News Analysis
China Anbang Insurance Group’s sudden withdraw of its $14 billion bid for Starwood Hotels raises questions about Anbang’s source of financing, business model, and standing with the Chinese Communist Party regulators.
Anbang’s all-cash offer should be more attractive to shareholders on paper, but a person with knowledge of the deal told the Financial Times last week that Anbang had failed to demonstrate it had the necessary financing to back up the all-cash bid.
Starwood indicated that it was comfortable Anbang had the financing in place for its latest offer. But with Marriott likely preparing a sweetened bid should Anbang’s latest offer have stood, it was unclear if Anbang’s consortium—which also includes private equity firms J.C. Flowers and Primavera Capital Ltd.—would have been able to arrange enough financing to increase the bidding.
Circumventing Regulators
Information from China paints a different, and more convoluted, picture.
The China Insurance Regulatory Commission (CIRC) was considering blocking Anbang’s acquisition of Starwood, due to Chinese regulations barring domestic insurance firms from owning more than 15 percent of its assets in foreign investments.
Anbang already has a roster of foreign assets. It owns overseas insurance companies such as Iowa-based life insurer Fidelity & Guaranty Life, Belgian property-casualty insurer Fidea, and South Korea’s Tongyang Life Insurance. Last year it paid $2 billion for the Waldorf-Astoria Hotel in New York.
CIRC calculates foreign holding limit by using insurance assets only, and Anbang’s insurance assets are comparatively small. Out of its $293 billion (1.9 trillion yuan) of assets as of 2014, only $50.8 billion relate to life, property, and casualty insurance, capping its foreign holding at around $7.7 billion.
But something doesn’t add up.
Regulatory difficulties seem like an excuse—they have never been a problem for Anbang’s Chairman Wu Xiaohui. He is the grandson-in-law of the former Chinese Communist Party leader Deng Xiaoping, and Anbang recruits among former senior party officials.
A Chinese investment bank said Anbang intentionally reshuffled shareholder registrations over the years in order to skirt CIRC rules on insurance company ownership, according to Caixin, a Chinese financial magazine. CIRC rules state that a single investor could not hold more than 20 percent of any insurance company.
Caixin’s research also found that some of Anbang’s 39 investors are obscure outfits such as auto dealerships, real estate firms, and mine operators that sometimes use shared mailing addresses, many of whom are connected to Chairman Wu. Most of the investors bought their stakes in 2014 and together injected 50 billion yuan into the company. There’s also a trend of major state-level investors scaling back their ownership, with SAIC Motor Corp. and Sinopec decreasing their ownership levels from 20 percent each to 1.2 percent and 0.5 percent respectively.
A Chinese investment bank said Anbang intentionally reshuffled shareholder registrations.

When Anbang raised its offer to Starwood to $82.75 per share, Wu was telling Chinese media that the insurance company had around 1 trillion yuan to deploy, signaling Anbang’s global ambitions were hardly sated.
With the company seemingly treating regulators as a nuisance to be brushed aside, why would a foreign investment limit from the CIRC suddenly stop Anbang in its tracks?
Uncertain Business Model?
Anbang has snapped up market share from rivals by offering the highest returns for its policyholders.
The biggest portion of Anbang’s premium revenues comes from sales of so-called universal insurance policies, a combination of death benefit payout and an annuity with guaranteed payments during a policyholder’s life. Another driver of the company’s recent success is Anbang’s decision to capitalize on the popularity of wealth management products that offer high yields while maintaining short maturities.
None of this is out of the ordinary, as many Chinese insurance companies offer similar products, though few can match the returns promised by Anbang. What’s strange is Anbang’s investment model, which deviates from most insurers.
Insurance companies typically buy into low risk, highly liquid financial securities such as government bonds and investment grade corporate debt. The reason for this is twofold—insurance companies’ No. 1 mandate above all else is to preserve their capital (which is the definition of “to insure”), and since payouts caused by deaths and natural disasters are unpredictable, fixed-income instruments such as bonds offer a stable and secure cash flow over time to cover such liabilities. In effect, a big challenge for any insurer is cash-flow matching, which is having the liquidity profile to cover payouts (cash outflows) with cash inflows generated from investments.
But Anbang completely upends this model. Its assets are real—banks, hotels, and companies—and long term investments. While they generate far higher returns than bonds, they are illiquid and unstable.
