Bottom line: Anbang is likely to drop its pursuit of Starwood (HOT) due to objections by Beijing, leaving Marriott (NYSE:MAR) as the winner in their brief but frenzied bidding war.
Just a day after I predicted that aggressive Chinese insurer Anbang would make a counter-offer in its bidding war with Marriott for US hotel giant Starwood, a new report is saying such a bid would almost certainly get vetoed by Beijing regulators. That's an important new element in this story, since Beijing must approve all global acquisitions of this size by Chinese companies.
This particular move is a bit unexpected, since Anbang almost certainly would have gotten Beijing's permission before launching its surprise bid earlier this month for Starwood, operator of the Westin and Sheraton brands, which had agreed last year to be bought by Marriott. But in an important twist to the story, Anbang also recently opened talks to pay $6.5 billion for a portfolio of US luxury hotels owned by Strategic Hotels & Resorts (previous post).
The behind-the-scenes story here appears to be that Beijing is worried Anbang may be investing abroad too aggressively. That certainly seems like a valid concern since Anbang appears willing to pay rich premiums for trophy western real estate, leading at least one major bond rating company to predict that a recent bubble for such properties might be on the verge of bursting.
In this particular instance, that means Anbang may soon be forced to choose between the Strategic Hotels & Resorts deal and its separate bid for Starwood. If that's the case, I expect Anbang will choose to pursue the Strategic deal, which is more logical since it involves actual real estate that is a popular investment among big insurers. By comparison, Starwood is a hotel management company that is far less popular for conservative insurers because it owns far fewer concrete assets.
All of that said, let's look at the latest reports, which come from Caixin, one of China's most reputable financial publications, just a day after Marriott raised its bid for Starwood to $13.6 billion, topping the most recent offer from Anbang. I commented that Anbang looked determined to buy Starwood at any price and was likely to make a new counter offer soon. But I might have to revised that view after reading this latest report.
Over the Limit
The new report is quite brief and doesn't say much besides the simple fact that China's insurance regulator would probably reject a bid by Anbang to buy Starwood (English article, Chinese article). The official reason is relatively straightforward since such a purchase would push Anbang's overseas assets above a 15 percent maximum allowable threshold under Beijing's rules.
Chinese insurance companies and other major institutional investors were previously barred from investing overseas completely, a policy that helped to protect China from major losses during the global financial crisis. Beijing has slowly been lifting that ban to help such investors diversify their holdings, but still places relatively strict limits on how much they can buy overseas.
In this case the combined total of $20 billion from the purchases of both Starwood and Strategic Hotels & Resorts would probably push Anbang above the 15 percent limit allowable under current rules. But I also suspect that Beijing may be getting worried that many inexperienced investors like Anbang are overpaying for their overseas purchases, and could end up with huge losses if those assets fall sharply in value.
All of that brings us back to the decision that Anbang is probably now facing, over which of the two big deals it ultimately wants to pursue. As I've said above, I would expect it to ultimately choose the Strategic deal, which is more traditional and also about half the size of the Starwood purchase. If that's the case, an April 8 deadline for Anbang to make a counter offer for Starwood could come and go without any new developments, leaving Marriott as the winner in this brief but frenzied bidding war.