Chinese entity created immediately before $2.1-billion offer for InnVest

Quick incorporation of Bluesky signals growing interest from wealthy Chinese families in hotel sector
Fairmont Royal York, Toronto
Fairmont Royal York, Toronto
When Bluesky Hotels and Resorts Inc. closed the deal for InnVest REIT Aug. 19, the financial media indicated the buyer was something of a mystery, a private Canadian company rumoured to be backed by Hong Kong money. Even the lawyers who do regular day-to-day work for InnVest didn’t know much more.

There’s a reason why. Bluesky was incorporated in Canada days before the transaction was announced.

Graham Gow, one of the partners at McCarthy Tétrault LLP in Toronto who acted for Bluesky, says the buyers “had us incorporate it so it would be the face of the transaction.” While Gow can’t say much about who owns the Canadian entity, he says that “they’re a family in Hong Kong. They prefer a low profile, so they haven’t been publicly identified over the course of this transaction. But they’re obviously wealthy and they liked the idea of investing in Canada — compared to the US everything’s on sale here, you get a 25-per-cent discount on our dollar compared to the US dollar.”

Bluesky made its offer in early April, and InnVest immediately turned to Norton Rose Fulbright Canada LLP, its transaction counsel. “This is a pretty exciting story in that this company’s board turned over on a settlement of a proxy fight three years ago,” says Walied Soliman, co-chair of the Norton Rose Canadian special situations team. “It changed management and changed its board and worked on improving shareholder value. And it was successful in identifying an acquirer in Bluesky, so it’s a big success story.”

The $2.1-billion deal started with the family looking for high-quality hard assets in Canada. Hotels offer both income and an appreciation in the underlying value of the land. The family was particularly in interested acquiring the Hyatt Regency in Vancouver, says Gow, and approached InnVest about selling that one hotel. InnVest turned them down, saying it was very happy with its portfolio as a whole.

When the family looked at the 109-hotel portfolio, it discovered several more “very impressive” hotels —  from the Fairmonts in Calgary and Edmonton to the 20-per-cent stake in Toronto’s storied Fairmont Royal York, ­which has hosted British royalty –– as well as reputable names such as Courtyard by Marriott, Delta, Hilton, Quality Suites, Holiday Inn and Travelodge. “That eventually led to the idea of, ‘Maybe we should buy the whole thing,’” says Gow.

Once the offer was received, Soliman says there was a “principals discussion that went on for several weeks,” and an extensive due diligence review leading up to the deal closing.

Several law firms say Canada’s hotel sector is just one of the areas on fire with wealthy private Chinese investors like Bluesky right now, and there are bound to be more deals. Private investors often don’t have the same sensitivities as some of the domestic institutional or strategic buyers who have to ensure they’re bidding at a proper rate of return or that the acquisition’s going to be immediately accretive.

Gow says that, in his experience, their No. 1 priority is to identify world-class assets, No. 2 is that it’s in a jurisdiction that is stable, and No. 3 may be price. “Having said that, we had a very vigorous negotiation with the board of InnVest over price. Price was definitely relevant, but was it the very first thing they were thinking about? I’m not sure it was.”

What makes Canada’s hospitality sector so attractive to private Chinese buyers, besides the combination of land and income, is the low risk of national security review. Unless the hotels are in close proximity to sensitive institutions, located in an airport, or frequented by high-ranking government officials, they don’t generally give rise to security concerns.

In fact, Gow confirms there was no full-blown national security review with InnVest. “We assumed going in it would be completely simple because these are hotels we’re talking about.” That’s not to say Investment Canada didn’t do its job, he stresses, saying it asked a lot of questions and obtained firm commitments.

It wanted Bluesky to comment, for instance, on what the employment levels were going to be going forward and what capital expenditures were going to, he says. “Bluesky’s response was, ‘Look, we’re buying this business because we like it. We not planning on shutting it down so of course we’re keeping the employees. We need them to run the hotels. And of course we’re going to continue with capital expenditures because these are terrific hotels and we want to keep the quality up.’”

Soliman says the transaction with Bluesky “was actually quite smooth” in the sense that often you hear talk about transactions with foreign-based acquirers being potentially difficult to consummate. He says Bluesky showed an understanding of the transaction-risk issues that were important to InnVest, and, at the same time, the Canadian company understood and respected the unique requirements that a foreign acquirer needs to get comfortable. “There was a very constructive dialogue between principals and counsel which enabled this transaction to cross the finish line.”

He cites increased transaction risk as one example. Bluesky deposited $100 million of the purchase price prior to the announcement of the transaction to help “derisk” the chance of the deal not closing. “There were very clear circumstances where that $100 million would be lost if the deal didn’t close,” Solimon says. “They wanted a very clear perception in the market that, if we didn’t get to close, there was going to be money in the bank.”

Was Bluesky formed as a single-acquisition vehicle? Definitely not. When the InnVest deal was announce, Bluesky Chief Executive Li Chen that the new Canadian company represents “a platform” from which to continue to pursue growth opportunities in North America. Many large corporate law firms say they are getting an increasing number of inquiries from private Chinese investors like Bluesky.

Will the deals all come in the hospitality or real estate sectors? Probably not. Gow, for one, believes the next big wave of Chinese investment will come in an entirely different area: renewable energy.

“There are a lot of renewable energy power assets up for sale. Northland Power is looking at strategic alternatives. Veresen Inc. put something out recently. Those are again world-class assets located in Canada. My guess is they will be very much of interest to some Chinese investors. We’re seeing interest on that front.”

For Canadian companies leery of doing deals with any foreign buyers, Soliman says this was an excellent model as to how it can get done. His best advice to potential Canadian targets? “Ensure both advisors and principals are both creative and open-minded in their approach to getting the deal announced and closed.”

 

*Correction: A previous version of this article misidentified one of the counsel. McCarthy Tétrault LLP represented Bluesky Hotels and Resorts Inc. and Norton Rose Fulbright Canada LLP represented InnVest REIT on the deal. Lexpert apologizes for the error.