Commentary on Political Economy

Thursday, 11 June 2020


[China’s global mergers and acquisitions footprint has already shrunk dramatically outside the technology sector. China itself no longer has massive funds to recycle to the rest of the world. Failure to close the Anbang hotels deal or finding a new buyer, however, could seriously dent its capacity and that of Chinese companies to be taken seriously in developed markets for years to come. “Chinese buyers are no longer considered the buyer of first choice,” says one investor with experience of the market. “Whether as buyers or sellers, they have lost credibility.”]


The mystery document holding up China’s sale of Anbang hotels 
A legal fight over the ownership of US assets threatens to embarrass the Chinese Communist party

When South Korean asset manager Mirae pulled the plug on a $5.8bn hotel deal with China’s Anbang in April, it looked like one more casualty of the coronavirus outbreak. The acquisition agreed in September 2019 had dragged on into the pandemic, which has devastated the hotel industry. Mirae’s last-minute termination of the deal in April led to accusations from Anbang that the buyer “got cold feet”. But a previously undisclosed document — revealed in a US court by Mirae, part of its defence in a suit brought by Anbang — suggests the pandemic was just one element of why it walked away from the purchase of 15 hotels including the JW Marriott Essex House overlooking New York’s Central Park and Four Seasons and Ritz-Carlton resorts in California. The document reveals competing claims of ownership on the hotels, which were stripped from Anbang’s former chairman Wu Xiaohui by Chinese authorities in 2017. Purportedly signed by Wu, the Delaware Rapid Arbitration Act agreement, or DRAA, appears to be an attempt to transfer ownership of the hotels from Anbang to four Delaware-based parties, and also give his own family a claim to the assets, just weeks before he was detained in China in June 2017 on corruption charges.

 At the time he was arrested Wu was the most high-profile tycoon to be ensnared in President Xi Jinping’s anti-corruption drive. Anbang was once considered the darling of Chinese M&A, launching an $18bn buying spree between 2014 and early 2016. Along with a small cohort of other acquisitive conglomerates such as HNA and Dalian Wanda, its deals were often viewed as part of the Chinese government’s “going out” policy that endorsed overseas investments. Now Beijing is potentially saddled with billions of dollars in debt from that spending spree and facing a bitter US legal fight over Anbang’s assets that threatens to embarrass the Communist party’s top leadership. Among those who have been drawn into the legal fight is the family of the late Communist party leader Deng Xiaoping — who opened up the economy in the 1970s. A granddaughter of Deng became Wu's third wife.

 “The politics behind Anbang got very complicated for Xi Jinping, mainly because there are other powerful families with interests in the company,” says one person close to its senior management. There has been a continuing internal fight over the company assets since Wu’s arrest, the person adds. Anbang and bust The sale of the hotels to Mirae — which won a hotly contested auction involving 17 bidders, including private equity firms Blackstone and Brookfield — was supposed to be one of the last large disposals of Anbang’s financial and property empire. The transaction would have helped reduce its debt, to the relief of Beijing regulators, who had already given the leveraged insurer a $10bn state bailout. Founded by Wu as a small insurance group in 2004, Anbang was from the beginning a one-man show. But the one man at the heart of it — a former car salesman from Wenzhou — proved to be erratic.

 The company underwent rapid expansion after 2011 with its by then billionaire owner quickly garnering a reputation as the country’s most prominent dealmaker. In a matter of months in 2015, it bought Dutch insurer Vivat and a large stake in South Korea’s Tongyang Life. By 2016, Anbang held insurance and real estate assets spanning the globe. That same year, Wu was involved in a bitter battle with Marriott to buy Starwood Hotels, at one point offering $14bn for the chain only to abruptly withdraw the bid without explanation days later. Military commander turned entrepreneur Chen Xiaolu, the former Anbang director who died of a heart attack in February 2018 after being questioned by Chinese regulators about his role in the insurer. His seal was on disputed DRAA document © Giles Sabris/New York Times/Redux/ eyevine But the company was not built on a solid foundation. Chinese investigators alleged in 2017 that the company’s founder had been injecting insurance premiums into Anbang to artificially inflate its stock, bolstering the size of the group and fuelling his buying spree.

