The Real Deal New York

Starwood would face problems closing a deal with Anbang

There's no guarantee a purchase agreement would be enforced by Chinese courts

March 31, 2016 12:45PM

Thomas-Mangas-W-Hotel-Wu-Xiaohui-e1458650883903

From left: Starwood’s Thomas Mangas, the W Hotel and Anbang’s Wu Xiaohui

If Anbang Insurance Group wins its bidding war for Starwood Hotels & Resorts, the hospitality firm would still have a lot of work to do to ensure the deal closes. 

When financing or other issues arise, parties generally enforce purchase agreements through the courts, but there are myriad difficulties in suing a firm such Anbang – with most of its assets based in China – for the colossal $14 billion sum that Anbang has offered, the New York Times reported.

The rule of law is notoriously weak in China, and it’s not clear that a Chinese court would enforce a judgement against Anbang. But Starwood still has options.

Many companies doing business internationally – especially in other weak-rule-of-law countries such as Russia – have included contract provisions mandating binding arbitration to settle disputes, instead of the courts.

About 24 national governments around the world, including China’s, have signed on to the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, known as the New York Convention.

But still, it’s widely believed even this sort of decision doesn’t amount to a guarantee in the case of China, the Times reported. And even if Chinese courts went along, the process would likely take years, far longer than Starwood can afford.

Another avenue for Starwood is demanding that Anbang put up collateral. The problem is that Anbang’s combined assets outside of China – the largest of those being the Waldorf Astoria Hotel, which it bought for $1.95 billion in 2014, and the Strategic Hotels and Resorts portfolio it recently bought from Blackstone for $6.5 billion – don’t add up to the value of its $14 billion bid.

Starwood’s lawyers would likely seek a deposit or letter of credit as collateral, the Times reported. Anbang’s opaque ownership structure makes collecting deposits from shareholders unlikely, but the firms could follow the lead of Shuanghui International Holdings, who placed a $275 million termination fee in escrow when it bought Smithfield Foods in 2013, about 5 percent of the purchase price.

Starwood may seek a larger escrow deposit, largely composed of letters of credit and financing letters rather than cash.

There are also likely to be problems with regulatory permission and financing for the purchase, the Times reported.

All these factors suggest Marriott International’s $13.6 billion bid may be relatively more attractive than Anbang’s, despite being lower. [NYT]Ariel Stulberg

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