October 12,2009

Tenzhong Comes to Terms on Hummer

By CT Johnson

Four months after stunning the automotive world with its bid for GM's Hummer division, Sichuan Tenzhong Heavy Industrial Machinery Co. announced Friday that it has reached definitive terms with GM over the sale of the iconic brand.  The deal, which was first announced on the GM website, is reportedly worth $150 million, well shy of the $500 million GM expected to realize from the sale when Hummer was originally offered for sale in June 2008.


"Hummer is a strong global niche brand and this agreement signifies another important milestone in writing the next chapter for both GM and Hummer," said Fritz Henderson, GM President and CEO.  "For Hummer, the combination of its knowledgeable leadership team, vehicle design expertise and the capital financing of Tenzhong portend a successful future."


Tenzhong will acquire Hummer through an investment entity, in which it will own an 80% share.  The remaining 20% stake will be held by Suolang Duoji, an entrepreneur with holdings in the Hong Kong-listed thenardite maker Lumena.  Per the agreement, Hummer will continue to manufacture the specialty vehicles at its US plants until 2011, maintaining jobs for 800 US workers at in Shreveport and Hishawaka. 


Sichuan has faced significant challenges from the Chinese government over the proposed acquisition.  Reports in the official Chinese media originally indicated that Beijing was caught off guard by the June 3 announcement that Tenzhong was buying Hummer.  Later reports emerged that the National Development and Reform Commission, one of at least three government bodies that must sign off on the deal, would block the deal over concerns about the poor fuel economy and high environmental impact of Hummer's gas-guzzling SUVs.


The latest development in the Tenzhong-GM negotiations brought a fresh objection from China's Commerce Ministry, which said Saturday that is had not received an application from Tenzhong to buy the US automaker.  An unnamed Ministry official was quoted on Chinese state radio as saying, "The Ministry of Commerce has yet to receive an application concerning Tenzhong's purchase of Hummer.  Currently, the Sichuan province commerce office is preparing to report the situation to the Ministry of Commerce, and because nothing is known about the specific content of the purchase agreement, for now (the ministry) will not say any more."


For now, the Ministry of Commerce has not raised any regulatory obstacles to the deal and Jim Taylor, the GM executive tasked with steering the sale through the Chinese regulatory process, said that Chinese officials have signaled that the deal will be approved.


If the deal closes, it would be the first major acquisition of a distressed US automaker by a Chinese firm.  The Chinese auto industry, which has grown remarkably in the past five years, is seeking to improve its quality image, with the ambition to gain the advanced technology and full design capabilities of international brands like Hummer.  Beijing Automotive attempted to purchase GM's European Opel brand during the summer, but the deal fell apart over technology transfer issues.  Geely Automotive is currently in the hunt for Volvo and is rumored to be the only party interested in acquiring the famed Swedish brand. 


Hummer will continue to be managed by its existing management team, including James Taylor, Hummer's chief executive officer.  This decision underscore's Tenzhong's inexperience in passenger vehicle manufacturing and the risks it faces in the acquisition. 


Nonetheless, Yang Yi, chief executive officer of Tenzhong, was enthusiastic about the acquisition and its prospects for the future.  "This transaction marks an exciting step for both Tenzhong and Hummer, as we invest in a business that has significant opportunity in the US and around the globe," he said on Friday.  "We are excited about some of the initiatives already underway at Hummer that we believe our investment will be able to accelerate, particularly related to the creation of the next generation of more fuel-efficient vehicles that meet not only future regulations but also customer expectation."


Time will tell if Mr. Yang's confidence is justified.

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