In pursuit of China's middle class, billionaire Guo targets Fosun's debt burden

Folli Follie SA

11/12/2014 21:00

* Fosun Intl moves to new insurance-based business model 
    * Club Med first major co-investment bid with Portugal 
insurer 
    * Utilises equity markets, seeks to reduce leverage 
    * Investing in China's middle-class opportunities 
 
    By Matthew Miller and Umesh Desai 
    BEIJING/HONG KONG, Dec 12 (Reuters) - Guo Guangchang, the 
billionaire founder of Chinese conglomerate Fosun International 
Ltd  0656.HK , has followed in the footsteps of buyout titan 
Henry Kravis even though he considers himself a student of 
investor Warren Buffett, who famously dislikes debt. 
    Over the last two years, Guo has used bank credit and 
leverage to help make nearly $4 billion in deals. But the 
47-year-old is now pursuing a takeover that signals Fosun's move 
beyond debt for investments and aims to transform its business 
model. 
    In his consortium's $1.1 billion bid to buy French resorts 
operator Club Mediterranee  CMIP.PA , Guo is also facing off 
directly against Kravis, whose investment fund KKR  KKR.N  is 
backing rival consortium Global Resorts SAS, led by Italian 
tycoon Andrea Bonomi.  ID:nL6N0TU1RW  
    A Club Med takeover would represent the most significant 
co-investment between Fosun and Fidelidade, the Portuguese 
insurance firm Fosun forked out $1.29 billion to buy in May, and 
advance Guo's goal of turning his Shanghai-based manufacturing 
and real estate-focused conglomerate into a multinational 
insurance-based investment manager. 
    Fosun CEO Liang Xinjun said the Portugal insurance assets 
make a big difference and will be used to finance most of 
Fosun's future investments. Acquisition of Fidelidade led to a 
significant jump in group assets to 313.3 billion yuan ($50.63 
billion) at the end of June. 
    "The company's balance sheet will be less stretched in the 
future," Liang said. 
    With a Moody's credit rating three notches below investment 
grade, Fosun had little choice but to change its strategy. Group 
debt reached 87.5 billion yuan at the end of June, an increase 
of more than 26 percent from the end of last year, with debt due 
in the next 12 months amounting to nearly half the total. 
    Finance costs for the first six months of the year increased 
by one-third to 1.76 billion yuan, while the ratio of 
debt-to-earnings before interest, taxes, depreciation and 
amortization stood at 4.8 times at the end of last 
year, compared with 3.6 times in 2010.  
    Fosun already has started putting the Portugal insurance 
assets to work, completing a series of investments after taking 
over the firm in May. They include taking a 3.97 percent stake 
in REN, the Portugal national energy network firm, and a stake 
in casual clothes manufacturer Tom Tailor Holding AG  TTIGn.DE . 
    In October, the conglomerate also employed the insurer to 
take over Portuguese healthcare provider Espirito Santo Saude 
 ESSS.LS  for 459.83 million euros ($572.40 
million). ID:nL3N0SB2MK  
    "Fosun's increasing use of insurance company funds is credit 
positive," said Kai Hu, senior credit officer at Moody's 
Investment Services. "It's an evolving and fast-changing 
company." 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
    Reuters Insider video interview with Guo: 
    http://reut.rs/1pD13TO 
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 
    Fosun also has turned to equity markets to raise cash. In 
May, the group raised HK$4.89 billion ($630.85 million) from a 
rights issue, capitalising on a 126 percent rise in its share 
price over the last two years. 
    A month earlier, Shanghai Fosun Pharmaceutical Group Co 
 2196.HK , the conglomerate's healthcare division, raised 
HK$1.76 billion from a new share placement.  
    Earlier this month, subsidiary iron ore producer Hainan 
Mining  601969.SS , raised 1.93 billion yuan in a Shanghai share 
sale. 
     
    MIDDLE-CLASS LUXURY     
    For Guo, overhauling Fosun has become hugely important. 
Conglomerate revenues remain deeply rooted in core businesses. 
About 90 percent of group sales and nearly two-thirds of profits 
in the first six months of this year were attributed to 
industrial holdings, which include Nanjing Iron & Steel Co. 
 600282.SS , Fosun Pharma and Shanghai Forte Land Co. 
    Guo's current focus is to combine global resources and 
China's economic momentum to provide the country's increasingly 
affluent city dwellers with "affordable" luxury.  
    "China now is seeing the rise of a large middle class,"      
Guo told Reuters earlier this year. "They are demanding a new 
way of life, and they very much enjoy many foreign brands."  
    In the last two years, Fosun has bought Israeli cosmetic 
treatments firm Alma Lasers Ltd and taken minority stakes in 
Italian menswear manufacturer Raffaele Caruso SpA, U.S. apparel 
maker St. John Knits International Inc  SJKI.PK  and Greek 
jewellery retailer Folli Follie SA  HDFr.AT . 
    Guo, who Forbes estimates has a net worth of about $4.3 
billion, described Club Med as an ideal investment because the 
vacation resorts were perfect for China's middle class to 
relax.  
    "From a tourist's point of view, you finally have time to 
travel, but you need to spend your time looking after your 
child. Club Med takes care of the entire family," he said. 
($1 = 0.8033 euros) 
($1 = 7.7515 Hong Kong dollars) 
($1 = 6.1881 Chinese yuan renminbi) 
 
 (Additional reporting by Beijing newsroom; Editing by Emily 
Kaiser and Muralikumar Anantharaman) 
 ((matthew.miller1@thomsonreuters.com;)) 
 
Keywords: FOSUN INTL STRATEGY/