Why Was HNA Group’s Investment in Global Eagle Entertainment Blocked?
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APEX Insight: HNA Group’s proposed $416-million investment in a joint venture with Global Eagle Entertainment failed to secure US government clearance last week. Why was it blocked? Protection of customer data passing through GEE’s in-flight Wi-Fi service was one reason. But HNA Group’s opaque ownership structure is also raising questions.
HNA Group’s hopes of increasing its presence in the in-flight entertainment market took a dent last week. HNA subsidiary Beijing Shareco Technologies’ proposed $416-million investment in a joint venture with Global Eagle Entertainment collapsed after it failed to secure clearance by the Committee on Foreign Investment in the US (CFIUS), an inter-agency committee that reviews international acquisitions for potential national security risks. The deal, announced in November 2016, would have seen HNA Group’s Shareco subsidiary acquire a 34.9-percent stake in GEE for $103-million and 51-percent majority ownership of the JV, which would deliver in-flight entertainment and connectivity to HNA-owned airlines. So why was it blocked?
Overseas Spending Spree
A maelstrom of acquisitions, including a 25-percent stake in Hilton Worldwide, a 9.9-percent stake in Deutsche Bank and takeovers of Swissport and gategroup saw HNA Group emerge as a major global player in the international aviation and tourism industries. Its HNA Aviation subdivision has sizable or majority shareholdings in 13 Chinese airlines and five overseas airlines, including Azul and Virgin Australia. One of main reasons for the HNA’s $40-billion global spending spree was to hedge against the weakening value of the Chinese yuan, but it caught the attention of Chinese and American regulators.
In late June, the China Banking Regulatory Commission asked banks to check their loans to HNA and three other fast-growing companies: Dalian Wanda, Fosun and Anbang. Rumors soon swirled that China’s banks were halting loans. The Economist said the risk from China’s point of view is twofold. Firstly, the cash exodus puts pressure on the Chinese yuan, forcing the central bank to eat into foreign exchange reserves to prop up the currency. Secondly, much of the investment has been funded through domestic borrowing, increasing the risk of crippling debts if the overseas assets perform poorly.
Data Concerns
Neither GEE nor HNA disclosed the reasons for rejection by the CFIUS. However, an unnamed source told Reuters that an area of concern for CFIUS was the protection of customer data that passed through Global Eagle’s in-flight Wi-Fi service. In April, GEE CEO Jeff Leddy said CFIUS had found “unresolved national security” concerns and that a new application would explore “mitigation alternatives.” In a separate article published two weeks ago, sources told Reuters that the CFIUS had objected to at least nine acquisitions of US companies by foreign buyers. The news agency said this “historically high number” indicates that the CFIUS “is becoming more risk-averse under US President Donald Trump.”
Some US media outlets have pondered whether the abrupt dismissal of White House communications director Anthony Scaramucci just 11 days after his appointment may have been about more than his verbal tirade on live television. Jim Rickards, editor of investment newsletter Strategic Intelligence, told CNBC that the $200-million sale of Scaramucci’s hedge fund, SkyBridge Capital, to HNA Group subsidiary HNA Capital, raised a red flag. The acquisition was finalized in January, but is currently pending CFIUS approval.
Opaque Ownership
Bank of America has suspended business dealings with HNA Group due to its opaque ownership details. The New York Times cited a June 28 internal e-mail from Bank of America’s Asia Pacific president Matthew M. Koder, saying, “We simply don’t know what we don’t know, and are not prepared to take the risk.” He told colleagues that “given the importance of maintaining rigorous client selection standards, we have decided not to be involved with transactions with the HNA Group at this point in time.”
With the hope of allaying concerns about its ownership structure and allegations that relatives of top Communist Party officials held stakes, on July 24, HNA Group disclosed that a New York-based non-profit organization called the Hainan Cihang Charity Foundation now owned 29.5 per cent of the company. That stake was until recently held by a businessman named Guan Jun, who had donated it to HNA’s US-based charitable organization. Combined with a 22.8 percent stake held by HNA’s sister charity in China, the group said 52 percent of it is now owned by the Cihang foundations.
HNA Group has acknowledged that its pace of acquisitions will likely slow down this year. “HNA Group signaled several months ago that our investment pace was likely to moderate somewhat this year relative to 2016,” it said in a statement.