M&A

Insurance claim

Will Buffett soon make another move in China?

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D-day could be 8/8/18 when he’s 88

Warren Buffett has always attracted admirers from the Middle Kingdom. There are always Chinese bidders participating eagerly in the charity auctions for private lunches with the Sage of Omaha (see WiC297) and thousands of Chinese investors join the yearly meetings of Berkshire Hathaway shareholders in Nebraska.

At least a quarter of the attendees at last weekend’s gathering were Chinese, and the billionaire investor played to his audience in answering some of the questions. “In August, I will be 88, in a year that ends in an 8. Eight is a lucky number in China,” he explained, implying that it might be a fortuitous month to make a major Chinese investment.

Then he turned to the current tension in trade relations between the two countries. “The United States and China are going to be the two superpowers of the world, economically and in other ways for a long, long, long time,” he predicted. “We have a lot of common interests and like any two big economic entities there are times when there will be tensions. But it is a win-win situation when the world trades.”

With Berkshire sitting on more than $100 billion of cash, there has been speculation that some of the surplus might be invested in Chinese firms.

Here Buffett was coy, agreeing that companies of Berkshire’s size should be looking to invest in major markets like China’s and saying that “he would love to find big things to do” there.

“Charlie keeps pushing me to do more in China,” he added, referring to his longtime business partner Charlie Munger, who is now 94.

Could that include a bid for a Chinese insurer, following another round of commitments from Beijing in April to ease foreign ownership limits in the financial sector?

Among the planned reforms, the cap on foreign investment in life insurance firms is expected to be lifted from 50% to 51% by the end of the summer, and eliminated entirely within three years.

Buffett refers to the insurance business as “the engine that has propelled our expansion since 1967” and he deploys its ‘float’ – premiums collected in advance of payouts – as financial firepower for acquisitions.

Berkshire usually likes to buy major or controlling shareholdings in the companies that it targets and in prior times that ruled out Chinese insurers.

Of course, another of Buffett’s maxims is that you should never invest in businesses that you don’t fully understand (he purchased another 75 million shares in Apple recently) and, in the case of the Chinese market, Berkshire may want to see how the foreign ownership reforms are implemented before making a major move.

One concern is whether the Chinese government is really going to give freer rein to international firms to take control of some of the larger, mostly state-backed insurers. Berkshire may also need more convincing that it will be able to get its profits out of China, which has been more of a challenge in the past 18 months because of capital controls.

Issues like these are why Berkshire hasn’t made more investments in China. Previously Buffett has owned shares directly in just two Chinese firms.

He cashed out of energy giant PetroChina for a substantial profit in 2007 and a year later he put $230 million for an 8.5% stake in electric vehicle maker BYD, reportedly at the urging of Munger, his partner.

Buffett is still well ahead on this second investment, with BYD’s shares up more than 10 times on his entry price, although the company has lost nearly $9 billion in value since its highs of last year, after warning that profit could fall as much as 83% in the first half of 2018.

The Chinese are eager to see another investment from Buffett but are there any bargains on the table?

One audacious dealing partner could be Anbang, whose former chairman Wu Xiaohui was given an 18-year jail sentence on Thursday for fraud and was made to surrender Rmb10.5 billion ($1.65 billion) of assets.

Put under state control since February, Anbang has been looking out for strategic investors. But would the Sage of Omaha want any linkage with a disgraced Chinese tycoon previously known as “China’s Buffett”?


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