In the 1980s one of the attractions for Japanese tourists visiting New York was a tour of the landmarks that had been snapped up by their countrymen.
The visitor groups went to Radio City music hall, part of Mitsubishi’s purchase of the Rockefeller Center. They climbed the Empire State Building, then owned by a Japanese businessman. And often they lodged in hotel chains acquired by Japanese investors. The Tokyo conglomerate Seibu Saison bought InterContinental hotels in 1988 for $2.3 billion, and a year earlier Aoki Corp had grabbed the Westin brand.
Even a certain Donald Trump sounded cowed by the surge in investment: “Bidding on a building in New York is an act of futility, because the Japanese will pay more than it’s worth just to screw us,” he told Playboy magazine in 1990. “They want to own Manhattan.”
Their purchases were backed by bank-style lending from the Japanese life insurers. But the spree started to turn sour after the collapse of the country’s own property market. In 2000, Chiyoda Mutual, the most leveraged of the insurers, imploded, becoming Japan’s biggest bankruptcy since the Second World War (it would later be bailed out by AIG). Weighed down by their exposure to bad loans linked to diminished property assets, six insurers would go bust by 2002.
A cautionary tale, perhaps, for Chinese investors, who have been turning their attention to global assets like never before too. Among “the new Japanese” are the Chinese insurers, but rather than financing the overseas acquisitions of other firms, they have been targeting the trophy properties themselves.
Leading the charge is Anbang Insurance. When WiC first reported on Anbang two years ago (see WiC226) its incredible rise was only being tracked by the local media. Since then it has become a mainstay in the international financial news.
What was Anbang’s latest move?
The insurer spooked investors on April 1 by walking away from a $14 billion all-cash offer to buy Starwood Hotels and Resorts.
For weeks Anbang had been trying to outbid Marriott International for a hotel chain that owns the W, Westin and Sheraton brands. Indeed, Starwood was close to securing a $12.2 billion sale to Marriott last month when Anbang gatecrashed the deal with a $13 billion offer. Marriott then raised its bid by nearly 10% but Anbang sweetened its counterbid too.
As the media waited for news on what would have been the biggest takeover yet of an American company by a Chinese group, Anbang abruptly called off the takeover, citing “various market considerations” as the reason for backing out.
Prior to that Anbang had acquired an air of invincibility in global M&A circles. As the bidding for Starwood began, it had already agreed to pay the private equity firm Blackstone $6.5 billion for Strategic Hotels and Resorts, which owns 16 leisure properties including New York’s Essex House and several Four Seasons and Ritz-Carlton resorts in the US. The deals looked to have established the reach of Anbang’s chairman Wu Xiaohui far beyond his Chinese guanxi network (see WiC318), with Wu telling an audience at a Harvard University conference last year that Blackstone chairman Steve Schwarzman was a “good friend” of his.
Blackstone-controlled Hilton group had already sold the iconic Waldorf Astoria hotel to Anbang for $2 billion in 2014. And a year later it offloaded a 26-storey office building in Fifth Avenue for $415 million. The building is now home to Anbang’s New York headquarters.
Why did the bid for Starwood falter?
According to the Wall Street Journal, Anbang first expressed an interest last May but Starwood’s executives weren’t confident that the Chinese could secure the funding for the takeover. They found Wu “hard to read” and were confused by his negotiating style. Clearly, he was the dominant figure in the discussions, despite turning up for meetings with a group of colleagues educated at American business schools. “Mr Wu served as Anbang’s lead negotiator. At times his bankers didn’t speak during entire meetings… and Mr Wu didn’t turn to them for advice,” the newspaper reports.
Starwood seems to have got more comfortable with its potential acquirer after the Marriott bid, however. This time it was Anbang that finally walked away.
One explanation was that the price was too high. “While attracted to Starwood’s high-end global hotel portfolio, at the end of the day Anbang is a disciplined buyer,” Fred Hu, the boss at Primavera Capital told Reuters (his private equity firm was part of the Anbang bidding consortium).
If that’s true, it seems strange that Anbang would pull out after raising the bid itself, not on hearing that its rival had upped its offer.
Maybe Anbang wasn’t enjoying the media coverage of the takeover battle. The international press was deeply intrigued and had started to dig into the details of Starwood’s mysterious suitor. No one at Anbang answered the phone when the New York Times called for an interview and the fax number on the company’s website is said to have connected to a dentist’s office. But that didn’t prevent the newspaper from poring over the 37 holding companies that bolster Anbang’s capital base, at least two of which appeared to be linked to relatives of Deng Xiaoping.
More plausible is that Chinese regulators were the decisive factor in the breakdown of the deal. The China Insurance Regulatory Commission (CIRC) limits ownership of overseas interests to 15% of insurance companies’ assets, and the local media had been speculating since mid-March that the Starwood transaction would have seen Anbang breach the watchdog’s thresholds.
The Financial Times agrees that the insurer got too ambitious and that the CIRC “clipped the wings” of Anbang – having watched Wu agree on $20 billion of acquisitions in 18 months. One outcome is that Wu’s reputation as a power-broking dealmaker has taken a dip. “Wu told his advisers that the regulators would not be an issue,” the FT reports, citing someone who took part in the process. “He used to boast that he knew everyone there [at the CIRC] from the chairman to the doorman.”
Why has Anbang been so keen on hotels?
During the bidding process Wu championed a vision of bringing Starwood brands to China’s emerging middle class, the media has reported. Parts of the Chinese press took a less visionary line, arguing that Anbang simply sees hotel projects as relatively high-yielding property investments in a low interest rate environment.
