TRAVEL: Anbang Plays Hide-and-Seek with Beijing in Canadian Hotel Bid

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Bottom line: Beijing regulators should take a more hands-off approach to outbound M&A by major institutional buyers like Anbang, and let them take more direct responsibility for their investment decisions.

Anbang targeting InnVest?

A new showdown could be brewing between Beijing and China’s newly minted field of outbound investors, as reports emerged last week that insurer Anbang was planning a major new Canadian acquisition less than 2 months after China’s insurance regulator reportedly vetoed a previous similar plan. The latest deal would see Anbang buy InnVest Real Estate Investment Trust (Toronto: INN-UN), one of Canada’s largest hotel owners, following its failed bid in March to buy US hotel giant Starwood (NYSE: HOT), operator of the Westin and Sheraton brands.

China’s insurance regulator reportedly objected to the earlier Starwood bid over concerns that Anbang was investing too much money in unfamiliar offshore markets, and thus this new bid could touch off yet another challenge to Beijing’s authority. Beijing’s heavy oversight of outbound M&A was understandable in the 1990s and early 2000s, since Chinese companies had little experience in major overseas buying and often made unwise purchases due to that lack of understanding.

But as this group of global investors gains more experience, Beijing should consider taking a new approach that would give more sophisticated investors like Anbang greater freedom in choosing their offshore targets with less government oversight. Such a model is already the norm in the west, and uses a market approach that lets companies bear the big majority of responsibility for their investment decisions.

Beijing-based Anbang made headlines earlier this year when it became embroiled with US hotel giant Marriott (NYSE: MAR) in a bidding war for Starwood, even as many observers questioned the wisdom of such a large purchase by a Chinese buyer. After putting forth its latest bid worth around $14 billion, Anbang abruptly abandoned the deal in late March without offering any explanation, allowing Marriott to go forward as the buyer.

Earlier reports had indicated that officials at the China Insurance Regulatory Commission (CIRC) had opposed the deal because it might have pushed Anbang above the allowable limit for offshore investment by Chinese insurers. Similar limits on big institutional investors are part of the Chinese regulatory landscape, and are a legacy of an earlier era when Beijing worried about overexposure to foreign markets by inexperienced Chinese buyers.

Undeterred by its failure in the Starwood bid, Anbang was back in the headlines last week when media reported it might be the buyer behind a mystery $1.6 billion bid for InnVest. (English article; Chinese article) The Canadian hotel owner announced earlier this month that it had agreed to be purchased by Bluesky Hotels & Resorts, described as a real estate investor backed by money from Hong Kong.

But investigative reports in US media uncovered signals that showed Anbang might be the real name behind the bid. Those included word from an unnamed person involved in the transaction saying that one of the deal’s chief negotiators initially said she was representing Anbang. But when that met with objections she changed her description to say she was representing Hong Kong-based new pool of capital called Bluesky.

Conflict Avoidance

If Anbang is indeed the buyer, it may have avoided using its name in the transaction after failure of the Starwood bid, and also possibly due to political sensitivities in Canada. But the company is certainly no stranger to major North American investments, which include two major Canadian real estate deals, and its purchase of the storied Waldorf Astoria hotel in New York for a record $2 billion last year.

CIRC’s concerns about Anbang’s investments come as another Chinese regulator, the State Administration of Foreign Exchange (SAFE), is reportedly in another tussle with software security specialist Qihoo 360 (NYSE: QIHU), objecting over the company’s plan to move billions of yuan offshore to fund the planned privatization of its stock from New York.  (previous post)

That particular conflict is different in nature from Anbang’s clash with CIRC, and reflects China’s concerns about restricting money flows out of the country. But it once again reflects Beijing’s desire to try to control outbound investment activities by domestic companies.

CIRC, SAFE and other conservative regulators could take a lesson from another regulator, the China Securities Regulatory Commission (CSRC), which is planning to roll out a new registration-based process that abolish heavy state oversight and lets the market determine the pace and size of new IPOs. A similar movement to more market-based approaches for outbound M&A would not only force companies like Anbang to take full responsibility for their investment decisions, but would also have the added benefit of allowing them to diversify overseas as China’s economy starts to slow.

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