Fosun, Striving to Be the Berkshire Hathaway of China

JANUARY 10, 2014, 6:17 AM

Striving to Be the Berkshire Hathaway of China

By NEIL GOUGH

Fosun International aspires to be China’s answer to Warren E. Buffett’s investment firm, Berkshire Hathaway, and it wants to be sure everyone knows it.

On Friday, the Shanghai-based Fosun announced that it had won the bidding for Portugal’s biggest insurance company with an offer of 1 billion euros, or $1.4 billion, beating out the American private equity firm Apollo Global Management.The deal is the latest, and biggest, in a string of global acquisitions by Fosun, which has investments in China that include real estate, pharmaceuticals, steel and iron ore production. Fosun has been rapidly expanding internationally in areas like retail, in a deal to buy a stake in the Greek fashion label Folli Follie in 2011; resorts, acquiring Club Med last year; and insurance and reinsurance, joining with the International Finance Corporation, the profit-seeking arm of the World Bank.

Fosun is clear as to what it wants to accomplish — and who it hopes to emulate — with the latest acquisition. It will give Fosun an 80 percent stake in the Portuguese insurer Caixa Seguros e Saúde, a state-owned company that is being privatized under the terms of the government’s bailout deal with the European Union and the International Monetary Fund.

‘‘This marks a solid step for Fosun to evolve into Warren Buffett’s model,’’ Fosun’s chairman, Guo Guangchang, said in a statement on Friday.

Fosun still has some ground to cover. In the first half of last year, it took in $3.1 billion; in the same period, Berkshire’s revenue was $88.6 billion. The Chinese company’s shares closed 5 percent higher in Hong Kong on Friday after the Portuguese deal was announced, but its market value still trails Berkshire’s — by nearly $280 billion.

Fosun is perhaps the most openly ambitious among Chinese companies that are newly looking abroad for investment opportunities. In the past decade, Chinese deal-making on foreign shores had taken on a distinctly mercantilist hue, characterized by large, state-owned companies announcing blockbuster acquisitions intended to lock in strategic resources to meet China’s growing demand for energy and raw materials.

Such transactions still take place, of course, like the $15 billion purchase completed last year by the state-owned China National Offshore Oil Corporation, or Cnooc, of the Canadian oil producer Nexen. But increasingly, it is private companies, not state companies, that account for most of China’s outbound investment, and they are focusing on companies outside of the resource sector.

In the United States, for example, acquisitions by private Chinese companies overtook deals by state companies for the first time in 2012, accounting for 59 percent of total transaction value, according to a report published Tuesday by the Rhodium Group, an economic and policy research firm based in New York. In 2013, when the value of deals by Chinese companies in the United States doubled, to $14 billion, private buyers again increased their influence, accounting for 87 percent of transactions by volume and 76 percent by value. Last year’s activity was bolstered by the $4.7 billion cash bid for Smithfield Foods by Shuanghui International, a privately owned company that is China’s biggest pork producer.

‘‘We expect Chinese interest in U.S. assets to remain strong in 2014 because of aggressive economic reforms in China, a more liberal policy environment for Chinese outbound investors and a positive outlook for the U.S. economy,’’ the Rhodium analysts, Thilo Hanemann and Cassie Gao, wrote in the report.

For companies like Fosun, overseas acquisitions are almost always approached with an eye on how they can be leveraged to tap the huge and fast- growing domestic market in China.

In the $765 million Club Med deal, for example, Fosun worked with Axa Private Equity of France last May to take over the resort operator with a plan to build its business in China. Club Med has already opened its second property in China since that deal was completed — a two-hotel resort that sits on 116 acres of land in a national park in the southern tourist hub of Guilin — and more resorts are planned.

A list of other overseas deals executed by Fosun last year includes the purchase in October of One Chase Manhattan Plaza in New York from JPMorgan Chase for $725 million, a $55 million investment in the American women’s apparel brand St. John Knits in June and the $221 million takeover in May of Alma Lasers, an Israeli medical equipment manufacturer.

In saying the deal for Caixa Seguros moved it closer to Mr. Buffett’s model, Fosun was referring to its growing footprint in the insurance business. Berkshire Hathaway is a major player across the industry, including being the owner of the American auto insurer Geico and the biggest single shareholder of the German reinsurance giant Munich Re.

Fosun, for its part, has for years invested in the Chinese property and casualty insurer Yong’an. In 2012, it set up two new insurance ventures: a 50-50 joint venture with Prudential Financial based in Shanghai called Pramerica-Fosun Life Insurance, and Peak Reinsurance, an Asia-wide firm that insures insurance companies and is partly owned by the International Finance Corporation.

At a conference in Hong Kong in November, Fosun’s chief executive, Leo Liang, said the logic behind investing in the insurance industry was also a China strategy. The country’s banks sit on one of the world’s biggest piles of cash, with more than 100 trillion renminbi, or $16.5 trillion, in deposits. Ordinary Chinese save a relatively high percentage of their incomes against fears of future medical costs, which Fosun sees as a sign of demand for a host of new insurance products.

Moreover, as the country’s financial markets liberalize, Fosun will have more options as to how and where it can invest its float — the money left over from insurance premiums after claims are deducted. Adding Caixa Seguros to the mix will broaden those investment options on a global scale.

Analysts see the growth potential, but are worried about the debt that has resulted from Fosun’s global shopping spree in recent years. In a report published Tuesday, analysts at Goldman Sachs upgraded their rating on Fosun’s stock, to ‘‘neutral’’ from ‘‘sell,’’ but pointed out that 41 percent of the company’s debt was due for refinancing within a year.

‘‘We are still concerned about earnings risk in a rising interest rate environment due to Fosun’s highly geared balance sheet,’’ the Goldman analysts wrote. ‘‘That said, we believe the above negatives could be offset by fundamental improvement in its underlying businesses as outlined below. Should it execute well on its growth strategies in the asset management and insurance divisions, better investment return may help the stock to re-rate further in the medium term.’’