A Chinese regulator could foil Anbang's plans—and that's a good thing

Anbang

Anbang Insurance Group. It's a company hardly anyone took notice of in the U.S. until it swooped into Manhattan in the fall of 2014 and picked up the Waldorf Astoria from Hilton Worldwide for the cool sum of $1.95 billion.

That was its introduction to the U.S. market, and its curtain calls have become longer than some might have expected. Its reasoning, however, is quite clear, but is cause for alarm.

Its Moves
After acquiring the trophy New York hotel, Anbang, on the hospitality front, went quiet until this month, when news broke it would be acquiring Strategic Hotels & Resorts' portfolio from Blackstone Group for $6.5 billion.

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It wasn't finished. Just last week, it was revealed that Anbang was coming after Starwood Hotels & Resorts Worldwide, making a higher bid than Marriott International had, to the tune of $13.2 billion—a bid that was accepted by Starwood as "superior" to Marriott's. Marriott, since, came back over the top with a higher bid that was, once again, accepted by Starwood, so the ball is now back in Anbang's court.

One thing is certain: Anbang is for real and has the capital to back it up. Just one thing: Not everyone thinks Anbang is passing the smell test.

That something is China's insurance regulator, the China Insurance Regulatory Commission, which, according to China's Caixin, is set to reject Anbang's U.S. hotel conquest plans, both of the Strategic portfolio and Starwood, should they attempt to make a follow-up offer. 

As the news outlet reports, a person close to the Commission said the regulator had "clearly a disapproving attitude" toward both plans because completing the deals would break rules banning insurers from investing more than 15 percent of their assets abroad. In 2012, the Chinese government started allowing insurers to invest abroad. In February 2014, it raised the share of balance sheets that insurers could invest abroad from 5 to 15 percent, giving insurers more leeway to spend on U.S. real estate.

Public records show that Anbang has spent almost US$7 billion on foreign acquisitions since 2014.

The latest proposals would have cost the firm close to US$20 billion.

Anbang's Unsettling Plays
Today's New York Times has an insightful piece on Anbang, authored by Steven Davidoff Solomon, a professor of law at the University of California, Berkeley. In it, he argues that, one, if Anbang was a U.S. company, there would be a public outcry toward its actions and, two, Anbang's hospitality aspirations are little more than a currency scheme.

Solomon writes: "Typically in a takeover battle, a strategic bidder [Marriott] should always triumph over a financial bidder like a private equity firm or Anbang, which has teamed up with two investment firms. The reason is simple. A strategic buyer is an operating company and almost always can pay more for a target. The strategic buyer can expect to earn more from the target through cost savings. There would be no need for two general counsels, for example. A strategic buyer should also be able to reap operating efficiencies or other benefits from putting two assets together—what deal makers call 'synergies.' This sort of strategic rationale is what is driving Marriott’s bid."

Anbang is only a 12-year-old company, and its chairman, Wu Xiaohui, has close ties to the Beijing government. His wife is the granddaughter of Deng Xiaoping, the former leader of China.

Solomon compares Anbang's arc to that of Warren Buffett’s Berkshire Hathaway—aspirations to fashion itself into a financial conglomerate. Anbang, meanwhile, is funding this spree by selling high-yield investment products to Chinese citizens. As Solomon writes: "If this type of company existed in the United States, there would be an outcry. It may be reasonable for an Internet company to appear out of nowhere and be a giant after 10 years, but an insurance company? And one that is buying noncore assets abundantly? We’ve seen this story many times before, and it typically doesn’t end well."

We are convinced that a play like this—acquiring U.S. assets and companies—is a diversification play, particularly in light of China's slowing economic growth. "This is particularly important for a life insurer, since China’s population is aging rapidly, so higher returns are a must," Solomon writes, comparing this shopping spree to that of Japan's in the early 1990s, which did not turn out well in the end.

When Anbang acquired the Waldorf, it signed a 100-year management contract with Hilton to operate the hotel. So the hotel is in astute hands. Let's say Anbang comes back, outbids Marriott once again, and gets the keys to Starwood. Who then would manage Starwood? Surely not Anbang—what does it know about the nuts and bolts of operating and developing hotels. It sells insurance, right?

It's consortium partners are private equity firm J. C. Flowers & Company and the Primavera Capital Group, the former specializing in acquisitions in the financial services industry. Again, no hotel experience for either.

One could argue that Anbang could keep Starwood's management team in place, allowing them to run it. But, according to reports, Anbang has trouble being a passive owner. According to the Times piece, after Anbang acquired a Belgian insurer last year, the management team left after a few months "amid complaints of Anbang’s management style."

There's no doubt that Marriott would be the better owner, better caretaker and able to facilitate long-term growth.

As Solomon points out, Anbang's move is most likely a grand currency play: "Anbang is willing to overpay because it is converting Chinese currency. As the world knows, there are expectations that there will be a further devaluation of the Chinese currency, the renminbi. By moving its money out of China, Anbang can hedge against such a downturn."

Beyond the hurdle of passing China's regulatory approval, if Anbang was to win out in the bidding war to acquire Starwood, it would have to pass the review process by the Committee on Foreign Investment in the United States. It is worth noting that Anbang's acquisition of the Waldorf was cleared by the Committee.

Solomon asks the last question: "If a 10-year-old opaque American financial conglomerate with no hotel experience were to buy Starwood, funding the transaction in part with the sale of high-yield investment products to retail investors, wouldn’t that give us pause?"

Here's where I disagree with him. He notes that Starwood should be sold to the highest bidder, "no matter the circumstance." Should it? Wouldn't Marriott have a better chance of unlocking long-term value and growth than a Chinese insurance company? I think so.

Ultimately, like everything, it comes down to dollars. Starwood's largest shareholders are activist funds, who'd rather take the money and run rather than stick around and see Starwood blossom under Marriott's guidance.

The saga continues. 

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