HNA’s Spanish troubles a lesson for all Chinese firms going global
An ongoing drama in the board room of a Spanish company that has seen the overthrow of its co-chairman and three directors appointed by Chinese shareholder HNA Group signals a new kind of challenge faced by Chinese companies seeking to go global through aggressive mergers and acquisitions while sticking to a Chinese style of management control.
The odd situation that has left mainland aviation and property conglomerate HNA stripped of board representation at Spain’s NH Hotel Group – where it remains the largest shareholder with a 29.5 per cent stake – comes after 60 per cent of NH shareholders last week voted out three directors appointed by HNA including former company co-chairman and chairman of the board Charles Bromwell Mobus, while chief executive Federico González Tejera was removed from his company directorship at a later board meeting.
NH’s second largest shareholder Oceanwood Capital, a British private fund, motioned the vote because it considered HNA’s pending acquisition of the Carlson-Rezidor hotel group a “conflict of interest”. HNA in April agreed to buy Carlson Hotels, which owns the Radisson chain and a majority stake in Brussels-based Rezidor Hotel Group, for an undisclosed sum.
The “dramatic turn of events” is a result of the Chinese conglomerate being too acquisitive in recent months and could be the start of more troubles to come, said Michel Brekelmans, co-head of LEK Consulting in China.
“HNA is a particularly active M&A player, closing a new deal almost every other week. Globally, there are probably few other groups that close the number of scaled deals that HNA has in the past 2 years,” he said. “Perhaps in this flurry of activity they didn’t have a chance to properly work things through with all the relevant stakeholders. Since many of their deals are minority investments they will have an increasingly complex and challenging task in meeting the expectations and investment needs across all the constituents, both fellow shareholders and management teams, across their ever expanding portfolio,” he said.
HNA said in a statement that it was disappointed in the NH development as it had “rescued NH Hotel Group from the brink of failure by providing a necessary capital infusion three years ago”. It said it would “continue to be an active shareholder” and “not be coerced into launching a tender offer”.
The setback follows a number of recent blows to mainland firms’ global ambitions, including the first high-speed railway contract in the US awarded to the China Railway Group that was suddenly axed this month.
It is not the first instance of resistance encountered by Chinese firms in Spain this year: Property giant Wanda Group has not been allowed to demolish and transform a historic building in Madrid it had acquired.
Brekelmans said it is hard for outsiders to speculate on the reasons for the infighting between HNA and NH’s second-largest shareholder, but the incident highlights the issue of control for Chinese acquirers that are getting increasingly active. “The real issue is the span of control in the portfolio. As they are executing so many deals, can they provide enough attention to each portfolio company? HNA is using a traditional Chinese management model, i.e. quite centralised in the most senior executives in the organisation,” he said.
“This can be good to push a deal through at rapid speed, as we have seen. But once the deal is closed, it will be hard to manage the intricacies and expectations of each [business unit] unless some of the day-to-day oversight and authority is delegated to a lower level,” Brekelmans said.
David Yu, adjunct professor of finance at New York University Shanghai, said the HNA case was an example of a pitfall in minority stake acquisitions internationally, due to stronger shareholder activism and power.
“Acquirers will need to be more thoughtful about perceived or real conflicts going forward, ”Yu said. “Management control will increasingly be a key challenge for Chinese firms’ acquisitions, instead of regulatory hurdles. ...Taking a more passive approach might alleviate some of the issues.”
Brekelmans added; “In general, Chinese buyers have come a long way over the past 5 years in their pursuit of global M&A targets. They get advised by top firms and have become a lot more savvy.”
In March, a consortium led by Anbang Insurance Group walked away from a US$14 billion bid to acquire Starwood hotels after a year-long courtship “due to various market considerations”, which was considered by some as a sign of the Chinese investor’s discipline.
This story was corrected in the second paragraph to say that chief executive Federico González Tejera was removed by the board, not by shareholders.