When Buybacks Can Scare
We've all been there. We ask our significant others how they're doing and get the dreaded response, "I'm fine." Cue warning bells. "Fine" typically means anything but.
So when Fosun International Ltd., the Chinese investment group that likes to think of itself as the Asian Berkshire Hathaway, hastily convened a conference call last week for Chairman Guo Guangchang to assure investors he was just fine, those bells should have sounded.
Remember, Guo vanished without warning in December 2015. When he reappeared days later, he would confirm only that he assisted in a Chinese government investigation. Since then, he's lost a handful of lieutenants and pulled back on the firm's aggressive M&A. A few weeks ago, the owner of Cirque du Soleil Inc. and Club Med SAS was among those targeted in a probe of overseas loans to China's largest dealmakers. News of the investigation on June 22 sent Fosun's $1.4 billion of 5.25 percent bonds due in 2022 down almost five cents to 97 cents on the dollar.
Guo's statement may be full disclosure. But a spate of well-timed stock buybacks at Fosun International, which helped keep the shares from sinking further, suggests something's still rattling him.
Fosun International has repurchased stock on the open market only 27 times in the last 10 years, according to Bloomberg data. More than one-fifth of those buybacks occurred in the last two weeks, with Fosun's largest-ever such transaction the day of the "fine" phone call.
Buybacks can be good for investors in theory, giving them a larger proportional stake as the share count is reduced.
Other companies owned by Asian conglomerates that avoided buybacks in the past, such as Swire Pacific Ltd. and Li Ka-Shing's Cheung Kong Property Holdings Ltd., have been purchasing more of their own stock in recent months.
Buybacks can also be viewed as a vote of confidence: Fosun's Guo has said he thinks his companies are undervalued and their stock prices should be higher.
But with the public float of Fosun's flagship companies so small, his strategy won't work forever. Hong Kong typically sets a limit of 75 percent of shares held by insiders. Eventually, Guo will need to have a frank and detailed conversation with his partners.
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