Chinese Investor

Shopaholic takes a break

Chairman Of HNA Group Chen Fent At A News Conference
Too big to fail? Source: Bloomberg

It long looked as though nothing could satisfy HNA’s enormous appetite. Since early 2016, the conglomerate that started out as a regional airline in south China has disbursed an eye-watering $40 billion and snapped up anything that moves people, products or capital: especially banks, logistics and travel companies.

In May this year, the former airline purchased a nearly 10-percent stake in Deutsche Bank, which on Thursday morning reported a profit of €466 million, or $545 million, for the second quarter of this year. HNA also took over US electronics dealer Ingram Micro and Swiss airline caterer Gategroup Holdings, and acquired a 25-percent stake in the Hilton hotel chain. Mid-July, Deutsche Bank’s new biggest shareholder signed an agreement giving it 60 percent of Rio de Janeiro’s international airport, Brazil’s second-busiest.

Founder Chen Feng often talks fondly about his empire, calling it a “miracle.” But recently, HNA encountered some painful setbacks on its global shopping spree: Deals collapsed, watchdogs turned a critical eye toward the firm and rumors – denied by HNA – made the rounds about a withdrawal of support by several banks. None of this sounds too good for Deutsche Bank.

Other stalled investments include $416 million to create a joint venture with Global Eagle Entertainment (GEE), an American provider of media solutions for airplanes. That failed after the Committee on Foreign Investment in the United States refused to okay the deal. Then, HNA withdrew on its own accord from the HSH Nordbank sale in Hamburg.

“The Chinese government wants to stop the capital drain.”

Huang Weiping, professor, Renmin University of Beijing

The US governmental committee has not yet approved the purchase of shares in Skybridge Capital, an umbrella hedge fund owned by the new White House communications director, Anthony Scaramucci. This isn’t necessarily due to politics, but a rumored backlog at the committee because important positions haven’t yet been filled. HNA insiders still hope the transaction will be completed by the end of the summer.

Despite these mishaps, the conglomerate says it still has room to maneuver. “For several months now, the HNA Group has signaled that, in response to our evaluation of the overall situation in comparison to 2016, the speed of our investments could slow down,” said an HNA spokeswoman. “But we continue to pursue a disciplined approach, to actively identify, evaluate and execute strategic takeovers.”

A slower pace of foreign investment would fit with the current political climate in Beijing: China’s government has become critical of the overseas shopping sprees undertaken by its financial behemoths. The huge indebtedness of companies like HNA and others including insurer Anbang, investment conglomerate Fosun and the Wanda real-estate giant is cause for concern and the firms must now provide information about their financial structures.

“The Chinese government wants to stop the capital drain,” said Huang Weiping, a professor at Beijing’s Renmin University. At the same time, Beijing fears that these companies might have miscalculated their investments. “Those firms pose a financial risk for China,” he said.

HNA financed many acquisitions through loans. For example, UBS and ICBC provided €473 million solely for its stake in Deutsche Bank, according to SEC documents. But the company dismisses any talk that it is highly indebted, insisting that “Our takeover financing is supported by healthy cash flows from our core business.”

Whether HNA has a debt problem is also crucial to Deutsche Bank. Its biggest stockholder is supposed to guarantee a degree of stability to the struggling lender. In the past weeks, rumors suggested HNA could be forced sell shares in Germany’s largest bank to lower its own indebtedness. That isn’t exactly what Deutsche Bank CEO John Cryan needs in the middle of a painful restructuring process that has only just started to pay off.

But the conglomerate counters such talk with soothing words: “In fact, the debt-to-asset ratio at the HNA Group is at a historic low in spite of our robust takeover activities,” the HNA spokeswoman said, adding that in the 2016 business year, the figure fell to 59.5 percent, the seventh annual decline in a row.

HNA denies that its debt reduction is caused by banks withdrawing: “We categorically deny that large, global investment banks have ended their cooperation with the HNA Group.” The conglomerate insists it works with various investment banks around the world. Bank of America is said to have recently issued internal instructions to have no more dealings with HNA. But the Chinese firm has had very little to do with that institution to begin with. “There is nothing to stop, because there was nothing to be stopped,” said the HNA spokeswoman.

 

Lea Deuber is a reporter in China with Handelsblatt’s sister publication, WirtschaftsWoche. Yasmin Osman is reports on banks from Frankfurt for Handelsblatt. To contact the authors: unternehmen@wiwo.de, osman@handelsblatt.com.

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!