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Geely settles commercial terms for acquisition of Volvo

HANGZHOU, Zhejiang – Zhejiang Geely Holding Group Co., Ltd. (Geely), China’s leading privately-owned automotive group, announced on December 23 it has settled all substantive commercial terms with Ford Motor Company related to the proposed acquisition of Volvo Car Corp.

Geely now expects to sign a definitive stock purchase agreement with Ford in the first quarter of 2010, paving the way for potential completion of the transaction in the second quarter of the year. Further discussions will focus on finalization of documentation and financing, as well as government approvals, Geely said in a company statement.

The agreement on commercial terms follows detailed discussions with Ford, which have intensified since Geely was named the preferred bidder for Volvo in October 2009, according to the statement.

While Ford would continue to cooperate with Volvo Cars in several areas after the proposed sale, the company does not intend to retain a shareholding in the business post-sale, according to a Ford statement.

The announcement of the Geely-Volvo deal was only days after another Chinese automaker, BAIC Holding, announced the purchase of Saab assets. Chinese automakers are aggressively making their way into the global automotive market through buying foreign brands or assets.

Largest overseas acquisition

The value of the deal was estimated at under $1.9 billion, far short of the $6.45 billion that Ford paid for Volvo in 1999. However, if successful, it will be the largest acquisition of a western auto brand by a Chinese company so far.

The price is not a small figure for Geely, which started from making of economic cars. Earlier reports said Geely had reached credit agreements with three Chinese banks on funding for the acquisition. Bohai Industrial Investment Fund Management Co., Ltd., which has lately bought stake in China’s largest independent automaker Chery, was also said to provide cash to Geely for the transaction, according to sohu.com.

A Goldman Sachs Group-managed private equity fund also poured about $250 million in Geely in September to support Geely’s ambitious expansions.

The Chinese central government already gave Geely the nod in August to buy the stricken automaker from its current owner Ford. Compared with the Tengzhong-Hummer deal, the Geely-Volvo transaction has received support from the Ministry of Commerce according to recent positive comments made by its spokesman.

Geely’s acquisition of Volvo would give a Chinese automaker the technology and market for luxury cars, according to local analysts. Some believe that it represents a milestone in the competition between Chinese automakers and multinational companies.

New developments

“Should a stock purchase agreement be finalized, Volvo will retain its leadership in safety and environmental technologies, and will be uniquely-positioned as a world leading premium brand to exploit opportunities in the fast growing China market,” Geely’s chairman Li Shufu said in the company statement.

On the issue of running Volvo worldwide, Li Shufu intends to retain the existing management team, tooling and R&D equipment in the transition period. In the future Volvo would be led by an independent management team and its headquarters would still be in Gothenburg. The team will be led by Tong Zhiyuan, former senior executive with Beijing-Daimler Benz who has just joined Geely as COO for its Volvo project.

Analysts believe that the most urgent task Li Shufu faces is to solve the capacity issue at Volvo’s European plant, which only has a utilization rate of about 60 percent. Geely said it would commit itself to improve the rate before moving production to China.

As for the Chinese market, Geely has chosen Beijing Yizhuang Economic Development Zone as the location of Volvo’s new China plant, which would have a yearly capacity of 300,000 vehicles. A new technical center will also be built there where Volvo engineers from its headquarters in Gothenburg, Sweden, would work. The new base will need an investment of $1.9 billion, which will be jointly provided by Geely and Beijing municipal government, according to sohu.com

By setting up a plant in Beijing, Geely eyes to gain government procurement orders to compete with other premier auto brands in the Chinese market, according to analysts.

Currently, the Volvo S40 and S80L are being assembled in China by Chang’an-Ford-Mazda Automobile Co., Ltd. (CFMA), which has signed with Volvo two 10-year pacts of contract production of the two models in 2007 and 2009 respectively.

Geely will talk with Chang’an Auto and Mazda to coordinate production of the two models, according to an insider, quoted by sohu.com. However, a spokesman from Chang’an Auto said: “CFMA’s contract production will not be changed. We have not been affected by Geely’s acquisition until now and will act according to the existing pacts.”

The Shadow of SAIC Ssangyong

This is not the first time for a Chinese automaker to buy a foreign auto brand. Geely’s acquisition of Volvo is similar with SAIC’s purchase of Ssangyong, Korea’s fourth largest automaker. However, the transaction became a flop after Ssangyong was announced bankruptcy protection in January 2009.

In 2005, SAIC acquired 51 percent stake of Ssangyong and became the largest shareholder of the struggling Korean automaker. Stricken by the economic crisis, Ssangyong entered court receivership last January and SAIC is no longer able to use its management right in the Korean company. The Chinese auto manufacturer said it had lost at least ¥3 billion ($430 million) in Ssangyong.

“Evaluation of mergers and acquisitions, especially those involving a multinational corporation, often lies in whether or not synergy can be realized and the merged company can report positive performance,” Jones Zhong, veteran auto analyst and chief editor of Qiche Yaowen, CBU‘s Chinese language newsletter, told CBU/CAR.

“Geely should first guarantee Volvo’s normal operation. It will not only involve the issue of investment, but also the outside environment, for instance, the Swedish government, labor union and Volvo employees. Geely must deal with these relationships well, which is the key for Chinese automakers to go global,” said Jia Xinguang, senior auto industry analyst. “Secondly, Geely should make Volvo function as a hatchibator of model lineups. Volvo has strong R&D capability and unique innovation in auto safety, which can help improve Geely’s product development. Chinese automakers used to simply satisfy with moving back the equipment from a purchased brand, which is shortsighted. Last but not the least, Geely has to learn from Volvo in terms of company management.”

Given the fact that Volvo has been integrated into Ford Motor’s vehicle platforms, analysts doubt if Geely could get much of the real Volvo technologies in the deal. According to Geely spokesman Yuan Xiaolin in a media interview, Geely will be able to “use the intellectual property rights” of Volvo vehicles, but such rights would still be owned by Ford.

When the deal is closed, Volvo will join Geely’s multi-brand family. Geely has named three sub-brands for different segments: Gleagle for volume, entry brand cars; Emgrand for luxury cars and Shanghai Englon for prestige cars. The three brands are run by different units and have separate distribution networks. The Volvo cars, in the future, will be sold in an independent network, according to latest reports.

Volvo’s U.S. sales in the January-October period of 2009 fell 20 percent from a year ago to 51,166 units. The brand’s Europe sales also declined in 2009, ebbing 21.2 percent to 122,414 vehicles in the January-August period.

Geely’s total sales increased 44.43 percent year-on-year to 290,041 vehicles in the first 11 months of 2009, according to CBU-Autostats.

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