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Regulatory ambiguity clouds Starwood/Anbang deal

Nowthat Anbang Insurance GroupCo. is back in pole position to take over after besting MarriottInternational Inc.'s offer, the regulatory hurdles the Chineseinsurer must pass to close a deal have come under sharper scrutiny.

Andwhile Starwood's April 8 stockholder meeting provides time for the company to weighits options, a successful acquisition ultimately could hinge on the Chineseregulators' ability to stage-manage the outcome.

Recentreports indicate thatthe China Insurance Regulatory Commission could scupper Anbang's U.S. hotelambitions, since the deals would put the insurer's offshore holdings above therequired 15% thresholdof its total assets.

Mostof the time, though, the commission is generally supportive of Chineseinsurers' outbound transactions, Zhan Hao, a managing partner of Beijing-basedAnJie Law Firm and an independent director of Anbang subsidiary Anbang LifeInsurance Co. Ltd., said in an interview.

"Theregulators have loosened their grip on insurers' outbound investments over theyears and actually encourage them to go overseas," said Zhan, who providedlegal services to Ping An Insurance for its Lloyd's building in 2013, but could notcomment on the specifics of the Anbang deal. "Overall, the policyenvironment is favorable. It's just that some deals of gigantic size might facemore scrutiny at the regulatory approval stage."

Market observers believe that the regulator may considerAnbang's acquisitionappetite to be a bit too aggressive this time around, and that it feels it muststep in to investigate despite Anbang's perceived to the topauthorities.

Publicrecords show that the 12-year-old insurer, which acquired the andSouth Korea's TONGYANGLife Insurance Co. Ltd., has completed roughly $4 billion of overseasacquisitions since 2014. Its recent efforts abroad, including its designs onStarwood and the potential StrategicHotels & Resorts Inc. portfolio purchase, could cost thecompany at least another $20 billion should the deals go through.

Meanwhile,the group has more than 1.9 trillion Chinese yuan of total assets, according toits website.

Butit's almost impossible for an outsider to calculate whether Anbang has touchedthe regulatory red line, particularly due to insufficient public informationabout how much of its total assets are insurance assets and how most of itsoverseas deals were structured.

Andit's not just Anbang that faces regulatory risk in China.

Theregulatory clearance process for overseas investment is itself mysterious,according to Paul Guan, a partner in the real estate practice of Paul Hastings.

Forthe vast majority cases where the deal value does not exceed $1 billion, theinsurance company would merely need to lodge filings with China InsuranceRegulatory Commission and the State Administration of Foreign Exchange aftersigning the transactional documents, said Guan, who specializes in cross-borderreal estate transactions and whose clients include China Life Insurance andPing An Insurance.

Theinsurance regulator reviews the filing, but the process itself is in a"mystery box," he said in an interview. Furthermore, there is nowritten statement of the decision — the ruling is only given verbally. Then,once a deal gets this verbal approval, it still needs to wait for the foreignexchange commission to give the green light.

Thenature of the process creates a real risk that the deal could go south after anagreement is signed, he said. To mitigate this risk, experienced outboundinsurers will firstly inform the seller about this unique regulatory requirementin China, and will begin an informal dialogue with the Chinese regulators longbefore advancing a deal, he added.

Formaterial transactions such as Anbang's more than-$10 billion pursuit ofStarwood, an objection could come before the contract is signed, according toGuan. "Such deals normally need CIRC's examination and approval, a processthat takes at least a month," Guan said.