm Oddo to question Fosun’s 939 million-euro valuation of the company.
But it’s easy to see why there’s mutual interest between Fosun and Club Med. In KKR and Bonomi, Club Med CEO Henri Giscard d’Estaing saw private equity investors looking for a quick turnaround, telling Wall Street Journal early December that such a deal “could lead to Club Med’s breakdown.”
In Fosun, Club Med saw a longer-term marriage. Since 2012, Chinese tourists have been the world’s biggest spenders. According to its 2014 annual report, Club Med has two all-inclusive resorts in China and had made marketing to Chinese tourists one of its top priorities even before the buyout.
Fosun sees a high demand for luxury travel from deep-pocketed Chinese travelers, and Club Med has a supply of vacation resorts. The potential for Fosun to bring together such supply and demand is what made Club Med an attractive investment opportunity.
After completing the acquisition in February, Fosun wasted no time in building on its business. On March 6, it bought a 5 percent stake in UK-based travel agency and charter airline Thomas Cook Group.
Fosun paid 92 million pounds ($140 million) for the small stake, which it hopes to double to 10 percent, according to a filing with Hong Kong securities regulators.
The tie-up would drive collaboration and synergies between Thomas Cook and Club Med, and enable both companies to eventually benefit from increased marketing to Chinese consumers looking to travel abroad.
Influence in China
Fosun was founded in 1992 by four classmates of Fudan University. Guo Guangchang, one of the co-founders, serves as chairman. In Chinese, the company is pronounced “Fu-Xing,” which literally translates to “Fudan’s star.” In other words, it’s the culminating achievement of the four graduates from Fudan.
It’s notoriously difficult to build large-scale private enterprise in China, as the Chinese Communist Party (CCP) and its largely state-controlled banking system have traditionally favored state-owned enterprises, which are more beholden to government officials at the local, provincial, and national levels.
But Guo, who has an estimated net worth of $5.7 billion, seems to have generated enough connections of his own over the years. Fosun’s rise coincided with China’s efforts in the mid-to-late 1990s to liberalize its economy and promote private enterprises. Many of Fosun’s early investments were in the Chinese manufacturing and heavy machinery and equipment sector, which saw a boom during the last few decades as China assumed the title of “world’s factory.” Fosun gradually became involved in Chinese real estate, and in the last few years was a major private-sector investor in numerous state-owned enterprise (SOE) restructuring efforts.
Many of China’s SOEs, mired by corruption and unsound business decisions, were becoming bloated, unmanageable, and in some instances, money-laundering conduits for corrupt politicians. In 2013, during the CCP’s Third Plenary Session, the Central Committee proposed encouraging private participation in SOEs as an effort to spread the risk and attempt to rein in management of SOEs.
Fosun brought private money and became involved in SOE restructures. As of August 2014, it invested in 21 SOE restructuring projects. While details of these arrangements were not publicly available, the terms are believed to have been favorable to Fosun. The company was also frequently mentioned in official reports as a leading participant in such reforms, according to CCP mouthpiece Xinhua.
The company also seized upon the lax Chinese credit environment to finance a portion of its investments. As of June 30, 2014, Fosun and its subsidiaries had 84 billion yuan in debt and borrowings, with the majority (56 billion yuan) consisting of bank loans. Half of such bank loans were secured by assets of its Chinese subsidiaries. Such borrowings almost doubled from 2013 to 2014.
Today, Guo is also a member of China’s National People’s Congress (NPC), the Communist Party-controlled legislature. It’s a perch, which he has deftly used to advance Fosun’s interests.
In the United States, congressmen are accused of taking cues from the businessmen that financially back them—but in Guo’s case in China, the congressman is the businessman. Members of the NPC are effectively appointed to their posts by provincial and local authorities, and also must be approved by the Chinese Communist Party.
Shifting Capital Abroad
Over the last five years, Fosun expanded its horizon to Western companies, including well-known brands such as St. John apparel and Folli Follie accessories.
