CORRECTED-U.S. regulatory scrutiny scuppers deal for unit of China's HNA
HNA Group Co Ltd`s $416 million investment in U.S. in-flight services firm Global Eagle Entertainment Inc
HNA still awaits U.S. government approval for another deal, agreed in January, to buy a majority stake in hedge fund investment firm SkyBridge Capital LLC from Anthony Scaramucci, U.S. President Donald Trump`s new communications director.
Global Eagle said in a securities filing late Tuesday that the deal was cancelled because the Committee on Foreign Investment in the United States (CFIUS) had not completed its national security review by a so-called "outside date" agreed in its deal with HNA. Global Eagle shares dropped 6 percent to $3.09 in afternoon trading in New York on Wednesday, giving the company a market capitalization of $270 million.
Global Eagle and HNA did not elaborate on the reasons for the regulatory rejection, but a source familiar with the matter said that the protection of customer data passed on through Global Eagle`s WiFi service was a major area of concern for CFIUS.
"Anytime you do anything with a communication system, there`s always additional caution," said James Lewis, a senior vice president at the Center for Strategic and International Studies, who followed the deal but was not involved in it.
"Think about people who use airline satellite systems. They`re often in business class. It would be a good system to monitor."
CFIUS, which assesses international acquisitions for potential national security risks, has objected to a historically high number of deals this year, people familiar with the matter told Reuters last week.
The more conservative stance under U.S. President Donald Trump coincides with growing political and economic tension between the United States and China.
At the same time, China`s government is increasingly scrutinising banking relationships and aggressive overseas deal-making of some large conglomerates as it looks to stem the flow of capital leaving the country.NATIONAL SECURITY CONCERNS
HNA unit Beijing Shareco Technologies Co Ltd agreed to buy up to 34.9 percent of Global Eagle in November, which would have made it the single largest shareholder of the provider of satellite-based connectivity and media to sectors including aviation, maritime and home entertainment.
In April, Global Eagle Chief Executive Jeffrey Leddy said CFIUS had found "unresolved national security" concerns and that a new application would explore "mitigation alternatives".
Neither Global Eagle nor CFIUS responded to emailed requests for comment. Beijing Shareco did not respond to Reuters` queries. HNA declined to comment.
Chinese firms in recent years have been scouting for U.S. targets as varied as hotels and film studios, to expand in the country and hedge against a weaker home currency. They have announced 87 deals this year in the United States, a record high and up from 77 in the corresponding period of 2016.
But with CFIUS becoming more conservative, deals success is less certain. Deals that collapsed while under review include U.S. electronics maker Inseego Corp`s
Chinese deals awaiting approval include Ant Financial`s $1.2 billion purchase of U.S. money transfer company MoneyGram International Inc
As China cracks down on showy overseas ventures and high-profile empire builders, pressure is rising on sprawling, fast-growing and acquisitive companies such as HNA, which has announced $50 billion of deals over two years, buying stakes in logistics companies, hotels and even Deutsche Bank Group AG
HNA disclosed an ownership change this week, after two major shareholders, Bharat Bhise, CEO of Bravia Capital, and Guan Jun, a Beijing businessman, who owned 17.4 percent and 12.35 percent of the company respectively, transferred their shares to a New York-based charitable foundation. HNA said the change was aimed at advancing its philanthropic mission and maximising "efforts in corporate social responsibility".
On Monday, HNA also brushed off concerns that some Wall Street banks were shying away from its business, and said it maintained a strong working relationship with key banks including JPMorgan JPM.N, UBS UBSG.S and Morgan Stanley MS.N.
The investment agreement with Global Eagle also involved establishing a Chinese joint venture providing Chinese airlines with in-flight entertainment and connectivity (IFEC) services, in which the HNA unit was to hold a controlling stake.
Global Eagle said it continued to operate under existing agreements to provide other equipment and services to HNA-affiliated carriers Hainan Airlines Holding Co Ltd , Beijing Capital Airlines Holding Co Ltd and Yangtze River Airlines Co Ltd.
(Corrects paragraphs 3 and 4 company name to Global Eagle instead of Global Eye.)