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Can Fosun grow its investment division to over $100 billion?

Liang Xinjun

Liang of Fosun International

Romeo famously wooed Juliet by whispering sweet poetry to her as she leant over the balcony of her family home in Verona. Further north in Frankfurt and in the present day, German newspaper Die Welt says Fosun chairman Guo Guangchang has enjoyed less success during his own attempts to court the less lovely vision of BHF Kleinwort Benson CEO Leonhard Fischer.

Fosun hopes to take over the Anglo-German investment and private bank. But Die Welt says Guo and Fischer’s relationship could hardly be described as that of two star-crossed lovers. Rather it has turned into a struggle between two very large egos, pitting the German’s brash style against his Chinese counterpart’s rugged self-confidence.

The two are said to have fallen out over the removal of a top BHF executive in June. One month later, Guo launched a €674 million ($754 million) all-cash bid for BHF. Fosun, China’s largest privately-owned conglomerate, is currently BHF’s biggest shareholder with a 28% stake.

BHF says Fosun’s bid is too low. It is hoping for a bigger offer from French financial group Oddo & Cie, which owns over 15% of BHF too.

Local employees have told Die Welt they are sceptical of Fosun’s claims about the scale of private banking opportunities in China. They are also concerned that if Fosun’s bid is successful it might try and merge BHF with the German private bank Hauck & Aufhauser which is also a $233 million takeover target of Fosun.

Fosun certainly has the financial strength to increase its offer, but the Financial Times suggests it has been forced to refocus on China following political pressure from the Chinese government, which wants help propping up the A-share market. Fosun’s own share price has almost halved since May and some analysts believe its near-term focus will be on consolidating recent acquisitions rather than continuing to push forward with more international M&A.

The group has spent more than $8 billion over the past two years as it turns itself from an industrial conglomerate into an insurance-led investment holding firm modelled on Berkshire Hathaway. Insurance assets now constitute roughly 50% of the total, up from 30% last year following the consolidation of Portuguese insurer Fidelidade into its accounts.

Other recent acquisitions include US insurers Ironshore and Meadowbrook and Israeli financial group Phoenix Holdings. Until this week Fosun was also in discussions to acquire Portugal’s Novo Banco. (Reuters reports that discussions fell through because Fosun’s bid was too low.)

In a recent interview with the Chinese language version of the Wall Street Journal, Fosun International’s CEO Liang Xinjun said the group will continue looking for overseas investment opportunities and has a team of 38 executives scouring the world for potential targets.

Liang told the Journal that Fosun sets aside up to $1.5 billion to develop business at each of its new acquisitions and has now boosted investable assets to $22 billion from $17 billion last year. Over the next few years, he forecasts that the fund management division, including private banking, will grow its asset base from $7.8 billion to $100 billion.

But even though Fosun’s gameplan is to use insurance premiums to fund its M&A, such rapid expansion has come at the cost of higher leverage. The international rating agencies have repeatedly warned that Fosun needs to bring down its debt if it wants to maintain its current credit rating. At the end of 2014, the company had cash and equivalents of Rmb40.19 billion ($2.56 billion) and short-term debt of Rmb50.18 billion.

Since then, it has offloaded a series of minority stakes in A-share listed firms raising Rmb9 billion, plus $1.2 billion from a share placement in June. Last week, it surprised the market with another recapitalisation plan to bolster its balance sheet, via a 56-for-500 rights issue that raised a further $1.5 billion. As of June, its net gearing had dropped to 63% versus 86% two years ago.

Fosun’s Liang says the new push into private banking fits with the group’s going-out strategy. On the one hand it can use its bank in Europe to give wealthy families in China access to the financial products they are now seeking in overseas markets; on the other, it can introduce existing clients of the bank in Europe to investment opportunities in China.

As ever, the challenge is in the execution. What’s not in doubt: Fosun’s founder Guo Guangchang – the self-styled Warren Buffett of China – has an extensive network of super-rich friends to tap, particularly in the Yangtze River Delta.

Meanwhile the rumour mill continues apace. The British press is speculating that Fosun may try to leverage its stake in tour operator Thomas Cook and make a bid for Swiss operator Kuoni. That would add yet another brand and play to another of Fosun’s key growth strategies: profiting from the growing spending power of China’s middle class. In the same vein it bought Cirque du Soleil earlier this year and in February it took control of Club Med too.

In Shakespeare’s play, Juliet tells Romeo that, “my bounty is as boundless as the sea”. Fosun’s war chest is bit more modest, but its ambitions remain formidable…

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