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Lodging Thoughts from BTN's Lodging Editor

Why Did Anbang Leave, & What's Ahead for M&A

By Julie Sickel / April 01, 2016 / Contact Reporter
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It's a bit awkward, isn't it? To be back where we were five months ago. Marriott International is buying Starwood Hotels & Resorts. It's as true now as it was on Nov. 16, when the deal went public, and yet so much has happened.

We've outlined a whole timeline of the Starwood sale process, so I don't intend to repeat it all once more here. But let's go over the bullet points of the past month. Starwood agreed to be acquired by Marriott. A Chinese consortium led by Anbang Group Insurance Co. submitted an unsolicited, all-cash takeover bid of Starwood. Starwood accepted. Marriott came back, with more cash this time. Starwood accepted. Then Anbang came back once more with even more cash.

The cash is important here. It's what made the Anbang offer so desirable to Starwood shareholders. That, and the perception that such an arrangement would allow Starwood to continue on its same path while gaining some advantage in Chinese markets. But the cash also could be one explanation for why Anbang pulled out. On Monday, a story in The Wall Street Journal revealed that Anbang was a player in the Starwood bidding war long before this March—and that it has some murky ownership, just as an aside. The company reportedly submitted three unsuccessful bids for Starwood but finally pulled out of the dealings altogether when Starwood pressed for further details about financing. Maybe the same thing happened this week.

Another theory that's already gotten a lot of play is that Chinese regulators would obstruct Anbang's purchase of Starwood. Chinese business news site Caixin Online reported that an Anbang buy of Starwood wouldn't be allowed by the China Insurance Regulatory Commission because Chinese insurers can't invest more than 15 percent of their assets abroad. That's a problem for a company that's already paid $2 billion for the Waldorf Astoria New York and promised The Blackstone Group $6.5 billion for Strategic Hotels & Resorts. Maybe that's what happened. As Bjorn Hanson, a clinical professor at New York University's Tisch Center for Hospitality and Tourism, told me last week, it's difficult to find someone who's an expert on the hotel industry and Chinese insurance regulations.

There are a few things at play in the Starwood-Marriott-Anbang love triangle. One is the China factor. Anbang isn't alone in its aggressive pursuit of U.S. assets. As of the end of February, 2016 foreign acquisitions by Chinese companies already reached $81.5 billion, and many of the companies involved in the deals are relative unknowns to Wall Street banks. Sound familiar? The suggestion is that as confidence wanes in the Chinese economy, Chinese companies are trying to flex their muscles and spend their money elsewhere. There's been some speculation that if Anbang doesn't get Starwood, it will go after InterContinental Hotels Group or AccorHotels or NH Hotels. How much that holds up now that Anbang's pulled out—that I don't know. But it does bring me to the next piece of the equation in all of this: industry consolidation.

Back in February 2015, I reached out to Hanson to talk about hotel mergers and acquisitions. It was right after Marriott announced its plans to buy Canada's Delta Hotels and Wyndham announced it would acquire Dolce Hotels and Resorts. It was also two months after IHG bought Kimpton. I wanted to know why these deals happened when they did and if there were more deals to come. Yes, he said, there would certainly be more M&A activity, especially the type that has larger companies buying up smaller and midsize companies. Why now? This always happens at the top of a cycle. Large lodging companies have experienced a handful of very good years, and they have strong balance sheets they need to put to work. Acquiring another brand or company is more appealing than buying back stock—and these deals also help the smaller companies steel against tougher times ahead. Hanson's prediction of more activity turned out to be accurate; in addition to the Marriott-Starwood merger, we saw AccorHotels buy Fairmont and Commune and Destination agree to merge, and now there's talk of a Carlson sell.

But there's more to the push for M&A this time around, too. Lots of analysis out there attributes the current consolidation to hoteliers' desire to guard against the new kid on the block who doesn't play by the rules: Airbnb. It's a pretty sexy scapegoat. I don't know if I buy it as the culprit, though. More likely, what's behind the industry's most recent round of consolidation? Online travel agencies. It's no secret that hoteliers have been trying to wrangle power back from OTAs. AccorHotels CEO Sébastien Bazin has been particularly outspoken against OTAs, saying last year that they were a "mutation" of the industry and are suffocating independent hoteliers. Recent hotelier behavior, such as Accor's welcoming of independent hotels onto its online marketplace and the various initiatives encouraging guests to book direct (see: Hilton's "Stop Clicking Around" campaign), also points more to OTA challenges than Airbnb.

So if hoteliers are more worried about OTAs than Airbnb, what is key? Size. Best Western Hotels & Resorts CEO David Kong told me at the Americas Lodging Investment Summit in January that BW is less worried about the OTAs because BW has scale, more than 4,000 properties worth of it. With the Starwood-Marriott union, Marriott will be the largest hotelier in the world. They won't need OTAs as much, and so they can negotiate better terms. But OTAs are publicly traded companies that will need to make up that lost revenue somewhere. Kong suggested they would do it on the backs of hotel companies that have less scale. "So that landscape I think is actually going to cause some mergers and other things to happen in our industry, because we need scale,” he told me “Everybody needs scale." There we have it.

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