DealZone

Volvo purchase: an exceptional Chinese deal?

Zhejiang Geely Holding Group’s acquisition of Volvo from Ford for US$1.8bn means a Chinese carmaker has finally succeeded in reaching agreement to buy a Western marque. Ford originally put the Swedish brand up for sale nearly three years ago, as GM looked for a buyer for its notoriously gas-hungry Hummer.

Sichuan Tengzhong Heavy Industrial Machinery, advised by Credit Suisse, agreed to buy Hummer last June but that deal was later shelved. Similarly Beijing Automotive Industry Holding Co pulled out of a possible purchase of GM’s Swedish asset Saab. That deal had been fronted by smaller Swedish luxury carmaker Koenigsegg.

At the time, advisers murmured that these deals had been killed by the Chinese authorities baulking at allowing smaller vehicle makers in the unconsolidated Chinese market buying tired Western consumer brands. These would have needed significant investment to be restructured.

Geely, which is backed by a Goldman Sachs private equity fund, is in a different league. Its move, principally funded by US$1.6bn cash, looks credible and Volvo is in better shape and might need less effort to turnaround, fuelled by rampant Chinese demand, than other autos on the block. One estimate says China’s will post 12% annualised GDP growth this quarter.

That said, the Chinese state itself, although backing private company Geely’s deal, still seems more focused on easier asset deals. On the same day state oil company Sinopec has splashed out US$2.5bn on African assets, this time offshore from Angola. Ironically these were owned by Petrochina.

DealZone Daily

Time Warner is considering making a second-round bid of up to $1.5 billion for Hollywood studio Metro-Goldwyn-Mayer, a source tells us. The March 19 deadline for the bids for MGM — whose film library includes the James Bond and Pink Panther franchises — may well be extended.

Shares in Arrow Energy have been suspended — the suspicion is that Royal Dutch Shell and Petrochina will sweeten their joint $3 billion offer for the Australian gas producer. Read the Reuters story here.

And as I am writing this, London-listed Gulfsands Petroleum is saying that it has rejected a preliminary takeover approach. The suitor is Indian, it has also said, but it’s not ONGC. To be continued.

Battered car-makers rounding blind corner

AUTOSHOW/(Update: This piece was written, as several commenters have pointed out, before GM clinched a sale of Saab to Spyker on January 26.)

By Quentin Carruthers

(Acquisitions Monthly) Automakers face a demand slump in Europe and the longer-term challenge of addressing climate change. Both pressures are expected to lead to further restructuring, consolidation and M&A activity.

The North American International Auto Show, held each January in Detroit, Michigan, is just coming to an end. Detroit is the hometown of America’s “Big Three” automobile makers – Ford, General Motors, and Chrysler – and the show constitutes one of the most important events in the industry’s calendar.

Volvo’s Chinese journey

News that Ford expects to finalize the sale of Volvo to China’s Geely in the first half of 2010 caps a year that saw China overtake the United States as the world’s biggest auto market, something that would have been unthinkable only a few years ago. With Geely rival BAIC announcing its intention to harvest intellectual property from Saab, Chinese automakers are going into high gear in both their short-term goal of serving the high-octane domestic market and their longer-term ambition of retooling their manufacturing base to better serve the global automotive market.

Geely is China’s largest private automaker. Its charismatic founder, Li Shu Fu, is known as the Chinese Henry Ford. He has shown global ambitions and has pushed for Geely to become a global brand.

It’s a road well traveled, the highway from Asia’s industrial heartlands to the world’s garages. Japan and South Korea have blazed the trail thoroughly. Rather than ponder the significance for lumbering Western automakers who are shedding assets to stay alive, it’s worth wondering what Toyota and Hyundai make of their Chinese cousins.

Money no problem for Geely’s Volvo bid

Goldman Sachs has been known to pick a few winners in its day. The $334 million it plunked into the Chinese automaker Geely in September may prove to be one of its craftiest bets.

Geely, picked as the preferred bidder for Ford’s Volvo unit, is seeking at least $1 billion in loans from Chinese banks to finance a $1.8 billion bid, sources say.

