Could Chinese Insurance Officials Kill Anbang’s Next Bid for Starwood?

Marriott International added a new chapter to the Starwood Hotels & Resorts takeover drama yesterday, when Starwood’s board pushed aside a $13.2 billion deal with China’s Anbang Insurance, to accept a counteroffer from Marriott worth $13.6 billion.

Many observers are expecting Anbang, which is offering cash against Marriott’s combination of cash and stock, to be readying a counter offer for Starwood’s portfolio of over 1300 hotels and resorts around the world.

However, China’s insurance regulator may have the last word regarding Anbang’s global ambitions, as even the insurer’s most recent bid for Starwood would put the Beijing-based company’s total overseas investments at more than RMB157 billion ($25.8 billion), and violate mainland restrictions on overseas holdings for its domestic insurers.

Marriott Counters Anbang’s $13.2B Bid

Aiming to create the world’s largest hotel chain Marriott countered Anbang’s deal last week by offering $21 in cash and 0.80 share of Marriott common stock for each Starwood share, according to a statement by the company. Already accepted by Starwood’s board on Monday, this new offer ups the cash portion from just $2 per share from Marriott’s earlier bid. Marriott would also be paid a $450 million kill fee if Marriott ultimately signs with another party, compared to just $400 million in the original deal.

Commenting on its latest offer in a call with analysts and investors, Marriott CEO and President Arne Sorenson said, “We now believe there are more cost synergies than we estimated in November. We are also helped by a more efficient deal structure with a greater percentage of cash and finally we were helped by a modest recovery in our stock value in these weeks, as the disconnect between stock performance and hotel fundamentals narrowed considerably.”

Marriott’s latest package tops Anbang’s earlier all cash bid of $78 per share, which Starwood’s board had recommended be accepted on Friday.

Could Anbang Bid $82 Per Share?

Now that bidding for Starwood is into its third round of accepted offers, investors drove the company’s stock up 4.52 percent by closing on Monday, in the hopes that Anbang will continue to slug it out with Marriott to take home the owner of the Westin, St Regis and Sheraton hotel brands.

“It’s a Chinese company that is sitting on a lot of cash,” Nomura Securities analyst Harry Curtis told CNBC on Monday. Although not in contact with the parties to the deal, Curtis added that, “I guess it’s a game of bid and raise, and so I don’t think its over. I think that Anbang comes back two or three dollars higher.”

However in China, sometimes it doesn’t matter what analysts think, or what the players involved want to do, but what the government says you are allowed to do.

When the CIRC Says It’s Over, It Might Just Be Over

The China Insurance Regulatory Commission is the mainland government body that sets rules for insurers, and enforces them. And according to a report on the respected Chinese business news platform Caixin today, the CIRC is preparing to block Anbang’s plan to buy Starwood, as the acquisition would put the insurer in violation of China’s 15 percent limit on overseas assets.

Since 2014, Anbang has already acquired more than RMB71.5 billion ($12.6 billion) of overseas assets, not including its 2015 deal for Belgian insurer Fidea, the value of which was not disclosed. With the company declaring in February of this year that it has RMB 700 billion in total assets, its current overseas holdings, including its agreement earlier this month to buy Strategic Hotels and Resorts from Blackstone for $6.5 billion, would translate into 10.2 percent of its holdings.

Even at the $13.2 billion that Anbang offered for Starwood earlier, the Beijing insurer’s overseas assets would jump to RMB157 billion ($25.8 billion) – equivalent to over 22 percent of its total holdings.

According to Caixin, sources within the government regulator have stated that the CIRC will oppose Anbang’s deal for Starwood on that basis.

How Connected is Anbang Chief Wu Xiaohui?

The news from Caixin shows that there is opposition from at least one branch of the government to Anbang’s aggressive overseas expansion. However, Anbang chairman Wu Xiaohui – like any Chinese business leader – did not attain his current position without having powerful support from senior leaders.

The former auto dealer from Zhejiang is now married to a grand-daughter of former top leader Deng Xiaoping, and is rumoured to have many of China’s political and economic elite as investors in Anbang. Now, if Wu and his insurance enterprise are to stay in the bidding for Starwood, the former car saleman will have to start giving his best pitch to some tough customers in Beijing.