Bottom line: Fosun’s purchase of Club Med looks like a good bet despite the deal’s big premium, and could be followed by a major Chinese expansion and new IPO in Hong Kong in the next 5 years.
Normally I’m not a big fan of bidding wars since they tend to overinflate asset prices, but I’ll admit I was quite encouraged to read that Chinese private equity giant Fosun International (HKEx: 656) finally appears to have won a buyout battle for French resort operator Club Med (Paris: CU). My optimism is based on a number of factors, both financial and also on the strong future growth that Club Med could enjoy if and when the longest buyout in history for a Paris-traded company finally closes.
Fosun was part of a management-led group that made its original buy-out proposal for struggling Club Med in mid-2013, offering 17 euros per share in a deal that would have given Fosun 46 percent of the company. But the deal never closed because another group led by Italian tycoon Andrea Bonomi stepped in, sparking a bidding war that has lasted for the past year.
Fosun made its latest offer of 24.60 euros in late December, bettering the Bonomi group’s previous offer of 24 euros, and representing a 44 percent increase over the original offer. (previous post) The Bonomi group had until late last week to respond, and has now said it won’t raise its offer and is formally withdrawing its previous bid. (English article)
Bonomi’s decision came as a surprise to investors who had bid Club Med’s shares up to 25.10 euros over the past week in anticipation of a higher offer. The stock is likely to move down with Bonomi’s departure, and will likely trade not far below the 24.60 euro level until Fosun and its partners finally close a deal that will become the longest buy-out in Paris stock exchange history. The final deal has given Club Med a valuation of about 940 million euros, or $1.1 billion.
Normally such a heated bidding war would look bad for the winner, since in this case Fosun and its partners are paying nearly 50 percent more for Club Med than they originally envisioned. But in this instance it does look like Fosun is still getting a good deal, partly because investors were betting the bidding war might go even higher.
But more fundamentally, Fosun and its partners should be able to leverage their individual strengths to breathe some important new life into Club Med, one of the world’s oldest resort operators that has fallen on hard times lately. Apart from Fosun, other partners in the buyout include Club Med’s management team, and also partners from Brazil and Portugal.
A major plank in the group’s turnaround plan lies in the Chinese and Brazilian tourist markets, which are growing rapidly due to the fast economic growth in both of these BRICS countries. Club Med has released data underscoring the growth potential for both markets, pointing out that 80 percent of the 25,000 new clients who used Club Med resorts in 2013 came from either China or Brazil.
I’m less familiar with the Brazilian market, but can definitively say that China’s domestic tourism market is growing at breakneck speed, fueling a huge demand for high-quality vacation experiences. That demand has led to a boom in the domestic cruise industry, with my adopted hometown of Shanghai emerging as a leader in that area. (previous post)
But there’s still plenty of room for more quality vacation operators, and as a leading foreign brand in the space Club Med looks particularly well positioned to take advantage of the big demand. Fosun is already one of China’s oldest and most aggressive privately held big investors, and should be able to use local connections and knowledge of its home market to help Club Med realize its Chinese dreams. If things go smoothly, I could even see Fosun and its partners re-launch an IPO for Club Med in the next 5 years, possibly closer to home in a market like Hong Kong.