Geely to buy Volvo for $1.8 billion

Zhejiang Geely's $1.8 billion acquisition of the Volvo brand from Ford Motor Company epitomises how growing Chinese companies are setting a new order for global business and how the Chinese government is playing its role in this.

Zhejiang Geely is one step closer to its dream of owning an international luxury brand and getting access to world-class technology. The company entered into a formal sale and purchase agreement with Ford on Sunday to buy its Swedish brand in the largest overseas acquisition by a Chinese auto company, but how well Geely will handle the world's best known premium car brand remains to be seen.

The deal is expected to be completed in the third quarter of 2010. It is subject to customary conditions including regulatory approvals, but analysts say the Chinese government will spare no effort to facilitate the acquisition.

Under the agreement, Geely will acquire 100% of Volvo and related assets, primarily intellectual property. Ford will get $1.6 billion in cash and a $200 million note from Geely, according to a press release.

Ford has been moving to shed non-core brands in an effort to survive declining sales and avoid a government bailout. In 2008 the Detroit-based auto-maker sold its British brands, Jaguar and Land Rover, to India's Tata Motors for $2.4 billion and it has been trying to sell the Volvo unit since late 2008 to focus its resources on managing its core Ford, Lincoln and Mercury brands. Ford bought Volvo Cars from AB Volvo in 1999 for $6.45 billion.

For Geely, to amass enough capital to pay Ford could be a problem given years of aggressive investment and expansion in China's nascent car market. But its strong connections with the central government, without which the Volvo acquisition would not have been possible, have helped pave the way and state-owned banks and investment firms are queuing up to invest in Geely.

Meyrick Cox at Rothschild & Sons, Geely's adviser on the deal, said the carmaker is well-financed. "The acquisition finance is entirely equity, the majority of which comes from Zhejiang Geely, with a minority from provincial government investment vehicles, which are not disclosable at this stage. Geely also has substantial working capital funding from a range of banks, including Chinese, Swedish and other international banks, bringing the total funding to about $2.7 billion," he said.

The agreement signing ceremony was witnessed by Li Yizhong, China's minister of industry and information technology, and "that is a strong signal saying the Chinese government will absolutely give its best support to ensure the success of the deal", said Yin Guogui, a Beijing-based auto analyst at Bank of Communications International. 

However, Geely, while becoming the pride of China's auto industry as a result of acquiring Volvo, "will face challenges and pressure from the West", Yin said.

The 24-year-old internationally inexperienced Geely is expected to face tough challenges in managing and running the 84-year-old Volvo in a country as far away and as different from China as Sweden. Geely has little experience selling even its own cars outside of China.

Geely earned its fame from making inexpensive vehicles, which could be a drag on Volvo's reputation for quality and performance. Despite their growing earnings, Chinese companies are generally lacking in international stature and Geely, like many of China's leading auto makers, has struggled to upgrade its image in overseas markets. It has long coveted a bigger foothold in the West and was earlier rumoured to be bidding for both Opel and Saab.

Geely's chariman, Li Shufu, has reiterated on several occasions that he doesn't plan to merge Volvo and Geely, and that Volvo will remain an independent brand.

"Volvo will continue building cars in Sweden and intends to keep existing manufacturing facilities in Sweden and Belgium. They are likely to build factories in China, but these Chinese factories will be making Volvos for China and Asia only, not for the Western market," said Cox at Rothschild & Sons.

Shares in Geely Automobile, Zhejiang Geely's Hong Kong-listed unit, gained 1.5% yesterday to HK$4.16 and were up as much as 4.9% intraday, despite the fact that the listed company said in a statement to the Hong Kong stock exchange that it is not in discussion with its parent group on any form of co-operation in relation to the Volvo acquisition.

Citi and J.P. Morgan are advising Ford on the deal.