 The same year — and with pressure mounting on his business empire — the Wu signature and seal appeared on the DRAA, apparently giving his family and that of former Communist party leader Deng claim to billions of dollars in California hotel properties, in the event of Beijing seizing control of Anbang. The existence of the DRAA — dated May 15 2017 — was not widely known until April of this year. Much of its content focuses on trademark disputes. But a clause towards the end of the 16-page document states that, in the event that Anbang is seized by China’s insurance regulator or other government entities, the Wu and Deng families “unconditionally agree to have the four parties of the United States to sue and file an additional complaint against the institutions”. Travis Laster, the vice-chancellor of the Court of Chancery in Delaware who will be the judge when the case between Anbang and Mirae resumes in August, recently said of the “parties”: “Those folks have vanished into the ether. It may be because they never existed in the first place. It may be because they are fraudsters. It may be because they are somewhere in China. I don't know.”

 The document also warns that the DRAA is confidential and may not be leaked: “In particular, to Xi Jinping’s family, [then anti-corruption chief] Wang Qishan’s family and other families of members of the Standing Committee, or any personnel from the central government, any law enforcement personnel, and other personnel, lest that relevant personnel be subject to criminal liability or death penalty”. The document adds that any party that contravenes the agreement could be liable for a penalty of up to $270bn. Wu once described Wang to the FT as his biggest enemy. Just three weeks after the DRAA was signed, Wu was arrested in Beijing and eventually sentenced to 18 years in prison. Former aides say Wu was normally reluctant to sign documents, which has led some in Anbang to question the authenticity of the DRAA. Anbang legal representatives in the US have sought to portray the DRAA as a fraud, saying that Mirae is using it as an excuse to brake the deal, and on Wednesday asked the Delaware court to dismiss the document from the case. Adam Offenhartz, a lawyer at Gibson, Dunn & Crutcher, representing Anbang, said in a May 8 hearing: “I find it remarkable that Mirae, an international company with billions of dollars under its management wing, with billions of dollars of investments, is basically cloaking itself with the cloud generated by these fraudsters.”

 Anbang executives in China did not formally respond to emailed questions and requests for interview about the document. The DRAA also bears the seal of military commander turned entrepreneur Chen Xiaolu. Chen, a so-called princeling, was the son of Chen Yi, a revered revolutionary who served as mayor of Shanghai during Mao Zedong’s era. The younger Chen also served in the military but later moved into business, becoming a director at Anbang, though he was never formally on the payroll. He left the company in 2016, months before the DRAA was drawn up. A security guard tries to prevent photographs being taken outside the Anbang Insurance building in Beijing © Greg Baker/AFP/Getty Chen died of a heart attack in February 2018, after being questioned by Chinese regulators about his role in the insurer and the extent of the compensation he might have received from Wu, Anbang insiders say. Mr Xi sent a relative to the funeral service, who gave a short speech in which he described Chen as an elder brother to the Xi family, they add. According to a February 2020 letter by DLA Piper sent to Anbang’s current owner, the Chinese state, it was Chen’s idea to shift the ownership of at least some of the hotels from Anbang to the Wu and Deng families.

In court filings the law firm said it had been engaged by other parties to the DRAA to explore potential claims against Anbang but it has subsequently withdrawn from the case. The DLA Piper letter notes that Wu’s signature on the DRAA “appears to match the signatures on Anbang Insurance’s trademark applications filed to the” US Patent and Trademark Office. Yet it is not identical “so as to be a cut-and-paste copy”. The uncertainty over the ownership of the hotels was enough to trigger Mirae’s refusal to close the purchase in late April. “Once those litigations and related matters came to light within days of the . . . closing, the title insurers refused to unequivocally insure [Mirae] as the sole owner of the properties, and the lenders, several of the world’s leading financial institutions, were unwilling to provide the $4bn in financing needed to close,” according to Mirae’s counterclaim against Anbang. Unpicking the M&A spree The DRAA’s existence also poses problems for China’s banking and insurance regulator. The CBIRC took control of Anbang in February 2018 with a mandate to dispose of its overseas assets, reduce its mountain of debt and withdraw from the insurer, now renamed Dajia, within two years. Anbang’s management hired investment bankers to sell off its offshore assets. The priority was to find a buyer for the hotels, all under the Strategic Hotels & Resorts brand which Anbang had initially purchased from Blackstone in 2016 for $6.5bn.