Fosun has also diversified into U.S. real estate. Last year its real estate arm bought the 2.2 million-square-foot One Chase Manhattan Plaza in downtown Manhattan for $725 million. The building was originally the headquarters of Chase Manhattan Bank, now a unit of J.P. Morgan Chase & Co.
At the same time, Fosun has selectively shed some of its Chinese real estate investments. Its real estate development subsidiary, Shanghai Forte Land Co. Ltd., had net disposals of 1.2 million square feet of real estate space (acquisitions less disposals) during the first half of 2014, after years of adding new projects.
In recent months, Fosun has become even more aggressive in bidding for foreign assets. Last week, Bloomberg reported that Fosun is weighing a bid for New York-based Cushman & Wakefield Inc., the world’s third biggest real estate management firm.
The timing of Fosun’s foreign investment binge is impeccable. China is suffering from an unprecedented capital flight driven by Party leader Xi Jinping’s anti-graft campaign, a weak yuan, and collapsing asset values domestically. China’s capital outflows during Q3 and Q4 2014 were the largest on record, estimated Diana Choyleva of London-based Lombard Street Research in a recent research note.
These headwinds have been blowing for years. For Fosun, which is armed with insider political information and intimate knowledge of China’s manufacturing and real estate sectors, allocating greater capital toward Western assets is a necessity.
Guo cites American investor Warren Buffett as inspiration and views Buffett’s Berkshire Hathaway as his Holy Grail. As far back as 2011, Guo had his sights set on Berkshire Hathaway. Last year he referred to himself as an “apprentice” of Buffett during an interview with CNBC. “We’re learning from his investment methods. We hope to build on our own strengths and become Buffett’s successful disciples in China,” Guo told CNBC.
Buffett and Guo are both disciples of value investing. But what separates Fosun and Berkshire is the latter’s outsized balance sheet, which allows Buffett to finance transactions cheaply. Berkshire’s balance sheet largely comes from its insurance arms of Geico and Gen Re, which provide a huge capital base derived from policy premiums.
To that effect, Guo has said that Fosun will also look for “insurance businesses to improve our investment capacity in the future.”
But Fosun’s motivations for buying insurance companies likely extends beyond imitating Buffett.
The CCP’s current political volatility presents some problems. If Fosun’s existing political and business connections disappear, lucrative SOE restructuring and other favorable deals would dry up (not to mention even worse ramifications such as asset seizures). China’s economic malaise, namely a weak yuan, could also devalue Fosun’s investments and hurt its ability to obtain leverage. If this is what Guo believes, then he is likely seeking external sources of capital to cushion the potential blow.
This is where an insurance company comes in. For investment firms, insurance portfolios are a great source of stable, permanent capital. And for insurance and annuities companies frustrated by today’s low interest-rate environment, allying with investment and private-equity firms provides the necessary returns.
Last year Fosun acquired Caixa Seguros, Portugal’s biggest insurance group, by outbidding New York-based private equity group Apollo Management, which has its own insurance arm. Last December, Fosun reached a deal to buy Michigan-based Meadowbrook Insurance Group Inc. for $433 million. The deal is under review by insurance regulators, and if approved, marks the first acquisition of a U.S. property and casualty insurer by a Chinese company.
With insurance companies in the fold, Fosun doesn’t have to circumvent the CCP’s restrictions on capital outflows. Its capital base would already be in the United States and Europe, ready to be deployed.
Fosun is still majority-owned by its four founders. Eighty percent of its shares is held by a holding company registered in the British Virgin Islands controlled by the four co-founders. The remaining 20 percent of its shares are publicly traded in Hong Kong. Guo owns nearly 60 percent of the holding company, with the remainder split among the other three.
The company grew its assets from 88 billion yuan in 2010 to 313 billion ($51 billion) by 2014, roughly at a compounded annual growth rate of 29 percent.
Fosun’s recent moves were aggressive and deliberate; it appears to have positioned itself to take advantage of China’s political volatility as well as global economic headwinds. And if it can play its cards correctly during the waning days of the Chinese Communist regime, we could be witnessing the rise of China’s Berkshire Hathaway.