Of course, Anbang may have little choice but to swing for the fences. Its policyholders have to get paid, as wealth management products average 7 percent yields, and it must pay its brokers. Its tangled web of owners registered across China also demand returns on equity.
Anbang’s Starwood exit could be a matter of industry regulators putting the brakes on Anbang’s policyholder-financed spending spree. Or it could be Chinese Communist Party politics, as some of its executives were former party officials. Given the meteoric rise, it’s clear Anbang enjoyed past support from Beijing at each step of the way.
But such support could prove fleeting, depending on which side of the Xi Jinping fence Anbang’s executives reside.
More clarity will come soon enough, when we find out how quickly and effectively Anbang is able to deploy its “1 trillion yuan” of capital going forward.
MORE:Chinese Insurer Anbang Walks Away From Starwood DealAnbang Firms Up Its Offer for Starwood

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Anbang pulled its $14 billion takeover bid for Starwood Hotels on March 31. The surprising move will put an end to the recently escalated bidding war between Chinese insurer Anbang and the U.S. hotelier Marriott.
“The Consortium has informed Starwood that, as a result of market considerations, it has withdrawn its non-binding proposal to acquire all of the outstanding shares of common stock of Starwood for $82.75 per share in cash and does not intend to make another proposal,” said Starwood in a statement. 
A consortium led by Anbang made several attempts to break up Marriott’s merger plan by making a series of higher offers for Starwood. 
In its latest shot on March 28, Anbang raised the bid to $82.75 per share in cash. This valued Starwood at $14 billion against Marriott’s $13.6 billion proposal.
Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) shares fell as much as 4.5 percent to $79.65 in extended trading. Marriott International, Inc.(NASDAQ: MAR) shares also dropped by 5.02 percent.
Both Mariott and Starwood signed an amended merger agreement after Mariott sweetened its bid for Starwood on March 21. Starwood shareholders are scheduled to vote on Marriott’s cash-and-stock bid on April 8.
Starwood has about 10 brands including St. Regis, W, Westin, and Sheraton. If the merger goes through, it will create the world’s largest hotel company. Marriott is confident it can achieve $250 million in annual cost synergies within two years after closing the Starwood deal.
Other consortium members acting together with Anbang in the Starwood deal were the two private equity firms J.C. Flowers & Co. and Primavera Capital Limited.
Founded in 2004, Anbang made a surprising move in the United States last year by acquiring New York City’s iconic Waldorf Astoria Hotel. The company has aggressively taken billions out of China and invested them in insurance companies in the United States, Belgium, the Netherlands, and South Korea. 
It also offered $6.5 billion to buy Strategic Hotels & Resorts Inc., which owns several high-end properties including the JW Marriott Essex House in New York and Hotel Del Coronado in San Diego.
Anbang has close ties to the Chinese Communist Party. The chairman of Anbang, Wu Xiaohui, is the grandson-in-law of the former leader of the Chinese Communist Party, Deng Xiaoping. 
The company also has a complicated ownership structure with multiple layers of holding companies registered all around the country, according to a Wall Street Journal report. Several Wall Street banks could not get internal clearance to pursue work with Anbang in the past, partly because of its opaque ownership structure.

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The bidding war to acquire Starwood Hotels intensified after Chinese insurer Anbang raised its offer on Monday, March 28. The new offer is likely to threaten Marriott’s merger plan with Starwood.
Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) announced on Monday that it received a revised non-binding offer from the consortium led by Anbang Insurance Group. The offer is likely to lead to a “superior proposal” and allow Starwood to engage in discussions with the consortium, according to the company’s press release.
The consortium revised its bid to $82.75 per share in cash, an increase from the $78 per share proposal made on March 18. This tops Marriott’s latest bid on March 21, which was valued at $79.53 (in cash and stock). 
Anbang’s new offer raised the value of Starwood to $14 billion, Marriott’s offer was $13.6 billion.
Marriott International, Inc.(NASDAQ: MAR) reaffirmed its commitment to acquire Starwood on Monday and stated: “The combined company will offer stockholders significant equity upside and greater long-term value driven by a larger global footprint, wider choice of brands for consumers, substantial revenue synergies, and improved economics to owners and franchisees leading to accelerated global growth and continued strong returns.” 
In its statement, Marriott also questioned Anbang’s ability to finance the transaction and get the necessary regulatory approvals: 
“Starwood stockholders should give serious consideration to the question of whether the Anbang-led consortium will be able to close the proposed transaction, with a particular focus on the certainty of the consortium’s financing and the timing of any required regulatory approvals.” 
