Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

It's all very well spending money like water when it's flowing freely. When funds dry up, you need to take smaller sips.

Fosun International, the Chinese investment group often likened to an Asian Berkshire Hathaway, is turning its back on a $15 billion takeover spree to apply that lesson. The company, whose investments span steel, pharmaceuticals, tourism, insurance and real estate, will sell as much as $6 billion in assets, Chief Executive Officer Liang Xinjun told Bloomberg's Haidi Lun in an interview. That compares to about $40 billion of long-term assets held at the end of December.

A quick glance at its cash flow statements makes it clear why the spending had to stop.

If Something Can't Go on Forever, It Won't
Sooner or later, Fosun's investments were going to have to start making a profit
Source: Bloomberg

In the long run, companies have to pay for their investments through profits. Debt and equity finance can plug the gap in lean years, but ultimately have to give way to operating cash flows if a business isn't to end up with a tottering debt pile and insufficient funds to pay interest.

Fosun's operating performance hasn't come close to justifying its ability to raise capital from investors. Operating cash flows have actually consumed, rather than provided, an aggregate 11 billion yuan ($1.7 billion) over the past 10 years.

Compare that to the performance of co-founder Guo Guangchang's guru Warren Buffett and you can see the difference between a business that pays for itself and one that's dependent on the goodwill of creditors:

You're No Warren Buffett
Berkshire Hathaway derives the bulk of its cashflows from operations
Source: Bloomberg

Guo has been hinting that the M&A party was coming to an end for some time. Fosun's main job would be to bed down what it had already assembled, he told Bloomberg News last September. The fact that the company is now turning from consolidation to outright clearance sales, though, is a sign of how quickly things can change in China.

Three months after the September interview, he prompted investor jitters by disappearing without warning to assist in a government investigation. He's declined to comment on what went on during that period, but Fosun abandoned a takeover of an Israeli insurer and an Anglo-German bank soon after.

Other arms of the Chinese state were cooling on Fosun at the same time that Guo was helping the government with its probe. Guotai Asset Management, ultimately controlled by state-owned China Jianyin Investment, sold out of an 812 million yuan position in Fosun's 6.875 percent 2020 notes between October and December 2015, according to data compiled by Bloomberg. Bank of China Investment Management also quit a 100 million yuan position in Fosun's 2017 5.05 percent notes between June and December, according to the data based on filings.

That's relatively small potatoes compared with net debt that amounted to 37 billion yuan at the end of December. But every little bit counts at a time when Fosun's weighted average cost of capital appears to be rising, even as its return on capital moves closer to zero.

Money Pit
Fosun's returns to capital approximate to zero, and its costs of capital are rising
Source: Bloomberg
Note: WACC figure is an estimate.

There are signs the acquisitions pipeline is already drying up, or even reversing its flow. Fosun raised about S$83 million ($62 million) in June from selling its stake in an initial public offering of EC World, a Singapore-based REIT. Last month it outlined another IPO to dispose of as much as half of Ironshore, a Bermuda-based property insurer it bought for $1.84 billion last year.

Then again, just last Thursday its pharmaceuticals affiliate announced plans to spend as much as $1.26 billion buying an Indian drugmaker, Gland Pharma. You can decide for yourself whether those three deals collectively count as a tap on the brakes, or the accelerator.

Incomings and Outgoings
Fosun is still laying out more money on acquisitions than it's getting back from trade sales and IPOs
Source: Bloomberg
Note: IPO disposals show value of entire IPO; does not necessarily correspond to value of Fosun's stake in the IPO. July 2016 M&A acquisitions figure includes $1.26B as upper limit of proposed purchase of Gland Pharma. The final price may be lower.

Still, the experience of Anbang, another acquisitive insurer which dropped a $14 billion bid for Starwood Hotels in March after Caixin Online reported the country's insurance regulator had doubts about the deal, is a salutary one. China tends to be wary of companies that stick their necks out too far, especially if -- as is the case with Fosun and Anbang -- the state doesn't own or control them.

Those whose growth has depended on access to seemingly limitless pots of mainland cash will find life harder if they have to become more dependent on funding from global capital markets. Companies that lose the support of domestic creditors and can't make sufficient profits from their investments risk hitting a wall.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net