The insurer’s surrender in the Starwood bidding war marks the end of one deal gone awry. But Chinese capital remains a force to be reckoned with.
Yesterday, Marriott International emerged the winner of the weeks-long bidding war for Starwood Hotels & Resorts Worldwide.
The deal was a private equity textbook case of a strategic buyer, Marriott, pitted against a financial buyer, Anbang Insurance.
The two groups entered the battle with wildly different weapons and intentions, Anbang with deep pockets and desire to close the deal at seemingly any cost. The Chinese insurer’s rationale for raising the white flag are not yet clear, as Anbang cited “market considerations” as its basis for capitulating, according to Starwood’s Thursday statement.
But while Anbang’s logic may never fully come to light, its failed bid has ramifications reaching far beyond one deal.
Anbang’s surrender may compound existing prejudices against Chinese capital just as cross-border flows to the US and its Western peers hit record highs. On the day before the Starwood auction ended, one China-based private equity real estate executive we spoke with listed a number of concerns about the deal, all of which will need raising in future transactions as well: how will regulators on both sides of the Pacific respond to multibillion-dollar cross-border deals? For companies with ownership structures as opaque as Anbang’s, how can buyers be assured of financing? And given the record-setting sums involved, what does the impact of cash-rich Chinese buyers willing to pay full prices mean for the systemic stability of the real estate industry and also the wider economy?
These are all important questions, and Anbang’s exit underlines the need for investor caution and due diligence when it comes to dealing with Chinese suitors.
Still, it would be foolish to discount the potency of Chinese capital altogether. Anbang itself has the ability to pull off deals abroad, as evidenced by its $1.95 billion purchase of New York’s iconic Waldorf-Astoria hotel in 2014 and its other non-hotel deals in both the US and Europe, as well as its $6.5 billion purchase of Strategic Hotels & Resorts from The Blackstone Group, a deal struck just before the Starwood contest.
Neither is Anbang alone among Chinese institutions with big balance sheets in seeking Western assets. Over the next five years, insurers from the mainland are expected to spend as much as $73 billion in overseas property acquisitions, according to a report published by Cushman & Wakefield in November. Anbang was one of four Chinese groups that considered bidding for Starwood, and it is said to have real estate assets in 30 countries on its acquisition list.
So: while an upset, a single deal gone awry does not negate the opportunity for Chinese firms to provide valuable exit strategies for blockbuster deals, such as Strategic Hotels, or for trophy assets, such as the Waldorf-Astoria. Anbang and its peers are unlikely to make it a habit to walk away from deals. Therefore, investors should avoid being spooked by this latest turn of events, because Chinese capital is far from being ready to check out of Western real estate.