 A senior CBIRC regulator, Luo Sheng, was put in charge of the process despite having limited overseas experience to deal with complicated transactions such as the legal dispute with Mirae. Despite early successes — such as the sale of the Fidea Belgian assets for $543m — it quickly became clear that unpicking Anbang was going to be a complex process for the regulator, which declined to comment for this article. Problems surfaced even before the deal was signed in September 2019 when Mirae discovered grant deeds — separate from the instructions in the DRAA — that purported to show that ownership of six Californian hotels, including a Four Seasons in Silicon Valley and a Ritz-Carlton in Half Moon Bay, had already been transferred to other unrelated parties, according to legal documents reviewed by the FT. But Anbang reassured Mirae that it could expunge what it said were fraudulent titles, and later cleared most of the six. But with competing claims on some of the properties, the title insurance companies refused to provide the unconditional cover required for lenders to finance Mirae’s $5.8bn purchase. The Korean group had already paid a $581m deposit to Anbang and a $50m fee to its bankers. On February 24, Mirae’s leading lender Goldman Sachs alerted the South Korean company that its counsel Cleary Gottlieb had found that in addition to the disputes in California, Anbang’s remaining nine properties faced similar challenges in court in Delaware.

 Mirae’s lawyers now argue that Anbang deliberately failed to inform it of the competing ownership claims, fearing that such a disclosure would have sunk the deal. “It’s like someone pulled the emergency brake,” says a person involved at the time. “The discovery of the Delaware matters was a shock (and embarrassment) not only to Buyer, but to the title insurers and the lenders, who immediately pulled their commitment letter and demanded a full explanation,” Mirae said in a lawsuit against Anbang. Gibson, Dunn & Crutcher, Anbang’s lawyer, says the insurer was not obliged to inform Mirae of the DRAA and only made it available to the South Korean group 24 hours before the transaction was scheduled to close. Anbang continues to contest Mirae’s right to walk away from the deal to buy Strategic Hotels, whose value has almost halved from the $6bn it reached less than a year ago. But there is no obvious alternative buyer even at a substantial discount. “The legal quagmire that is emerging is going to make it very hard, even for the most aggressive buyer of distressed assets, to make a move,” says one investor familiar with the properties. The purported signature of Wu Xiaohui in blue ink on the DRAA document, dated May 15 2017 Legacy problem for Beijing

If Anbang fails in its case against Mirae, it and the Chinese state could be left holding billions of dollars of debt — used to buy the properties in the first place — with no obvious way to repay it. “This isn’t the best environment,” says one investor familiar with Anbang’s original purchase of the hotels. “That debt will have to be restructured. It will take years.” Even those who have dealt with both the company and regulators in the past, such as Blackstone and JC Flowers, say they are not interested in these assets, according to people close to the private equity groups. Nor is it clear where Anbang will get the money to complete the promised multibillion-dollar renovation of Wu’s most famous acquisition, the Waldorf Astoria, which he bought in 2015 for $1.95bn. Wu’s downfall signalled a larger shift for corporate China. In 2017 and 2018, several aggressive conglomerates began unwinding tens of billions of dollars in global investments.

 China’s global mergers and acquisitions footprint has already shrunk dramatically outside the technology sector. China itself no longer has massive funds to recycle to the rest of the world. Failure to close the Anbang hotels deal or finding a new buyer, however, could seriously dent its capacity and that of Chinese companies to be taken seriously in developed markets for years to come. “Chinese buyers are no longer considered the buyer of first choice,” says one investor with experience of the market. “Whether as buyers or sellers, they have lost credibility.”

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