Starwood, the owner of St. Regis, W, Westin, and Sheraton brands, will have to pay Marriott $450 million to break up the merger arrangement. 
Both Marriott and Starwood announced they had agreed to merge in a cash and stock deal that would value Starwood at $12.2 billion last November. Both companies signed an amended merger agreement after Mariott sweetened its bid for Starwood on March 21, valuing the company at $13.6 billion. 
The merger, if it still goes through, would create the world’s largest hotel company. Marriott is confident it can achieve $250 million in annual cost synergies within two years after closing the Starwood deal.
After the news on Monday, shares of Starwood rose 2 percent, to $83.78. And shares of Marriott rose 3.93 percent, to $71.34.
(Google Finance)
Other consortium members acting together with Anbang in the Starwood deal are the two private equity firms J.C. Flowers & Co. and Primavera Capital Limited.
Founded in 2004, Anbang made a surprising move in the United States last year by acquiring New York City’s Waldorf Astoria Hotel. The company has aggressively taken billions out of China and invested them in insurance companies in the United States, Belgium, the Netherlands, and South Korea. 
It also offered $6.5 billion to buy Strategic Hotels & Resorts Inc., which owns several high-end properties including the JW Marriott Essex House in New York and Hotel Del Coronado in San Diego.
The Waldorf Astoria Hotel in Midtown East in Manhattan on Oct. 6, 2014. (AP Photo/Mark Lennihan)
Recent Deals May Attract Scrutiny
Given Anbang’s ties to the Chinese Communist Party, such transactions present security issues.
There is plenty of reason for controversy. The chairman of Anbang, Wu Xiaohui, is the grandson-in-law of the former leader of the Chinese Communist Party, Deng Xiaoping.
One of Anbang’s consultants is Chen Xiaolu, founder of the Red Guard Police Corps during the time of Mao Zedong’s Cultural Revolution, who had previously admitted he was part of the torture and persecution of teachers during the Cultural Revolution. His father was one of the communist regime’s founding generals.
Anbang’s $1.95 billion acquisition of the iconic Waldorf Astoria Hotel last year, attracted scrutiny from the Committee on Foreign Investment in the United States (CFIUS), which reviews deals over possible national security concerns, but was eventually approved. According to experts, CFIUS will also take a look at Anbang’s latest activities. 

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Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT) announced that it received a revised binding offer from the consortium led by Anbang Insurance Group. The offer constitutes a “superior proposal” and Starwood’s board plans to call off the Marriott merger agreement, according to the company’s press release .
The consortium revised its bid to $78 per share in cash, an increase from the $76 per share proposal made on March 10, 2016. This tops Marriott’s earlier bid, which is currently valued at $65.33 (in cash and stock) and has a higher potential to derail the rival’s merger plan.
Anbang’s new offer raised the value of Starwood by nearly $340 million, bringing it to $13.2 billion.
Starwood, the owner of St. Regis, W, Westin, and Sheraton brands, will have to pay Marriott $400 million to break up the merger arrangement. Marriott International, Inc. (NASDAQ: MAR) has until March 28 to make another offer.
Both Marriott and Starwood announced they had agreed to merge in a cash and stock deal that would value Starwood at $12.2 billion last November. The merger, if it still goes through, would create the world’s largest hotel company.
On March 18, Marriott reiterated its interest to acquire Starwood and stated: “Marriott continues to believe that a combination of Marriott and Starwood is the best course for both companies and offers the best value to Starwood shareholders. Marriott is in the process of reviewing the Anbang consortium’s proposal and is carefully considering its alternatives.”
After the news last Friday, shares of Starwood rose 5.1 percent, to $80.32. And shares of Marriott rose 2.3 percent to $73.43.
(Google Finance)
Other consortium members acting together with Anbang in the Starwood deal are the two private equity firms J.C. Flowers & Co. and Primavera Capital Limited.
Founded in 2004, Anbang made a surprising move in the United States last year by acquiring New York City’s Waldorf Astoria Hotel. The company has aggressively taken billions out of China and invested them in insurance companies in the United States, Belgium, the Netherlands, and South Korea. 
Last week, it offered $6.5 billion to buy Strategic Hotels & Resorts Inc., which owns several high-end properties including the JW Marriott Essex House in New York and Hotel Del Coronado in San Diego.
