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March 15, 2016

Chinese Panic Buying US Assets in Monster Deals

The bigger the price, the better.

Starwood Hotels, which owns 11 brands including Sheraton, W Hotels, and St. Regis, spread over nearly 1,300 hotels & resorts in 100 countries, announced today that an unnamed “Consortium” has made an all-cash offer to acquire the hotel group for $76 a share, or $12.8 billion.

That consortium is trying to spoil Marriott’s party. Last November, Marriott agreed to acquire Starwood to form the world’s largest hotel behemoth with over 1 million rooms.

Marriott in turn came out today and announced that the consortium was in fact led by Anbang Insurance Group in China. On March 11, Starwood had approached Marriott with the news of the unsolicited offer and obtained a waiver to pursue the new deal. The breakup fee is $400 million. So if Anbang gets Starwood, it would pay a total of $13.2 billion.

Anbang has been busy recently. It acquired the Waldorf Astoria in Manhattan in late 2014 for a record $1.95 billion from Hilton, at the time majority-owned by Blackstone, after having acquired office buildings in New York and Canada. It also acquired South Korea’s Tongyang Life for $1 billion.

Not all deals worked out. Its €3.5 billion bid for Novo Banco, a teetering Portuguese “systemically important” bank, sank into the quicksand of politics.

But Anbang keeps slugging. Over the weekend, word leaked out that it had agreed to acquire Strategic Hotels & Resorts from Blackstone for $6.5 billion. According to Bloomberg’s sources, Anbang paid $450 million more than Blackstone had paid for it three months ago!

The Starwood deal would be the largest-ever US acquisition by a Chinese company. The Strategic Hotels deal would be the second largest. Both deals combined amount to nearly $20 billion!

Marriott did the math: Its own offer, a mix of mostly stock and $339 million in cash, was worth $72 a share at the time. A sky-high price, the result of a bidding war with Hyatt. But Marriott’s shares have since dropped, reducing the value of the transaction as of March 11 to $63.74 a share, or $10.8 billion.

Anbang is now offering $76 a share in cash or $12.8 billion. So $2 billion more.
This disregard for price, after seven years of rampant asset price inflation that now appears to be peaking in the US and around the world, has been a hallmark of these Chinese deals. But Anbang, which is privately owned, has two big sources of funding: its insurance business and its Anbang Asset Management, in existence since 2011, where very wealthy Chinese can place the proceeds of their labors to be invested overseas.

And it has big plans, according to the Wall Street Journal:
A banker who has worked with Anbang says the firm told him it wants to own a trophy real-estate asset, a bank and an insurance company in 30 countries around the world.
There won’t be any synergies between its insurance business and hotels, other than the flow of money. Unlike Marriott, it doesn’t know how to run a global hotel group, and doesn’t know how tough and competitive this can be, but now it’s spending nearly $20 billion on hotels.

No problem. Anbang is a special company, in the Chinese sense: well-connected!
Founder Wu Xiaohui is married to the granddaughter of Deng Xiaoping, China’s leader from 1978 until 1992. And so in 2004, Wu performed a miracle: in a sector dominated by state-controlled enterprises, at a time when it was difficult to get the required licenses to set up an insurance company, he was able to set up an insurance company.

Since then, he “turned what was mainly a small car insurer into a financial services conglomerate, with assets worth more than 800 billion yuan ($123 billion) as of February last year,” according to the Financial Times:
It has big stakes in “some of China’s largest banking institutions, including China Merchants Bank, according to Chinese media reports. It also owns controlling stakes in six insurers, two asset management companies, a financial leasing group, and a property developer in China.
Anbang’s partners in the consortium are US private equity firm J. C. Flowers and Chinese private equity firm Primavera Capital Group, “one person involved in the bidding process” told the Financial Times.

Marriott shareholders rejoiced on the news that their darling might be off the hook and in addition get the $400 million breakup fee, sending its beaten-down shares 3% higher today. Perhaps they’d lost their appetite for Marriott’s beautiful rhetoric about “significant equity upside and greater long term value driven by a larger global footprint,” etc. etc.
So capital flight from China – around half a trillion bucks in 2015 alone, and continuing this year – takes on new forms on an ever grander scale. At first it was residential real estate in certain trophy cities in the US, Canada, Australia, and other locations, then big development projects, particularly in California. And now corporate acquisitions.

And not just hotels. Chinese crane maker Terex Corporation is trying to buy GE’s appliances division. Chinese companies are on a shopping binge in Europe.  Alibaba has been acquiring minority stakes in a slew of US consumer-facing “tech” companies, including Lyft, Groupon, and Zulily.

In fact, China became the largest acquirer in the global tech space, with $34.7 billion for the first two months of the year, spread over 222 deals, according to Dealogic, which “accounts for a record high volume share (49%).” So in terms of tech, “for the first time, China is the top acquiring nation globally.”

Last year, Chinese companies spent about $108 billion on acquiring companies outside China, according to Dealogic. In the two-and-a-half months so far this year, they’re already nearly there. They’re buying companies left and right, on the motto: no synergies, no problem, the higher the price, the better. 

Courtesy of Wolf Richter, WOLF STREET    

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