On 15 January this year one of China’s biggest real estate investors emerged victorious in the longest-running takeover battle in French corporate history.
Some 18 months after making its initial €17 (£14.45) per share approach to buy the company credited with inventing the all-inclusive holiday, Club Mediterranée, Fosun’s final (and eighth) €24.60 offer was recommended to shareholders by the company’s board. The 45% premium on Fosun’s original offer values Club Med at €939m, a price that rival suitor, the Italian financier Andrea Bonomi, just could not justify.
Fosun bought its initial stake in the Club Med business five years ago, at the time its first deal outside China. That early international expansion reflected Fosun’s entrepreneurial spirit. The company prides itself on being the largest private investment firm in the People’s Republic and one whose strategic growth has mirrored the economic opening up of the world’s most populous country.
Against the backdrop of a slowing Chinese economy, which the government is furiously attempting to rebalance, what does Fosun’s determination to secure Club Med tell us and what will that mean for the company’s real estate ambitions globally?
Responsibility
Alex Gong is executive president of Fosun Property Holdings, the real estate arm of Hong Kong-listed Fosun International, with responsibility for the group’s overseas business. The former Bank of Shanghai and Standard Chartered banker is in no doubt about the merits of the Club Med acquisition, even if it came at a hefty price.
“We firmly believe there is a huge synergy to be generated if we work with Club Med by combining our tourism business, China International Travel Services,” he says, in his first UK interview.
“We have already helped Club Med to open three resorts in China (pictured) and between the size and depth of the Chinese market we believe three is just the beginning.”
CITS is one of China’s largest travel agencies and Fosun plans to use the platform to sell Club Med holidays to the country’s burgeoning middle class.
According to the China Outbound Tourism Research Institute, there were 102m border crossings by Chinese citizens between April 2013 and March 2014, a 15% increase on the previous year, despite the slowing economy.
This rapidly growing international demand, coupled with a lack of quality domestic supply, creates a compelling opportunity, according to Gong.
And the synergies do not stop there.
It is common in China for companies to buy package holidays for loyal employees. Given Fosun’s conglomerate structure – it has interests in everything from mining and menswear to jewellery and pharmaceuticals – Gong believes the company is well placed to leverage its diverse corporate relationships to the benefit of Club Med.
Beyond the beach clubs
And the Club Med deal bears a wider significance for Fosun. The group has for the past 20 years invested in Chinese businesses which it believes are best placed to take advantage of the government’s economic policy.
“Fosun has seized the opportunities in different phases of China’s development. For example, in the era of state-owned enterprise reform, we invested in Yuyuan Tourist Mart, the first commercial company listed in China and an undisputed cultural icon in Shanghai,” says Gong.
With Club Med, the group is seeking, in part, to diversify its interests away from the capital investment that has fuelled China’s growth for the past 20 years, towards the more consumer-led growth the Chinese government is trying to stimulate.
For Gong, this desire to diversify will have major implications for the group’s real estate investment activities, as it looks to increase the pace of its international expansion.
“We started investing in real estate outside China at the end of 2013 with two deals; one in London and one in New York. I would say these two deals are just the beginning,” he says.
Fosun has four “workstreams” for its international real estate business, according to Gong.
The first is to acquire platforms in various gateway cities around the world.
Instead of simply sending Chinese employees to cities including London, Tokyo or New York, Gong says Fosun will acquire experienced local businesses in each of its chosen markets, providing fast and informed access to the best deals.
Gong points to the company’s May 2014 acquisition of Japanese real estate investment firm Idera as an example.
Idera employs around 70 staff and has assets under management of ¥160bn (£900m). The purchase immediately gave Fosun access to the notoriously insular Tokyo market.
In the five months since taking over Idera, Fosun has bought the 25-storey Citigroup centre for an undisclosed sum well in excess of $100m (£65m) and the 23-storey Shinagawa Seaside Park Tower Building.
The second workstream involves direct real estate deals for buildings, portfolios, or development sites. Fosun’s first UK deal, the acquisition of Lloyds Chambers, E1, fits into this strategy.
The third strand of work will see Fosun buying into listed real estate companies. There is money to be made “from the fluctuations of undervalued securities”, says Gong.
The company has an experienced listed real estate team in China, but its international expansion is in its infancy and Gong is willing only to say Fosun is “looking at some opportunities” in London, as well as in Russia.
The final pillar of the company’s international expansion is its private equity and venture capital arm.
Fosun wants to invest in start-ups both in and outside China where it sees an opportunity to add value to various of its existing businesses.
Gong cites AirBnB, the website that lets people rent out their spare rooms, as an example of the kind of company in which Fosun would like to invest.
But such grand ambitions take serious firepower. And Fosun’s multi-billion pound overseas spending spree began to attract concerns among analysts last summer, amid fears the company might be borrowing excessively.
Burgeoning borrowing
Ratings agency Moody’s has put Fosun’s Ba3 credit rating – three rungs below investment grade – on negative outlook, suggesting it may soon downgrade the company.
“Fosun’s financial profile has remained weak because of its large debt-funded investments,” read the Moody’s report. “Its investments have exceeded its internally generated cash. For instance, its recurring EBITDA (earnings before interest, tax, depreciation and amortization) is barely enough to cover its interest expenses and tax payments,” the May 2014 note added. Moody’s suggested that if the company made further investments using its own resources, the impact on its finances would be negative.
But while its initial forays into international real estate have been funded from internal financial resources, Gong said Fosun’s ambitious future plans will leverage the group’s insurance subsidiaries instead.
In May 2014 Fosun completed the €1bn acquisition of 80% of Portuguese state-owned Caixa Seguros, the country’s largest insurance group. This, in turn, gave it control of Portugal’s largest insurance company, Fidelidade which includes health insurer Multicare, and travel and transport insurer Cares.
The purchase of the €13bn AUM Fidelidade, as with Fosun’s $433m (£282m) deal to buy US insurer Meadowbrook in December, gives the Chinese conglomerate access to quality long-term capital to finance its acquisitions.
“Our focus now we have bought Fidelidade is to optimise the allocation of its real estate portfolio,” says Gong.
“The allocation is flexible, but we would say, given our understanding of real estate, we probably tend to take a more progressive attitude towards it as an asset class.”
Western Europe, and particularly London, will be the focus for Fosun’s Fidelidade real estate allocation, which will be weighted towards core and core-plus assets.
Fosun is in the process of establishing an office in the UK capital to help channel its investment.
The strategy has been met more favourably by analysts, with Standard & Poor’s now predicting a stable outlook for the company after downgrading it from BB-plus to BB in April 2014, saying it will benefit from cashflow from its Portuguese acquisitions.
A Fosun future
It is clear that the company is delicately balanced at a time when the economy of its main domestic market is similarly finely poised.
Should it succeed, the global potential could be huge, but if it stumbles the shockwaves will also be widely felt.
Does Gong believe China could yet be in for a hard landing, or is it over the worst of the readjustment?
“China is not a single economy so any one single statement is not going to be accurate,” he says.
Perhaps the same could be said for Fosun and its ever-expanding portfolio.
jack.sidders@estatesgazette.com
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