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Anbang's aborted Starwood gambit raises questions about China-US deals

After the sudden emergence and equally sudden of 's roughly$14 billion bid for StarwoodHotels & Resorts Worldwide Inc., market participants areweighing the promise and complexity of deals between U.S. and Chinese buyers.

Anbang and its insurance-industry peers, includingPing An Insurance (Group) Co. ofChina Ltd., SunshineInsurance Group Corp. Ltd. and China Life Insurance Co. Ltd., clearly have the and the means to makeoverseas investments. Yet, well-funded as they are, large Chinese buyersseeking to follow Anbang's lead will have to overcome , cultural differences andthe residual skepticism that Anbang's abrupt exit from the Starwood deal mayhave left behind.

None of those hurdles are high enough on their own toprevent future deals, observers say. Still, the uncertainty they create couldforce Chinese acquirers to pay more, especially if they are seeking to competewith established U.S. bidders like Marriott International Inc., which is now in thelead to acquire Starwood.

M&A attorneys and advisers generally know how toquantify some variables between competing bids, such as stock versus cash, orhigher versus lower certainty of closing, Ettore Santucci, a partner and theco-chair of the REITs and real estate securities practice at Goodwin ProcterLLP, said in an interview. Offers like the one from Anbang and its consortiumpartners present a trickier challenge.

"What I think is very difficult to associate a valuewith — and I don't mean for this to sound negative — is opaqueness,"Santucci said. "What's the price of an opaque offer versus the price of atransparent offer? … I don't know, but there's got to be a number there."

Western exposure

Chinese companies' interest in U.S. real estate — as in othersectors, including semiconductors, entertainment, and even food processing — isreal, and opportunistic, Charles Comey, an M&A and corporate financepartner at Morrison & Foerster LLP who ran the firm's Shanghai office from2003 to 2010, said in an interview. The Chinese government is encouraging thegrowth of truly multinational Chinese-based corporations, Comey said, and U.S.acquisitions can prove highly accretive, as Chinese stocks typically trade athigher multiples than U.S. stocks.

The iconic Hotel Del Coronado, part of Strategic Hotels' portfolio
Source: ThinkStock

Chinese outbound real estate investment reached nearly US$30billion by the end of 2015, double the level in the previous year, according toKnight Frank research.

Since receiving permission from Beijing to invest globallyin 2012, Chinese insurers have joined the ranks of other Chinese companieslooking for real estate acquisitions around the world. Insurers' real estateacquisitions have generally been concentrated in the office and hotel sectors,in part because the Chinese government restricts their investments to trophycommercial assets that are located in the core areas of 25 developed countries'major cities and that can generate stable returns.

Chinese insurers believe landmark hotels can provide higherand more stable long-term returns than office properties, which face yieldcompression and competitive pricing in many global gateway cities, Liu Xinde, asenior partner of Dentons who assisted Sunshine Insurance in its US$230million acquisition of the Baccarat Hotel in New York in 2015,said in an interview.

High-end hotels also allow investors to capitalize on theburgeoning Chinese tourism market, Zhan Hao, a managing partner ofBeijing-based AnJie Law Firm and an independent director of Anbang subsidiaryAnbang Life Insurance Co. Ltd., said in an interview. There were 109 millionoutbound Chinese tourists in 2015, and they spent roughly US$229 billion,according to research firm GfK.

Sometimes, Liu said, the insurers care more about a deal'simpact on brand recognition than its financial benefits.

"If you look at Anbang, the company was little known inand outside China until it purchased the Waldorf Astoria hotel in New York insuch a high-profile deal," he said. "That acquisition is far moreeffective in promoting their brand than any form of publicity campaign."

Learning curve

The field will likely become more crowded, as at least 10Chinese insurers, including Shanghai Life Insurance and ,have qualified to invest overseas so far. However, many are relatively unfamiliarwith overseas markets and have yet to make any acquisitions, Paul Guan, apartner in the real estate practice of Paul Hastings, said in an interview.  

