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Collapse of Thomas Cook is a reality check for China's Fosun

The collapse of Fosun Group's flagship European investment, Thomas Cook, is proving to be a reality check for the Chinese conglomerate's ambitions to create a global travel empire via flashy acquisitions.

[HONG KONG] The collapse of Fosun Group's flagship European investment, Thomas Cook, is proving to be a reality check for the Chinese conglomerate's ambitions to create a global travel empire via flashy acquisitions.

After months of talks to hammer out a US$1.1 billion bailout package, Shanghai-based Fosun - the biggest shareholder in Thomas Cook Group plc - decided against committing any more money toward rescuing the inventor of the package holiday. For want of an additional £200 million (S$343.4 million) demanded by creditors, the indebted tour operator filed for liquidation this week.

Thomas Cook's final adventure ends in early-morning liquidation

Banking on a boom in Chinese outbound travel, particularly to Europe, Fosun's pursuit of Thomas Cook made sense initially. But its reluctance to see the deal through shows the company may be reconsidering a game plan that saw it buy about US$18 billion of assets over the last five years at home and abroad, including resorts brand Club Med SAS in 2015.

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With the global economy cooling and the trade war altering the landscape for offshore acquisitions, the Thomas Cook setback could also signal a pause in the wider plans of Hong Kong-listed Fosun, which has assets spanning brewing and fashion labels.

"Fosun is facing the headwinds of a slowdown," said Andrew Collier, managing director at Oriental Capital Research Inc in Hong Kong. "It's a difficult time to be expanding."

Led by billionaire Guo Guangchang and founded in 1992, Fosun has been lately focusing mostly on hospitality, healthcare and finance - businesses its chairman says are linked to happiness, health and wealth. They operate broadly under its listed units Fosun International Ltd, Fosun Tourism Group and Shanghai Fosun Pharmaceutical Group Co.

Fosun is the last of the few Chinese conglomerates still chasing overseas deals, while giants such as HNA Group Co, Dalian Wanda Group Co and Anbang Insurance Co have been selling assets to pare debt. Total debt at Fosun International stood at US$28 billion as at June 30, compared with cash and equivalents at US$22 billion, according to data compiled by Bloomberg.

In the tourism space, Fosun started expanding by acquiring control of Club Med in 2015 after a protracted takeover battle and later the same year with a stake in Thomas Cook.

Eventually, with an 18 per cent holding in the British company, Fosun was seeking to replicate its model at Club Med - the once flagging resorts brand - by tapping wealthy Chinese tourists traveling to destinations in Europe. Official data shows about 150 million travellers from China visited offshore destinations last year.

But sputtering growth in the world's second-biggest economy means a dip in demand. The slowdown, partly triggered by the trade war with the US has hit consumer spending, factory output and the jobs market. A weaker yuan has also added to concerns over spending.

It isn't just China that is under pressure. Parts of Europe are in recession or close to it, with World Bank president David Malpass this month saying the global economy is poised to decelerate more than previously estimated. Brexit has also roiled the UK.

Failing business

Going after a failing business like Thomas Cook wasn't a great strategy for Fosun, said Brock Silvers, managing director at investment advisory firm Kaiyuan Capital in Shanghai. Sinking under the weight of debt from deals made a decade ago, Thomas Cook had trouble keeping up with rivals as the business shifted online.

"Thomas Cook was massively indebted, bleeding red ink, with an outdated business model and no obvious fit with Fosun's portfolio," Mr Silvers said. The latest developments raise concerns over Fosun's deal-making, making it look "unfocused and undisciplined", he said.

A representative for Fosun didn't respond to a request for comments.

In a statement on Sept 23, Fosun said it was disappointed Thomas Cook couldn't find a viable solution for the extra capital needed. "Fosun confirms that its position remained unchanged throughout the process, but unfortunately other factors have changed," it said.

Thomas Cook isn't the only fiasco for Fosun. Folli Follie, a Greek retailer in which it is the second-biggest shareholder, is battling a crisis after a hedge fund disputed its sales figures last year and shorted the stock.

Fosun has plans to buy assets in the mining industry as well. A consortium led by the group is in talks to acquire a majority stake in a Russian gold miner, and a deal could value the target at about US$1 billion, people familiar with the matter said in June. Fosun has about US$2.2 billion of pending deals, according to data compiled by Bloomberg.

"The global atmosphere is now less favourable for China's outbound investors," Mr Silvers said. "Chinese conglomerates face increased scepticism, and potential partners will now find little comfort in Fosun's interaction with Thomas Cook."