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

[BEIJING] Guo Guangchang, the billionaire founder of Chinese conglomerate Fosun International Ltd, 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, Mr Guo has used bank credit and leverage to help make nearly US$4 billion (S$5.25 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 US$1.1 billion bid to buy French resorts operator Club Mediterranee, Mr Guo is also facing off directly against Kravis, whose investment fund KKR is backing rival consortium Global Resorts SAS, led by Italian tycoon Andrea Bonomi.

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 (US$50.63 billion) at the end of June. "The company's balance sheet will be less stretched in the future," Mr 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 per cent 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 per cent stake in REN, the Portugal national energy network firm, and a stake in casual clothes manufacturer Tom Tailor Holding AG.

In October, the conglomerate also employed the insurer to take over Portuguese healthcare provider Espirito Santo Saude for 459.83 million euros (S$932.0 million). "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." Fosun also has turned to equity markets to raise cash. In May, the group raised HK$4.89 billion (S$829 million) from a rights issue, capitalising on a 126 per cent rise in its share price over the last two years.

A month earlier, Shanghai Fosun Pharmaceutical Group Co, the conglomerate's healthcare division, raised HK$1.76 billion from a new share placement.

Earlier this month, subsidiary iron ore producer Hainan Mining, raised 1.93 billion yuan in a Shanghai share sale.

MIDDLE-CLASS LUXURY

For Mr Guo, overhauling Fosun has become hugely important. Conglomerate revenues remain deeply rooted in core businesses. About 90 per cent 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. , Fosun Pharma and Shanghai Forte Land Co.

Mr 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," Mr 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, US apparel maker St. John Knits International Inc and Greek jewellery retailer Folli Follie SA.

Mr Guo, who Forbes estimates has a net worth of about US$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.

REUTERS