LEISURE: Cash Rich and Worried, Anbang Raises Starwood Bid

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Anbang raises bid for Starwood

Bidding wars follow certain principles, but the recent battle for US hotel operator Starwood (NYSE: HOT) between local rival Marriott (NYSE: MAR) and Chinese insurer Anbang is quickly diverging from one of the most central rules. In a move that surprised many, including myself, Anbang has suddenly upped its bid for Starwood, increasing its original offer that was already 12 percent higher than Marriott’s original and only bid dating back to last year.

In all my years of covering M&A and bidding wars, this is the first time I can recall of a company increasing its own bid that wasn’t in response to a rival counter bid. The strange move probably reflects Anbang’s worries that its original offer might get rejected by Starwood, which I previously predicted would choose Marriott as a more dependable partner despite its lower offer. Now we’ll have to wait to see if Marriott responds by raising its original offer, which is now about 15 percent lower than Anbang’s latest bid.

According to the latest reports,  Anbang has formally raised its offer for Starwood, operator of the Sheraton and Westin brands, to $78 in cash per share, up from its unsolicited bid of $76 made earlier this month. (English article; Chinese article) Starwood has responded by saying it will accept the offer, which values it at $13.2 billion, and gave Marriott a March 28 deadline to make a counter offer.

Anbang was clearly worried that its earlier offer might get rejected, and last week hired a professional proxy solicitor to poll Starwood’s shareholders on how they felt about its bid. (previous post) Based on this new higher bid, it would appear that Starwood shareholders were lukewarm on Anbang’s first offer, which perhaps prompted the Chinese insurer to raise the figure in its latest move.

Bond rating agency Fitch has weighed in on the matter, saying that this kind of aggressive bidding by foreign companies indicates that prices are peaking and a correction could soon follow. (company announcement) The most obvious case of such aggressive bidding in the past came in the late 1980s, when cash-rich Japanese firms bid highly inflated prices for US trophy properties. That binge was followed by a sharp downturn in the early 1990s, which cost Japanese buyers billions of dollars in losses when prices fell sharply.

Global Buying Binge

Chinese companies have indeed been snapping up US real estate at a quick pace over the past 2 years. Anbang has been leading that charge, buying the storied Waldorf Astoria hotel in New York last year, and making another $6.5 billion bid last week for Strategic Hotels & Resorts, owner of a portfolio of luxury US-based hotels. Chinese hotelier Jin Jiang (HKEx: 2006; Shanghai: 600754) also made a major purchase in Europe last year, and private equity firm Fosun (HKEx: 656) has been an active buyer of high-profile global real estate as well.

Against that backdrop, Fitch could indeed be correct that the Chinese buyers are pushing up prices to unsustainable levels, creating a bubble that could burst in the next two years. The crash could come even sooner if China’s economy takes a sudden downturn similar to what happened in Japan 25 years ago.

All of that brings us back to the current bidding war between Marriott and Anbang, and what’s like to happen next. Technically speaking this isn’t really a bidding war yet, since Marriott made its original bid for Starwood last year and hasn’t made any counter-offers since Anbang entered the picture earlier this month.

But that said, Marriott now has a very specific deadline of March 28, or exactly a week from today, to decide if it will pursue or abandon this deal. I suspect that Marriott will raise its original bid slightly, perhaps as much as 5 percent, to show Starwood it’s still interested in a deal. But then it’s quite possible that Anbang will raise its own offer even higher, since it seems determined to acquire Starwood at any price. If that happens, Starwood’s management would have a hard time rejecting Anbang, even though it could throw the company’s longer term future into doubt under its new, inexperienced Chinese owners.

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