MergerMArket
Starwood seen demanding 10-digit reverse termination fee, attorneys say
* Multiple signoffs needed in China
* Fee must account for Marriott loss, regulatory risk
Anbang Insurance may have to offer Starwood Hotels & Resorts Worldwide (NYSE:HOT) a reverse termination fee of more than USD 1bn to cover regulatory risks, according to two industry attorneys.
Earlier this week, the Beijing-based group raised its takeover bid to nearly USD 14bn in cash for the Stamford, Connecticut-based hotel operator. The bid again trumped Marriott International's (NASDAQ:MAR) sweetened USD 13.6bn cash-and-stock offer. If Starwood abandons its signed deal with Marriott, it must pay a USD 450m termination fee, along with additional expenses.
Starwood said on Monday that it is discussing "non-price terms" with Anbang and working to finalize a binding agreement. It cautioned that it may not reach a final agreement that is superior to the Marriott deal.
Anbang’s proposed acquisition would require regulatory approvals from Chinese regulatory agencies, including the National Development and Reform Commission (NDRC) and the Chinese Insurance Regulatory Commission (CIRC), said a person familiar with the matter. In America, Anbang would need approval from the Committee on Foreign Investment in the US (CFIUS), the person said.
Marriott has said it stands by its offer and that Starwood shareholders should give “serious consideration” to Anbang’s ability to close its deal, particularly around financing and timing of regulatory reviews.
To assuage potential concerns about that regulatory exposure and to cover the costs of walking away from Marriott, Anbang would likely need to stipulate in its Starwood merger agreement a significant reverse termination fee, according to three industry attorneys. Two of these attorneys said the value of the fee would likely have to exceed USD 1bn, and potentially surpass USD 1.5bn.
These fees have proven to be a thorny issue in cross-border M&A negotiations. On Monday, California biotech firm Affymetrix (NASDAQ:AFFX) rejected an interloper bid from a China-backed group in part over disagreements about the size and structure of the fee along with financing risk.
Attorneys said Starwood will look to secure a reverse termination fee that covers several risks.
The first is that Starwood would terminate a “sure thing” merger with Marriott, said the first attorney, who practices corporate law and has experience in the hotel industry. Marriott has secured American and Canadian competition approvals and had planned to shortly hold shareholder votes before Anbang’s interloper offer earlier this month.
The fee would also have to cover the expense of terminating the Marriott transaction and the significant harm Starwood would face from a strategic perspective should the sale fall through, the first attorney said. There would be “no assurance that Marriott would come back,” the attorney said.
Anbang has launched an aggressive acquisition spree in the past few years to acquire financial and real-estate assets around the world. That has raised concerns about its ability to continue making deals and securing approvals from Chinese regulators.
The Chinese insurance industry is heavily regulated, said the second antitrust attorney, who practices antitrust law and has experience in China mergers. There are “strict limits” on Chinese companies acquiring foreign assets and the CIRC would need to sign off on a USD 14bn acquisition, the attorney said.
Chinese law limits insurance companies from investing more than 15% of their assets abroad, the third attorney said. If that threshold is breached, CIRC can impose sanctions, said the attorney, who was unaware of any precedents for such sanctions.
Anbang’s elusive Chairman Wu Xiaohui recently said Anbang’s assets exceed USD 154.39bn and allow for foreign investments such as the Starwood acquisition, according to Chinese news service Caixin. In an SEC filing connected to Anbang’s proposed acquisition of US insurer Fidelity & Guaranty Life (NYSE:FGL), Anbang is reported to have more than USD 140bn in total assets.
Earlier this month, Caixin reported that the CIRC disapproved of Anbang’s separate bids to acquire Starwood and USD 6.5bn in luxury hotel real-estate assets from the Blackstone Group (NYSE:BX). Citing a person close to the regulator, Caixin reported that the two hotel deals would cause Anbang to breach the 15% threshold.
In China, regulated businesses such as insurance companies “cannot do anything past the permitted, totally allowable procedures,” the second attorney said. If an insurance company exceeds the preapproved foreign investment level, it either needs to get approval from the regulator each time it moves beyond the threshold, or it needs to get a type of extension from the regulator, the attorney said.
Anbang could have already received approval for such an extension, as the company has engaged in multiple rounds of bids against Marriott, the second attorney said. The question is the limit of that extension. If the price of Starwood keeps increasing via rival bids, Anbang might have to go back to the regulator about the extension and could then be rejected, the attorney added.
“They absolutely need approval to do the investment at this point,” the second attorney said. “I don’t know what the number is. It could be USD 15bn, it could be USD 14bn, or it could be USD 18bn. But it’s a number, and they’re not just going to let Anbang buy Starwood no matter what.”
It is unclear whether Anbang’s bid for Starwood would require approval from the Ministry of Commerce (MOFCOM), the Chinese regulator responsible for administering and overseeing overseas investment.
The NDRC's review would take around a month to obtain, the third attorney said. Even with approval from NDRC, Anbang will still have to confront the insurance regulator. The CIRC’s reaction is “difficult to foresee” at this point, this attorney said.
The CIRC along with New York and Iowa insurance regulators have yet to sign off on the Fidelity & Guaranty deal, which carries no revese termination fee. Anbang has secured clearance from CFIUS for Fidelity & Guaranty and the purchase of real estate for the luxury Waldorf-Astoria hotel in New York.
All the three attorneys agreed that Anbang likely already has a degree of support from the Chinese government. If the government were to reject Anbang’s Starwood deal, it would represent a “significant loss of credibility” for Chinese companies in similar transactions, the first attorney said.
Regarding the reverse termination fee, Anbang could deposit the funds with a US escrow agent to further assure the seller, or Anbang could seek a letter of credit from a US or international bank that would be held by an escrow agent and then drawn on by Starwood if the deal were to fall apart, the first attorney said.
Anbang would likely be able to simply cut a check, as opposed to seeking a letter of credit, the second attorney said. Anbang likely has bank accounts in the US, as it bought the Waldorf-Astoria and did other US acquisitions, the attorney added.
In several cross-border transactions, US sellers have demanded foreign buyers place funds in escrow accounts for reverse termination fees. In some cases, only a portion of the fee has been moved into escrow or the amount has risen the longer a transaction remains outstanding.
Anbang declined to comment. Starwood did not return a request for comment.