LEISURE: Anbang Confident of Beijing Nod for Starwood Bid

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Bottom line: Marriott stands a 60-40 chance of having its bid for Starwood approved at an April 8 shareholder vote, since a competing Anbang proposal could face the strong possibility of rejection by China’s insurance regulator.

Anbang confident of Beijing will approve Starwood bid

A series of new reports and data on Chinese insurer Anbang are showing why the company is confident it can get regulatory approval from Beijing in its heated bidding war for Starwood (NYSE: HOT), operator of the Sheraton and Westin hotel brands. I also expect that the US regulator would have little or no reason to veto such a deal on national security grounds, since Starwood really doesn’t handle any sensitive information as hotel operator.

Thus from a regulatory perspective, if the latest Chinese reports are correct, it does look like Anbang would be able to get the necessary regulatory approval from both Washington and Beijing to buy Starwood for $14 billion in its ongoing bidding war with Marriott (NYSE: MAR). But the reports coming from China are quite contradictory, reflecting a potential looming clash between Anbang and China’s conservative insurance regulator. 

All of that raises the question of who Starwood shareholders likely to pick when they attend newly announced meetings set for April 8 to vote on who will acquire the company.  On the one hand, Marriott’s offer would have little or no difficulty getting completed. By comparison, Anbang is quite a wild card, and its bid could easily fall apart for a wide range of reasons, from regulatory rejection to lack of financing.

Technically speaking investors will only be allowed to vote on whether Starwood gets acquired by Marriott at the April votes, since Starwood previously agreed to a sweetened deal from its former rival that at the time was higher than the latest Anbang offer. But since then Anbang has raised its offer to about 6 percent above Marriott’s latest bid, though Starwood insists it will move ahead with a Marriott merger.

All that said, let’s zoom in on the latest Chinese media reports that reflect what’s happening in Anbang’s hometown where it faces the possibility of seeing its plan to purchase Starwood rejected by Beijing. Media had previously reported that China’s insurance regulator was likely to reject an Anbang bid because such a purchase, now worth about $14 billion, would push Anbang’s offshore investments above a 15 percent maximum allowed by Beijing. (previous post)

But now another highly reputable local financial newspaper, CBN, is citing an unnamed Anbang insider saying the insurer still has plenty of space to invest overseas. The report says Anbang has only invested 1.2 percent to 1.3 percent of its assets overseas at this point, and the figure could rise to 1.5 percent after some pending deals are completed. (Chinese article) Some of those assets include the stories Waldorf Astoria hotel in New York that Anbang bought for $2 billion last year, and US insurer Fidelity & Guaranty Life, which it bought for $1.6 billion.

Another media report says Anbang currently has about 1.65 trillion yuan in assets, or about $253 billion. The 15 percent limit would give the company up to $38 billion to invest abroad. Assuming the combined value of its overseas purchases to date are worth $5-$10 billion, that would still give Anbang at least $28 billion to spend — easily enough to buy Starwood.

Jittery Regulator?

So, why was another very reputable Chinese media, Caixin, reporting last week that the regulator was likely to veto such a deal for violating the 15 percent threshold? It appears the source for that report was inside the nation’s insurance regulator, which is probably jittery about Anbang’s aggressive bidding and possibly overpaying for a company in an industry where it has no experience.

There are many different ways to calculate one’s assets, and the $253 billion probably represents Anbang’s own calculations based on what it believes its assets are worth, many probably in China’s inflated property market. If some of those assets suddenly drop sharply in value, a likely scenario given China’s overheated market, Anbang’s overall assets could sharply drop in value. That could cause its offshore investments to suddenly rise above the 15 percent level.

I’ve been saying for the last week that Anbang looks determined to buy Starwood at any price, even though Marriott would be the best buyer to ensure Starwood’s long-term prosperity. Marriott realizes that as well, and most recently has tried to play on concerns about regulatory approval to scare investors into accepting its lower offer.

At the end of the day, investors will have to decide if they like a Marriott offer that’s almost 100 percent guaranteed to close, or a 6 percent higher Anbang offer that could quite possibly collapse over a number of issues, including rejection from Beijing. I do think we won’t see anymore bids in this contest, and shareholders will have the final say at the April 8 meetings by either accepting or rejecting the Marriott bid. I would still give Marriott the better chances of winning this war, but would add that Anbang still has a fairly reasonable chance of perhaps 40 percent of emerging as the victor.

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