Geely means “lucky” in Chinese. But with the bankers it has lined up, the company probably doesn’t need much in the way of luck. Bank of China, China Construction Bank and Export-Import Bank of China have agreed to extend it loans, our sources tell us. That’s about as mighty a banking syndicate as you can get in the People’s Republic.

from Breakingviews:

Safe Volvo a risk bet for China’s Geely

Shares in Geely Automobile have risen some 40 percent in the past month partly on hopes the Chinese carmaker's parent company will buy Volvo. Ford has named Geely as preferred bidder for the Swedish marque. But on this occasion it could be better to travel hopefully than to arrive.

Buying Volvo would be a huge mouthful for Geely. If it goes ahead, Geely and founder Li Shufu will have to write Ford a cheque for $2 billion. But that's just for starters. Volvo lost $1.5 billion last year. Assuming it continued at the same rate during Geely's first year of ownership, the Chinese would pretty quickly be in for $3.5 billion.

By way of comparison, that is almost 20 percent more than Geely Automotive's enterprise value of just $3 billion. And it doesn't include any further investment Geely might make. The long-term plans being talked about in the media suggest the total could hit about $10 billion. Achieving an acceptable return on that would require a dramatic turnaround in Volvo's fortunes.

Ford picks Geely… for now

Whatever reservations Ford may have had about selling Volvo to Geely and potentially exposing all of its competitive secrets to pirate-infested Chinese markets, they appear to have been laid to rest … for now.

The U.S. automaker named a Geely-led consortium as preferred bidder for the money-losing Swedish unit, estimated to be worth about $2 billion. The news is conspicuously coincidental — as many such stories are — with intensely routine negotiations in Hangzhou between top trade officials of the two countries. Naturally, Ford left open the possibility that it could back out of the deal, saying more detailed talks were needed.

It’s been nearly a year since Ford began efforts to sell Volvo, and only a week ago a source was telling us that concerns about intellectual property rights were threatening to scupper the deal. That followed news of a former Ford engineer’s arrest in the United States on charges of stealing trade secrets from Ford and using them to try to get work with Chinese auto makers. Good thing Volvo is such a safe brand; even with a preferred bidder in place, this asset sale could prove to be a wild ride.

Deals du Jour

At long last, Europe may see its first sizeable IPO: Aviva says it expects to complete the flotation of its Dutch unit, Delta Lloyd, in November. And shares in Telenor jump 15 percent after it settles a long-standing row with Russia’s Alfa Group. The agreement will involve a pooling of assets between the two companies. For these and other stories on deals, click here.

And here’s what we found of interest in other media today and over the weekend.

Shoprite Holdings Ltd chairman Christo Wiese is looking to swap some or all of his stake in Africa’s biggest grocer for stock in furniture maker Steinhoff, a South African newspaper reports.

from Commentaries:

Is Goldman’s Chinese convertible really a taxi?

BRITAIN/The number of London's trademark black taxis booked and waiting outside the European headquarters of Goldman Sachs -- meters running -- was once used by some as a barometer of the health of London's investment banking business.

When times were good, the queue was long and it was impossible for anyone else in the vicinity to hail a cab. But when the fees dried up, or markets turned, the cabbies who'd been at Goldman's beck and call suddenly had to find new customers.

Last year, Goldman was reported to have stopped free taxis home for staff working in the office after 9pm, extending this to 10pm.

from Commentaries:

China picks European cars off scrapheap

GERMANY/Chinese carmakers are seeking to step into the gaps left by U.S. companies in Europe -- but while acquisitions may give them access to badly-needed technical know-how, global brands and exposure to new markets, the question is whether they have learnt from past failures.

With China now the world's largest car market, it's no surprise that Chinese carmakers -- which have few if any really solid brands within their home market -- want to start making more of a mark.

In theory, foreign acquisitions offer a quick way to do so. Meanwhile the credit crunch has thrown world-renowned but now distressed car marques such as Volvo, Opel or Saab onto the block at what look like rock-bottom prices.