Anbang has virtually no experience of the tourism industry itself. But hotels were some of the earliest projects employed by the Chinese government to jumpstart the country’s economic reforms. Even today, local governments rely on five-star properties managed by the global brands to boost the value of city-centre land (and bolster a little municipal pride).
With the hotel sector in China showing signs of overinvestment (see WiC196) amid too much competition from real estate developers, going global offers a different route for the insurers, many of which are newcomers to the property industry. The CIRC only gave the green light for investment in real estate (including hotels) in 2010. Since then Ping An has acquired Lloyd’s London offices for $390 million in 2013 and Tower Place for $490 million in 2015. China Life, the biggest state insurer, completed a $1.2 billion deal to buy a skyscraper in Canary Wharf last year.
“Overseas investments pose tremendous risks. Insurers need to begin with something that they understand, and this is real estate,” a China Life official told Caixin Weekly.
Because hotel companies like Hilton have been selling off their property assets and choosing to become operators rather than owners, there is no shortage of opportunities for cash-rich buyers. In fact, a less-mentioned asset under the Starwood umbrella is the Starwood Capital Group, a private equity unit focused on real estate that has more than $45 billion of assets under management. Caijing magazine thinks that access to this dealmaking knowhow could have been another motivation for the Anbang bid.
Of course, by beefing up its assets and cashflows in US dollars and keeping its debt largely renminbi-denominated at home, Anbang might also benefit should the Chinese currency continue to weaken against the greenback (the renminbi dropped more than 6% in 2015).
Anything else on the shopping list?
The insurer has also opted to take direct exposure to a series of banking and property stocks. According to their annual reports. Anbang owns a 15.54% stake in Minsheng Banking Corp (as the biggest single shareholder) and a 10.72% stake in China Merchant Bank (the second largest shareholder). Combined, the holdings are worth Rmb91 billion ($14 billion). Both banks are generally considered to be state-controlled but their fragmented shareholdings have led to speculation that Anbang has positioned itself carefully should regulatory changes allow a change of ownership direction in the future.
The so-called Big Four banks all have the state as their controlling shareholder (in their case, the Central Huijin Investment agency) but Caixin Weekly reported this week that Anbang has accumulated stakes large enough to make it a top 10 shareholder in each of the four.
Certainly, Anbang doesn’t seem intimidated by the might of state capitalism. In fact, in December last year it invested Rmb9 billion for a 29% stake in the Hong Kong-listed property firm Sino-Ocean Land. The surprise move dislodged China Life as the biggest single shareholder. Also in December, Anbang raised its holdings in Vanke from 4.5% to 7%, becoming a key player in the unfolding takeover war for control of China’s biggest real estate firm (see WiC317).
How is Anbang so deep-pocketed?
Anbang is yet to publish its 2015 annual report but last year it raised more than Rmb50 billion through two private placements, quintupling its registered capital to Rmb62 billion (a figure which now exceeds that of China Life).
Anbang says on its website that its “total assets” are worth Rmb1.9 trillion. According to data from its annual report last year, assets at its life insurance and property insurance units make up only Rmb328 billion. The leap in value points either to gains last year in its hefty investment portfolio – such as the banking and property shares – or spectacular increases in some of its premium income. Premiums from life and property insurance policies last year netted Anbang far less than the income reported by industry counterparts such as China Life, according to Caixin Weekly.
However, it racked up more premium income last year by underwriting “special insurance polices”, which are primarily short-term investment products. “It has cornered about four-fifths of the Chinese market for investment packages sold to retail investors that yield up to 10%,” the magazine says. Many of these investment products are sold online and carry maturities as short as three months.
Is that a risky growth model?
Anbang doesn’t mind being described as a financial conglomerate being especially keen on comparisons with Warren Buffett’s Berkshire Hathaway – that is to say using a core of insurance reserves to buy into a variety of businesses.
Purchasing illiquid, long-term investments (such as real estate) with the help of rollover, short-term financing (the “special insurance policies”) might evoke less pleasant comparisons to the Sage of Omaha.
Instead, how about AIG’s practice of investing in mortgage-backed securities with capital raised on a short-term basis, often from lending out securities from its life insurance companies’ portfolios? The strategy later led to scathing criticism from former Federal Reserve chairman Ben Bernanke, who told the US Congress that he regarded AIG’s Financial Products unit as “a hedge fund attached [to] a large and stable insurance company.”
Anbang isn’t the only Chinese insurer adopting a more leveraged growth model. While state firms such as China Life and PICC are more familiar with the oversight of the insurance watchdog CIRC, the newcomers from the private sector are more aggressive in their practices. These younger players are being dubbed the “black horses” of the Chinese insurance sector. “The black horses believe they are born to a golden era… they mock our strategy as being too cautious and outdated,” a senior official at one state insurer complained to Caixin Weekly. “Typically they rely on short-term, high-yield and low-protection wealth management products to pull in their premium base quickly. Then they get further leverage via bank borrowing to invest in other assets.”
Real estate is a favourite bet for the newcomers. Among 133 listed A-share property firms, 21 have at least one insurance firm as a top 10 shareholder. For example Shenzhen-based Foresea Insurance has helped its sister firm – the formerly obscure Baoneng Group – build up a significant stake in Vanke (see WiC308). Sino-Life Insurance is another fast-growing player from Shenzhen. It has been threatening to displace China Mobile as the single biggest shareholder of Pudong Development Bank.
Foreign investors shouldn’t be too surprised if the likes of Foresea and Sino-Life suddenly show up on the opposite side of the M&A table. Both will want to prove that they can do better than their Japanese counterparts a generation ago.
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