When they do, both they and their counterparties may have toadjust the way they do business. Ronald Dickerman, founder and president of theprivate equity firm MadisonInternational Realty LLC, said in an interview before Anbang's exitbecame public that while Asian capital is "very aggressive, very large,very smart," and long-term in nature, "there is a real difference inthe cultural nuances and expectations" between Chinese and U.S. players.

"I can tell you there is a learning curve," hesaid, adding that even the basic mechanics of negotiation can be difficult.Given the time-zone differences, Dickerman said, "You're talking aboutdoing phone calls at 9:00 at night or 7:00 in the morning, and it's hard to do."

A more substantive issue, Goodwin Procter's Santucci argued,is clarity of financing.

"I think it's trying to handicap, really, the solidityof the commitment," he said. Regardless of a bidder's nationality, headded, "Would you not wonder if a bidder says, 'Don't worry, I have themoney'? 'Well, whose money is it?' 'Well, some of it's mine, some of it's otherpeople's.' 'Well, who are the other people?' 'I'm not going to tell you.' Youwouldn't take that from a capital source in the U.S., if they told you, 'Ican't tell you where half or a third of my capital comes from.' "

Anbang's decision-making process can be a one-man show, asource who has worked with the company told S&P Global MarketIntelligence on condition of anonymity. Anbang's employees often report toChairman Wu Xiaohui individually about investment ideas, after which the chairman determines whichones to pursue, and Wu handles material transactions such as the Starwood dealin person, the source said.

According to regulatory filings, Wu made verbal for the company in late2015 that far exceeded the eventual Starwood sale price. When Starwood pressedfor details on Anbang's financing plans that fall, however, the insurerwithdrew from the bidding.

Anbang returned in March as part of a consortium that alsoincluded J.C. Flowers & Co.LLC and Primavera Capital Ltd., and later provided documentation ofa fully financed proposal backed by a funding commitment from the New York branchof a Chinese bank. After multiple rounds of negotiations and price increases,however, the insurer walked away from its bid.

Degrees of difficulty

Even when all the parties agree, both Chinese and U.S.regulators can complicate potential deals. In China, though insurance companies usually only needto file deals smaller than $1 billion with the China Insurance RegulatoryCommission and the State Administration of Foreign Exchange after the fact, theinsurance regulator can still derail transactions by issuing a verbal rejection— even after a deal's signing.

In the U.S., the Committee on Foreign Investment in theUnited States, an interagency group with representatives from nine executivebranch agencies, can advise the president to reject or unwind deals that itviews as a threat to national security.

The danger for overseas acquirers is not so much a rejectionby the committee, known as CFIUS, as the uncertainty that its input adds to theprocess, attorneys said. The concerns surrounding the Chinese regulators aresimilar.

"On a basic level, it's nothing secret orcomplicated," Adam Emmerich, a partner at Wachtell Lipton, said in aninterview. "If you need some kind of permission from a governmentalauthority of one kind or another in order to spend X dollars in the U.S., theseller is going to ask you, 'Do you have that permission yet?' And if youdon't, or can't be in a position to, then you impose a certain degree ofconditionality on your transaction that may be greater than someone else has."

The extra layers of approval required for a deal may hurtChinese bidders' ability to fend off a competitor like Marriott — or likeBlackstone Group LP,which took Strategic Hotels &Resorts Inc. private before reportedly the REIT to Anbang for a $450million premium.

For a seller, "dealing with Blackstone, say, is a heckof a lot easier — they know how to do something lickety split — than dealingwith a Chinese company that has all kinds of approvals and relationships withthe state and so forth," Emmerich said.

The good news, Santucci said, is that Anbang's recentactivity may be a learning experience for its Chinese peers — and theiradvisers. If representatives for Chinese buyers think their offers are beingdiscounted too heavily, he said, they can find ways to handle futuretransactions to minimize perceived risks.

"In the deal business, Santucci said, "one thingwe are very good at is evolving."