As far as mergers and acquisitions go, the latest reports that China's insurance giant Anbang is to buy U.S. Strategic Hotels & Resorts from Blackstone (BX) are giving investors some reason to cheer. Although the transaction is private, the rumored sum -- of $6.5 billion -- seems to suggest the hotels sector is in good health.
The tourism and leisure sector on the London Stock Exchange opened in the green on Monday morning, despite news of a terrorist attack in the Turkish capital Ankara that killed 37 people at the weekend.
Looking more carefully at the transaction should give investors a few reasons to worry, too. First of all, yes, the amount looks healthy, but consider that Blackstone took Strategic Hotels & Resorts private only three months ago for $6 billion.
It is perhaps not a good sign that it is rushing to sell it to Anbang for a gain of a little over 8%. Yes, it is a good percentage in this brave new world of zero or even negative interest rates, but it could also be a sign that, in spite of all the denials, all is not well in the private equity world.
Real Money's sister publication, The Deal, wrote in a recent article (subscription needed) that private equity groups have taken quite significant hits on their exposure to the falling share prices of their publicly listed holdings.
"Those firms' exposures to the public equities market -- mostly IPOs of assets in which they still hold substantial stakes -- have upset their financial performance. While the actual declines of the public markets have been relatively muted ... PE firms are having trouble navigating an equities market that has been uncharacteristically volatile lately," according to the article.
In this light, the acquisition by Anbang of the group of hotels can be seen as an attempt by Blackstone to balance some of these declines with a quick sale.
It doesn't look all that good for the tourism sector, either. After all, why would a private equity group, with a lot of experience in turning businesses around and making big profits from that, sell a bunch of supposedly iconic hotels after holding them for just three months?
The other side of the equation -- China -- doesn't come out too well either. The appetite of Chinese companies for trophy real estate acquisitions is well known, and the Chinese insurance company already owns the iconic Waldorf Astoria in New York.
For some reason, it is easier, politically, for countries to allow acquisitions of real estate by Chinese investors to go ahead than it is to allow mergers in areas considered strategic like energy, so it is less likely that this transaction will meet resistance. This looks more like going for the low hanging fruit than a well thought out business decision.
Other than prestige, however, it adds little to Anbang's portfolio. Strategic Hotels had long-term debt of about $1.81 billion as of June 30 last year, and its earnings per share were constant at $0.25 in the third quarter of last year from the second quarter, while revenues shrank by some $2.5 million, according to data from StreetInsider.
This doesn't mean it is a bad business; just that it isn't really the kind of business that Anbang should go for in Western markets.
It looked like the Chinese insurance giant was beginning to build an empire in the West. So far, it has bought U.S. life insurance firm Fidelity & Guaranty Life Insurance Company, Dutch insurer Vivat, Belgian insurance group FIDEA and bank Delta Lloyd.
Buying Strategic Hotels & Resorts after Waldorf Astoria just serves to dissipate its focus and to make it look, in the eyes of the Western financial sector heavyweights, as a bit of a dilettante who doesn't really know which business it should concentrate upon.
Perhaps it is a symptom of Chinese companies' rush to go abroad for growth as their economy slows at home. The Deal has a very good analysis of the phenomenon, showing that deal making abroad by Chinese companies increased by 57% last year to $112.1 billion.
"The equity market losses of the first weeks of the year are fueling Chinese companies' outbound appetite rather than suppressing it ... And recent renminbi devaluations have spurred companies to strike before the Chinese currency falls further and makes overseas purchases costlier," the article writes.
It is possible, then, that investors will see more of this type of transactions. But they must bear in mind that, while they may look like positive developments, deals done just because Chinese companies need to park their cash in some assets are unlikely to contribute to long-term growth.
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