Fosun International said on Friday it had won the auction to buy assets from Portugal’s largest insurer for €1 billion ($1.36 billion) – another step in the ambitious Chinese company’s efforts to emulate Warren Buffett.
Fosun, a Hong Kong-listed subsidiary of China’s largest private investment company Fosun Group, has long looked at Berkshire Hathaway as a role model.
Although tiny in comparison, it is adopting similar tactics such as focusing on insurance to accumulate long-term capital. Buffett has used premiums generated by Berkshire Hathaway's insurance operations to finance investments.
Fosun is trying to “evolve into Warren Buffett’s model”, its chairman Guo Guangchang said in a statement.
Founded in 1992 Fosun has accumulated assets ranging from Chinese steel mills to Club Med.
It has also been increasing its insurance and asset management business. It bought Yong’an P&C Insurance during 2007, and then established a joint venture insurance company with the US’s Pramerica Financial in 2010. In 2012, Fosun and International Finance Corporation jointly set up Peak Reinsurance in Hong Kong.
The purchase of the insurance arm of state-owned Caixa Geral de Depósitos is the largest such deal to date but several analysts are worried how it will pay.
“Although the proposed acquisition is largely in line with Fosun's expansion strategy for global investments, which focuses on growing its insurance business, there are uncertainties associated with the company's plan to operate and integrate the Portuguese insurance business, given that it lacks a track record in the European market,” Alan Gao, a Moody's senior analyst said, in the final stages of the bidding process.
“Fosun's ability to fund its overseas investments through offshore funding is still developing, and we will closely monitor how the company will finance the acquisition if the bid succeeds,” Gao added.
Goldman Sachs analysts said recently they are concerned about Fosun’s highly geared balance sheet in a rising interest rate environment, with an estimated 63% net debt-to-equity ratio at the end of 2013. It also noted that 41% of its debt is due for refinancing within one year. Goldman estimated that every 1 percentage point rise in interest rate could cut Fosun’s core net profit by 8%.
However, if it executes 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, the analysts noted.
Fosun guaranteed Portugal it had the funds to pay but the structure of the acquisition financing has not been finalized, said people familiar with the matter. Financing experts expect Fosun to take out a bridge loan.
Portugal was hit badly by the Euro crisis after 2008 as worries spread through markets about the government’s ballooning debt. Portugal’s sale of these state-owned assets to Fosun are part of a series of privatizations. Portugal agreed to the sales as a condition for receiving aid from the IMF and the European Union.
“Portugal is a highly attractive key market and matches well with Fosun’s global expansion strategy,” the company said in a statement. It also said that the company was mulling other investment opportunities in Portugal’s property, tourism and branded goods sectors.
Other Chinese companies have also been snapping up bargains. China Three Gorges bought a stake in EDP-Energias de Portugal in 2011 for example.
Fosun had flagged it was bidding for the Portuguese insurance assets in December. It beat rival suitor private equity firm Apollo Global Management which had enjoyed a head start by entering the auction at an earlier stage. One of the reasons Portugal chose Fosun over the US fund is because Fosun committed to working with existing management and bid above book value for the assets.
Fosun can also offer the Portuguese insurer advice on investment opportunities in China and beyond. The Portuguese firm already has a presence in Macau that could be expanded.
Shanghai-based Fosun is buying 80% of the share capital and voting rights in each of Fidelidade-Companhia de Seguros, Multicare Seguros de Saúde and Cares-Companhia de Seguros.
All three companies are wholly-owned subsidiaries of Caixa Seguros e Saúde (CSS), Portugal’s largest insurance holding company and the insurance arm of a state-owned bank Caixa Geral de Depósitos.
In addition, Fosun will also acquire up to 5% of the shares and voting rights of Fidelidade at the same price it will pay for its 80% stake in the business, unless the employees of the three insurance companies buy such shares as part of the privatisation process. The remaining shares of the three target companies will continue to be owned by CSS.
It plans to complete the deal 30 days from January 9 subject to regulatory approvals in Portugal.
Morgan Stanley advised Fosun.