The Waldorf Astoria Hotel in Midtown East in Manhattan on Oct. 6, 2014. (AP Photo/Mark Lennihan)
Recent Deals May Attract Scrutiny
However, given Anbang’s ties to the Chinese Communist Party, transactions like the sale of the Waldorf  present security issues.
There is plenty of reason for controversy. The chairman of Anbang, Wu Xiaohui, is the grandson-in-law of the former leader of the Chinese Communist Party, Deng Xiaoping.
One of Anbang’s consultants is Chen Xiaolu, founder of the Red Guard Police Corps during the time of Mao Zedong’s Cultural Revolution, who had previously admitted he was part of the torture and persecution of teachers during the Cultural Revolution. His father was one of the communist regime’s founding generals.
Anbang’s $1.95 billion acquisition of the iconic Waldorf Astoria Hotel last year, attracted scrutiny from the Committee on Foreign Investment in the United States (CFIUS), which reviews deals over possible national security concerns, but was eventually approved. According to experts, CFIUS will also take a look at Anbang’s latest activities. 

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A Chinese insurer, Anbang Insurance Group was little-known before it acquired New York’s iconic Waldorf Astoria for $1.95 billion in 2015. It was the largest acquisition of a U.S. real estate asset by a Chinese buyer. And it continues its buying spree by making two new bids last week that aim to expand its real-estate empire in the United States.
A consortium led by Anbang made a $12.8 billion bid for Starwood Hotels & Resorts Worldwide Inc. (HOT) on March 10, offering $76 a share in cash. This tops Marriott’s earlier bid of $63.74 (in cash and stock) and has a potential to derail the rival’s takeover plan.
Starwood has nearly 1,300 properties in 100 countries and owns famous brands like St. Regis, W, Westin, and Sheraton.
The offer implies a premium of 7.9 percent to Starwood’s closing price on March 11. The share of Starwood rose after the company’s press release on March 14, disclosing the details of the unsolicited bid.
“Starwood has received a waiver from Marriott enabling it to engage in discussions with the Consortium in connection with its proposal,” said the company in its press release. Starwood entered discussions with the consortium on March 11 and the Marriott waiver will expire on March 17, according to the press release.
(Google Finance)
Both Marriott and Starwood announced on November 16, 2015, that they had agreed to merge in a cash and stock deal that would value Starwood at $12.2 billion. The merger would create the world’s largest hotel company.
On Monday, Marriott reaffirmed its commitment to acquire Starwood and stated: “Marriott is confident that the previously announced merger agreement is the best course for both companies.” If Starwood walks away from the Marriott deal, it has to pay a break-up fee of $400 million.
“In our view, nothing changes unless a firm offer is put on the table. If that happens, we believe that Marriott may slightly improve the terms of its offer and emerge as the winning bidder,” wrote Nomura Securities analyst Harry Curtis in a note.
Marriott and Starwood would be able to make more money from the combined lodging platform, according to Curtis. However, Anbang does not offer such future synergies. “Even if Anbang firms up its offer, it may need to come up with a higher price. In our view, Marriott remains the best long-term partner for Starwood shareholders,” 
said Curtis.
Luxury Properties
Anbang has also agreed to buy Strategic Hotels & Resorts Inc. from Blackstone, a private equity group, for $6.5 billion on March 12.
The deal came just three months after Blackstone purchased the U.S. luxury-resort company. Anbang’s price is about $450 million more than what Blackstone had paid in December. 
Blackstone had been planning to sell individual properties in the portfolio. But Anbang made a pre-emptive offer for the entire company, according to a Bloomberg news.
With this acquisition, Anbang will gain a substantial presence in luxury properties including a number of Four Season resorts, San Diego’s Hotel del Coronado and Manhattan’s JW Marriott Essex House.
Anbang’s move is the latest by Chinese companies looking to invest in U.S. real estate, which is considered a safe haven. U.S. real estate is especially attractive for insurance companies who seek high investment returns as well as diversification.
With the easing of restrictions over the past few years, Chinese insurers are now able to invest up to 15 percent of their total assets in offshore real estate.
“These [acquisitions] are consistent with the trend we have seen in the last couple of years. It makes sense for Chinese institutions to acquire major U.S. hotel chains,” said Michael Meyer, president of F&T Group, a real estate development company, in a phone interview. Hotel chains with underlying real estate assets provide good hedging against weak Chinese economy and currency, according to Meyer. 
“I would expect this trend to continue at a great pace in 2016 for both hotels and other real estate classes,” he said.

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