Fosun Seeks Club Med Investors to Plug Its Own Financial Holes

Key Takeaways:

• Debt-strapped Fosun is reportedly seeking to raise cash by bringing in a major outside investor for its tourism unit, whose crown jewel is the Club Med resort chain
• Club Med accounted for about 80% of Fosun Tourism’s business in the first three quarters of 2022, as the chain rebounded sharply on easing Covid restrictions outside China

By Doug Young

Could resort operator Club Med be set to sail back to its birthplace in France, as its current Chinese owner Fosun contemplates a sale of the company to pay down its large debt?

Fosun is answering that question with a clear “no,” even as signals indicate otherwise. The latest of those emerged in media reports last week saying the resort chain’s current owner, Fosun Tourism Group (1992.HK), was exploring selling some or all of the chain to an outside investor. One report also added the company is considering selling Thomas Cook, the storied English brand it acquired out of bankruptcy in 2019.

We’ll return to Thomas Cook toward the bottom of this review, as that asset is quite small and would probably fetch little or nothing if Fosun Tourism were to try to sell it. The much bigger story is Club Med, which is currently the crown jewel in Fosun Tourism’s portfolio, accounting for about 80% of the company’s tourism business in the first three quarters of this year. 

Fosun Tourism was cobbled together using tourism-related assets acquired in a global buying spree over the last decade by Fosun, one of China’s most successful financial conglomerates. Fosun acquired Club Med for nearly $1 billion in 2015, and the chain later became the core asset for Fosun Tourism, which made a Hong Kong IPO in 2018.

Club Med was just one of many major purchases made during headier times by Shanghai-based Fosun, which put most of those assets into the separately Hong Kong-listed Fosun International Ltd. (0656.HK). The large debt used to fund those purchases has now come back to haunt the company, leading major ratings agencies to sharply downgrade Fosun International and say it is at risk of defaulting on some of that debt.

To avoid such an outcome, Fosun has said it aims to sell up to $11 billion worth of assets over the next year. It also said in September it will sell down its stake in Fosun Tourism. It has started to do that, paring its current stake to 79.36% at present from 82.03% at the start of the year. At the same time, the company has brought in Meritz Financial Group as a new investor, with the South Korean company disclosing late last month it had purchased 6.57% of Fosun Tourism.

But that’s not the end of the story. Earlier this month, Fosun Tourism also announced a series of changes in its executive suite, led by the resignation of its Chairman and CEO Qian Jiannong, who became a non-executive director and honorary chairman of the board for life. It named Xu Xiaoliang, who was already an executive director at Fosun International, as its new executive chairman.

But the most intriguing shuffle saw Henri Giscard d’Estaing, the son of former French President Valéry Giscard d’Estaing, appointed as co-CEO, elevating him from his previous role as deputy CEO. Interestingly, there’s no mention in Fosun Tourism’s other materials of any other co-CEO, which seems to put d’Estaing in the clear number-two position at the moment. But a spokeswoman said a search is currently underway for another co-CEO.

Return of the native?

All of those moves seem to strongly suggest Fosun Tourism may be preparing to bring in another major investor, either in the entire company or possibly just for the Club Med assets. We suspect the former option would be more likely, since it would allow Fosun Tourism’s stock to keep trading in Hong Kong and avoid splitting up the company.

Fosun Tourism has a current market value of HK$10.2 billion ($1.3 billion), which means that Fosun International’s stake is worth just over $1 billion. That means Fosun International could theoretically raise around $300 million if it wanted to sell down its stake to 50% of the company, or even more if it wanted to maintain control without an actual majority stake.

A Bloomberg report says Fosun believes Club Med is now worth up to $1.5 billion, even if Fosun Tourism’s market value puts the number closer to the $1 billion, based on our calculation. Either way, Fosun wouldn’t be losing money on any stake sale and could even make a small profit, since Club Med was valued at just under $1 billion at the time of the purchase in 2015.

In fact, Fosun paid significantly more than it originally planned for Club Med in 2015 after an Italian investor unexpectedly started a bidding war for the struggling chain at the time. While it’s doubtful whether the Italian bidder, a fund tied to investor Andrea Bonomi, would still be interested, it does seem like d’Estaing probably has European connections who might be willing to buy a stake in the company.

Such a purchase would be particularly attractive at Fosun Tourism’s current price, which values the company quite low compared with its peers. It currently trades at a price-to-sales (P/S) ratio of just 0.75, which is quite small and compares with ratios of 2.76 and 8.33 for hotel operator Marriott International MAR and casino company Las Vegas Sands (LVS.US), respectively.

We’ll close with a quick look at Thomas Cook, which almost seems like an afterthought since its potential sale would do little or nothing to relieve Fosun’s debt burden. The storied brand fell onto hard times and collapsed in 2019. Fosun was a small stakeholder at the time and ended up taking over the brand, resurrecting a European-focused travel website and a China-focused app in September 2020.

Since then Fosun has given a few small updates on the brand’s progress. In a business update in April, it said the Thomas Cook China app had recorded business volume of 115 million yuan ($16 million) in this year’s first quarter, while the European Thomas Cook site was a bit better with business volume of 360 million yuan for the period.

Neither of those is particularly strong, which isn’t surprising since both are still relatively new in their current forms. Accordingly, we wouldn’t be surprised if Fosun Tourism simply shutters the China app and sells off the Thomas Cook European website for a few million dollars to relieve itself of an unneeded distraction at this critical time for the company.