As he summoned executives to his 26th-floor office on Manhattan’s Fifth Avenue last month, Wu Xiaohui seemed to have achieved the improbable feat of transforming himself from a low-level regional bureaucrat into one of China’s most politically-connected global tycoons before the age of 50. But now he was ready for his most ambitious act yet.
The chairman of Anbang, a fast-moving but little understood Chinese insurer, had acquired his US headquarters, with views of some of New York’s greatest properties, only last year.
Now, just a block from the St Regis Hotel — John Jacob Astor’s 1904 temple to hospitality — he presented his team with a proposal: a $13bn deal that would make him the operator not only of that historic property but also its parent, Starwood Hotels & Resorts, owner of the W, Westin and Sheraton brands.
The problem was that Starwood had already rebuffed Mr Wu three times in August, September and November, dissatisfied with details of the Chinese company’s bid, including its financing. Since then, Starwood had agreed a mostly stock-based sale to Marriott International, a US rival, in a deal initially worth $12.2bn but which had slumped in value as markets slid early this year.
To the strong-willed, inexhaustible Mr Wu this looked like an opportunity. However, a debate ensued in Anbang’s offices.
“Most senior managers disagreed,” says one participant. “We suggested that Marriott was well connected, not only in the US but also in China. There would be a lot of publicity. But we all knew he [Mr Wu] is the chairman. He is the only decision maker. Everybody follows him.”
And the boss, who is not fluent in English, had made up his mind: Anbang would unleash one of the fiercest bid battles in recent memory and attempt to strike China’s biggest deal to date in the US. He would ultimately fail.
But his efforts would also symbolise China’s rising role in global business, providing insights into the country’s outward ambitions and the obstacles it must overcome to compete on the international stage.
When, in March, Starwood revealed that it had received an unsolicited, all-cash proposal from an Anbang-led group at $76 per share, valuing the US company at $13bn, it caused a sensation. It raised the unthinkable prospect of a Chinese upstart wresting an agreed bid away from an American business with an 89-year record.
Marriott had been within weeks of getting shareholder approval for its acquisition of Starwood, a deal that would make it the largest hotel company in the world at a time when online intermediaries have sliced into its booking fees.
This time, Starwood saw “very convincing evidence” that Mr Wu had the cash in the US to complete the deal, says one person close to Starwood, which was working with Lazard, Citigroup and law firm Cravath, Swaine & Moore. “We had very high stakes if we messed up,” the person says. After a week of negotiations, Anbang’s $76 per share proposal had turned into an agreed $78 per share offer.
Like the other entrepreneurs who have driven China’s overseas dealmaking boom, Mr Wu relied on a formidable network built through prior deals to pursue his agenda.
Chief among these was Jon Gray, who runs the real-estate practice at Blackstone, the influential buyout group and asset manager. Mr Gray sold Mr Wu Manhattan’s flagship Waldorf Astoria hotel from Blackstone-controlled Hilton Worldwide in 2014 for $2bn, his Fifth Avenue headquarters for $415m and 16 US luxury hotels, including New York’s Essex House, for $6.5bn around the time of its renewed Starwood push.
Mr Wu, who resides in the royal suite at the Waldorf when in New York, also brought in investment bankers from PJT Partners, a boutique advisory firm that spun out of Blackstone over a year ago, to assist him.
This time, Mr Wu calculated that the presence of partners would aid his effort. He contacted Chris Flowers, a US private equity executive from whom he had bought a Belgian insurer and whose JC Flowers investment firm previously occupied the 26th-floor office that Anbang now controlled.
Fred Hu, founder of Chinese private equity firm Primavera Capital and a former Goldman Sachs executive, also came on board. Mr Hu, originally from Hunan, is believed to have close ties with former Chinese premier Zhu Rongji.
These two put up only a fraction of the funds for the deal, say several people familiar with the Anbang bid. “He could have had stronger partners,” says one person close to Anbang. “But he did not want that. He wanted to control everything.”
Mr Flowers declined to comment and Mr Hu did not respond to requests for comment. Another person close to the process says that even his advisers had little sway: “American investment bankers know how to do American M&A, but he [Mr Wu] did it in his own style.”
Marriott’s leadership felt the pressure to act quickly. “This was not a bluff,” says Arne Sorenson, chief executive of Marriott. “These guys [Anbang] are for real. You don’t come in with a $13bn fully financed offer unless you are serious.” Mr Sorenson, while in Havana, Cuba with a US presidential delegation, spent the weekend agreeing a new cash-and-stock bid for Starwood worth $79.53 a share.
Mr Wu was determined to return with a counter-offer, but cracks in his strategy were starting to show. Under capital controls in China, the State Administration for Foreign Exchange insists on approving sizeable transactions that involve moving money abroad. In addition, the Chinese Insurance Regulatory Commission limits the size of transactions abroad to 15 per cent of the buyer’s total assets.
How that is defined has never been clear cut, however. “The key issue is whether CIRC would allow the inclusion of consolidated assets, in the calculation of Anbang’s total assets,” noted one Hong Kong-based investor specialising in merger arbitrage. “If allowed, Anbang would not breach CIRC’s rule on overseas investment cap; if not, Anbang might not get regulatory approval to make the acquisitions.”
Mr Wu told his advisers that the regulators would not be an issue. “He used to boast that he knew everyone there from the chairman to the doorman,” says one person who participated in the process.
However, that claim was thrown into doubt when the respected Chinese journal Caixin reported that regulators believed the transaction value would breach the 15 per cent limit.
For the Starwood bid, Anbang had secured a commitment from the state-owned China Construction Bank. But after the Caixin report, CCB’s commitment became less clear, according to two people familiar with the situation.
Still, Mr Wu pressed on, raising his bid twice over the Easter weekend: first to $81 a share, then to $82.75, or $14bn — hoping that he was closing in on a knockout bid.
This time Starwood said the latest Anbang proposal was likely to lead to a “superior offer” to Marriott’s terms, but privately pressed the Chinese bidder to provide greater clarity on financing and other details.
As Anbang became less responsive, Starwood worried that the regulatory issues and questions over Anbang’s financing raised in the press were real. Those concerns proved well-founded on Thursday last week, when three letters arrived at Starwood — from Mr Wu, Mr Hu and Mr Flowers. They said the bidders were walking away, mysteriously citing “various market conditions”.
Was it a fear of overpaying or pressures back home in China? One person with insight into the talks said that China’s regulators had “ clipped the wings” of its high-flying chairman, while a second person confirmed that the problems were regulatory.
A spokesman for Anbang rejected suggestions that its funding had fallen apart, that Mr Flowers and Mr Hu had put up only limited funds, and that its senior executives had doubts about a bid.
“He wants to create a real international Chinese company and to be the number one businessman in China,” says one Anbang insider. “But he was not well prepared, and he did not listen to advice. He was too impatient to do the deal.”
Regardless, the person close to Starwood says, Mr Wu made his mark. “They are using an insurance base to make interesting investments. The fact that they got this far is significant.”
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