Bottom line: A veto threat by China’s insurance regulator ultimately killed Anbang’s bid for Starwood, but the Chinese insurer is likely to pursue more mega-purchases in the more traditional overseas real estate sector this year.
In a sudden and unexpected turn in the bidding war for hotelier Starwood (NYSE: HOT), Chinese suitor Anbang has suddenly bowed out of the contest without explanation, paving the way for a merger with US suitor Marriott (NYSE: MAR). Many are marveling at this sudden turn of events, since Anbang earlier this week had submitted an all-cash bid that was 6 percent higher than Marriott’s latest offer for Starwood, operator of the Sheraton and Westin hotel brands.
But anyone in China might say they saw this coming, based on a couple of local media reports from sources at Anbang and China’s insurance regulator. The first of those reports came last week, and saw one of China’s top financial media report that the Chinese insurance regulator was likely to veto a deal over concerns about the size of the investment. That was followed by another report based on comments from an Anbang insider this week, saying the regulator would have no grounds to veto such a deal.
We’ll return to this behind-the-scenes story shortly, which provides some insight to what happens in China’s opaque world of major M&A. But first let’s review the latest sudden development, which has seen Anbang, one of China’s largest insurers, announce it is abandoning its $14 billion bid for Starwood. (English article; Chinese article)
In an unusual move for a privately held Chinese company, Anbang also issued a relatively lengthy statement explaining its move. It said it was attracted to Starwood for the company’s famous brands, and ability to generate consistent returns over time. But it then added it decided to abandon the bid due to unspecified “various market conditions”.
I suspect the biggest of those so-called “conditions” was a behind-the-scenes clash that was likely taking place between Anbang and China’s insurance regulator. China’s used to forbid big institutional investors like Anbang from investing abroad, but has gradually eased that rule and now allows them to invest up to 15 percent of their assets offshore.
The insurance regulator was worried that a Starwood purchase would push Anbang over the 15 percent limit, though Anbang had countered that it would still be well below that limit. The main area of disagreement appeared to be differing interpretations about the total value of Anbang’s assets.
The conservative regulator probably felt that Anbang was overvaluing its assets, many of them in China’s overheated real estate market. Thus if and when China’s real estate market underwent a major correction, which seems likely within the next year or two, Anbang’s total asset value would have come down sharply. That could easily have pushed its total offshore holdings above the 15 percent limit.
At the end of the day, China’s insurance regulator was probably equally concerned about the wisdom of Anbang putting so much money into a single investment like Starwood. Big insurance companies often invest in actual hotel properties, and Anbang itself made headlines last year with its purchase of the landmark Waldorf Astoria in New York. But it’s far less common for them to invest in a company like Starwood, which has few physical assets and instead makes most of its money by managing hotels for property owners.
An interesting footnote to this story has seen Marriott and Starwood stock both drop 4 percent or more after Anbang’s surprise announcement. Chinese companies like Anbang are famous for overpaying for their overseas assets, and the stock drop probably better reflects Starwood’s true valuation. But I do expect we’ll still see Anbang’s name appear in some other big deals later this year, most likely for more traditional real estate at prices that continue to represent big premiums to their actual value.