National Security Cloud Hangs Over Ironshore IPO

By | July 28, 2016

Chinese acquirers are continuing their buy-and-flip strategy and this time, it’s Fosun International’s turn. However the question isn’t only whether the fundraising will lower the company’s debt load, but how easy it will be to sell the asset in the first place.

Shanghai-based Fosun, which also owns French resort operator Club Med, said it was buying Bermuda-based insurance company Ironshore in a $1.84 billion deal in May last year. Ironshore filed for a U.S. initial public offering last week with a preliminary raising of $100 million, a placeholder-only amount used to calculate fees. Fosun will receive all the proceeds from the offering, the filing shows.

There was some other interesting information in Ironshore’s sale document too. It mentioned that Fosun’s purchase is under review by U.S. foreign investment watchdog CFIUS (Committee on Foreign Investment in the U.S.).

Ironshore said it was “uncertain” what decision CFIUS, which rules on national security grounds, would make, although it expects to get the final result before its IPO registration becomes effective.

Ironshore controls Wright USA, a key source of liability insurance for CIA agents.

A recent Newsweek piece said that federal investigators are looking at the purchase because Ironshore controls Wright USA, a key source of liability insurance for CIA agents.

Although it’s perhaps unusual for companies to finalize a cross-border transaction, especially one involving a Chinese firm, without first obtaining CFIUS approval, people familiar said Fosun didn’t feel Ironshore was a particularly sensitive asset, adding that Wright is only a small part of its business and anyway, is on the sale block. Fosun and Ironshore also filed with CFIUS as soon as the government body contacted them, the person said.

Ironshore itself says in its share-sale document that:

“controlling ownership of Ironshore by Fosun, which is based in China and has non-investment grade credit ratings, has negatively impacted our ability to compete in certain lines of business or for business from certain types of insureds, such as those connected to the U.S. government.”

Fosun, backed by Chinese billionaire Guo Guangchang, could do with the money. It’s spent billions in recent years on everything from Club Med to Cirque du Soleil and, more recently, Wolverhampton Wanderers Football Club.

Guo has long emulated his hero, Warren Buffett, and aimed to replicate a model of using insurance premiums as cheap financing for other equity investments. But with industrial operations like steel accounting for a larger portion of assets, Fosun is burdened with high debt levels, one reason why S&P has its outlook on the company at negative.

An IPO so soon after a deal isn’t exactly new for Chinese companies. Pork producer Shuanghui acquired Smithfield Foods in a $4.7 billion transaction in September 2013 and listed the combined operations in Hong Kong within 12 months; Dalian Wanda, the real estate-to-shopping mall operator owned by tycoon Wang Jianlin, bought U.S. cinema chain AMC Entertainment in May 2012. By December 2013, AMC was publicly traded in New York.

Ironshore won’t be an easy sell, though. Net income last year was down 32 percent on 2014 while revenue was basically flat, its share filing shows. Fosun’s debt levels have also been a drag , with even Ironshore saying a downgrade or negative outlook could “severely limit or prevent us from writing new and renewal insurance policies.”

When it works, the buy-and-flip strategy can be a great one, handing companies a war chest they wouldn’t have had otherwise. Proceeds from AMC’s share sale, for example, allowed Wanda to go after U.S. cinema chain Carmike and purchase British movie-theater operator Odeon.

For now, Guo may need to tame his acquisitive ambitions. The CFIUS cloud surrounding Ironshore could mean Fosun has to be a little patient around the flip part of its plan.

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

About Nisha Gopalan

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter. More from Nisha Gopalan

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