September 17,2009

Geely's Volvo Deal: Join Hands with an SOE Giant to Resolve Financing Problem

By CSC staff, Shanghai

Chinese carmaker Geely Automobile Holdings plans to issue convertible bonds and warrants worth $250 billion, though the company says this fund-raising has nothing to do with its plans to acquire Swedish car maker Volvo from Ford. Geely says it will join hands with a state-owned investment company to solve that financing problem.

 

Ford intends to sell Volvo at $2 billion, and Geely is now the only firm showing interest. The big question has been whether Geely has the wherewithal for the acquisition or how it will raise it. Volvo's 2008 sales totaled $14.7 billion, at a loss of $1.69 billion, while Geely's sales reached 4.29 billion yuan in 2008, about $628.5 million, with pre-tax profit of 920 million yuan, about $134.8 million.

 

Through Hong Kong-listed Geely Automobile Holdings, Geely has already been bargain-hunting overseas, with Vice-President Yin Daqing is the firm's overseas acquisitions trader. In March, Geely announced it would acquire Australian auto parts supplier DSI's business and business assets at no more than AU$58 million, saying payment would come from proceeds after placement of shares.

 

In October 2006, through directional issuing of additional shares of Geely Automobile Holdings, Geely acquired 30% of Manganese Bronze, a UK-based engineering firm and maker of the famed London Taxi, becoming the latter's largest shareholder. Later, through London Investment Company, Geely promoted Manganese Bronze to ally with Shanghai Maple and set up the joint venture Shanghai LTI Automobile Components (SLTI) and became SLTI's controlling shareholder.

 

Gui Shengyue, president and executive director of Geely Automobile Holdings, has more than once denied trying to acquire Volvo through the listed company. The parent company Geely Group will join with an investment company for the bid, and its listed arm will not participate. Some analysts have pointed out that funds from the issuance of the convertible bonds may be used to expand production. At present, Geely's two bases in Jinan and are in full swing.

 

Shares of Geely Automobile Holdings closed at HK$1.79 yesterday, down 9.6% over the past month, while the latest semi-annual report shows that Geely's sales in the first half year totaled 138,000, up 29% over the same period last year. Sales revenue reached 5.95 billion yuan, with net profit of 596 million yuan, up 145%.

 

It is not surprising for 12-year-old Geely to bid for 82-year-old car maker Volvo. In China, Geely is a low-market vehicle; for 30,000 yuan you can pick up a new one. Many Geely buyers like to replace the hood emblem with one from a Mercedes-Benz or BMW. Li Shufu, Geely's founder, has cherished the dream of making the world's best cars and luxury cars. It is hoped the funding problem can be solved if Geely joins hands with a cash-flush state-owned giant, though integration after any M&A would be a big challenge.

 

Stories of overseas acquisitions by Chinese firms have not been cause for optimism, either. Shanghai Automobile Industry Corporation's 51% stake in bankrupt Korean carmaker Ssangyong looks to be cut to 11.5% in a reorganization plan. And Geely's integration of Manganese Bronze over the past two years has not gone smoothly. In the first half of 2009, the joint venture company suffered a net loss of 11.7 million yuan, and with the decline in the UK market Manganese Bronze has sold only 1035 vehicles.

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