Can A Starwood-Anbang Deal Even Be Done?

So, Starwood's lawyers are assuming that Starwood will really have no recourse in China to enforce its agreement if Anbang decides to breach it.

All is not lost, however. Starwood's lawyers will look for Anbang to put up collateral -- mainly American assets. These will secure any judgment so that Starwood would not have to turn to China.

The problem is that Anbang has limited assets in the United States. It owns the Waldorf Astoria, which it bought for $1.95 billion, and has agreed to buy Strategic Hotels and Resorts from Blackstone for $6.5 billion. But these assets are not enough. In both cases, Anbang most likely borrowed heavily to acquire them and they will not be available to meet the full purchase price for Starwood.

This leaves the last option. Starwood's lawyers will have to look for a deposit or a letter of credit. It is also possible to get commitments from Anbang's owners, though the problem is that they are unknown and are also very likely abroad.

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The China risk on this transaction goes beyond the enforcement of the agreement. Approval of Chinese regulators is required for this deal and there are signs that the government may not approve, since the amount will exceed 15 percent of Anbang's assets, the limit on insurers' foreign investment under Chinese rules.

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But remember what is driving this deal? Anbang is willing to pay so much in order to arbitrage the Chinese currency, the renminbi. Anbang knows that the renminbi might go down, and is desperate to get its money out and convert it to dollars. Indeed, Anbang appears partly built on a currency play. Many Chinese citizens buy its high-yielding life insurance products because that allows for the conversion of renminbi into dollars. Perhaps the Chinese government may be more forgiving to Anbang, as this conversion may benefit the company if there is indeed further renminbi devaluation.

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Then there is the issue of national security approval in the United States by the Committee on Foreign Investment in the United States, or Cfius, a committee of various federal agencies charged with reviewing foreign takeovers for national security purposes.

A hotel acquisition does not on its face raise national security issues. Cfius, however, does review how close Starwood's hotels are to national security facilities. It has previously blocked investments in a wind farm and a gold mining company by Chinese companies because these properties were located too close to military facilities.

Cfius will almost certainly not block the Starwood deal, but it may require divestments of hotels, like Starwood properties near the White House. This analysis will take a while since Starwood has about 1,300 properties. But this will only delay, not hold up, a deal.

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The final risk to this transaction is financing. Anbang will be looking to borrow billions to finance the deal with its partners J. C. Flowers & Company and Primavera Capital. But financing can fall through, particularly in today's markets in the United States and China.

And so, the questions really are whether Starwood will take the risk here, and how the lawyers deal with it. There are no complete solutions -- Starwood is unlikely to be able to get an agreement that it can enforce or collect the full acquisition price if Anbang walks away.

Because of this risk, Marriott's bid is likely to be a better one even if Anbang is willing to pay more. This is because the bird in the hand of Marriott is a better bet.