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Geely to Pay 1.8 Billion US Dollars for Volvo
Summary:

Cover,issue 454, Jan 25
Translated by Tang Xiangyang
Original article:
[Chinese]



Privately-owned Chinese automaker Geely Automobile, is expected to finalize its acquisition of Volvo by Feb. 8, a source closely involved in the deal revealed to the Economic Observer. The final purchase price will not exceed 1.8 billion US dollars and may even fall below 1.6 billion US dollars.

The Ford Motor Company spent 6.5 billion US dollars to purchase Volvo in 1999, which means it will lose 4.6 billion US dollars in the deal.

Geely will acquire net assets worth more than 1.5 billion US dollars in the deal, according to the same reliable source.

The acquisition has the support of China's National Development and Reform Commission (NDRC), and over the next few days, officials from the NDRC and related government departments will visit Sweden to hold consultations with Swedish officials, the source revealed.

Geely: Controlling Shareholder
 
Zhao Fuquan, vice chairman of the Geely Group, has been back in China over the past few days taking part in a capacity expansion project at Geely's Lanzhou production facility, though he plans to return to America very soon in order to join Geely's negotiating team in finalizing a deal with Ford.

According to the above source, the two parties have set a tentative signing date of Feb. 8, but because of the size of the project, he said no one could say for sure when exactly it will take place. However, he added that it's likely that a contract will be signed sometime before the middle of February.
 
There has been much concern about what impact the acquisition will have on the ongoing agreement between Volvo and the Chinese Chang'an Automobile Group. Chang'an currently has a contract with Volvo to manufacture the S80L and S40 models. EO's source told the newspaper that Geely will continue to honor the technology cooperation agreement that Volvo signed with Chang'an until it expires. Furthermore, Geely will provide a one-year-term transitional period for the Chang'an side. The only difference will be that Geely will now be Volvo's majority shareholder.
 
"During the acquisition, the purchasing process, the future operating model and the structure of the board will be the most important aspects," the source said.
 
As far as the acquisition goes, "Geely will dominate the deal, uniting private capital and related banks," he went on to explain, "that's to say, Geely will be the controlling shareholder. In terms of the operating model, the Volvo business, including research and development, marketing, purchasing, financing, quality supervision and production, will all remain completely independent of the Geely brand. This independent company will have its headquarters in Beijing and all the registration formalities have already been completed."

The New Board and Maintaining the Brand

The source went on to reveal that Geely has registered an international investment company, with initial registered capital of between 8 and 9 billion yuan. Geely will control the majority of shares, though other investors, including Chinese banks, will also contribute funds. Then in 2010, the company will gradually increase its capital to the value needed to acquire all the Volvo shares.
 
The Economic Observer produced an exclusive report on registration of this investment company and another firm earlier this year.
 
The source declined to reveal specific details about how much private capital and the banks were actually contributing to the acquisition vehicle, but hinted that Geely might hold more than 80 percent of the shares in the company.
 
Another note worthy aspect of the deal is that the board of China's Volvo project will be international. In addition to Geely executives, distinguished European businessmen will also be invited to serve on the board. 
 
The three moves mentioned above seem aimed at responding to remarks that Ford president and CEO Alan Mulally's made at the North American International Auto Show on Jan. 11.  Mr Mulally said that "Volvo is a great brand, we hope Mr Li Shufu will continue with its current development strategy and protect its brand name."

After officials from the central government's main economic policy setting body complete their consultations with Swedish officials, Geely Chairman Li Shufu plans to fly in to Sweden to sign the contract. Yang Xueliang, head of PR at Geely, also confirmed that "the two sides will sign the contract in February in Volvo's Sweden plant."  
 

A Good Deal

Given it's market value, Volvo was expected to be sold for around 2 billion US dollars. It now appears that Geely will purchase the company for 1.8 billion US dollars or even less.

This has led to speculation that the latest renewable technologies co-developed by Volvo and Vattenfall might not be included in the Geely deal.

Given that Ford's president and CEO is on record as saying that "all the assets of Volvo will be sold, but we will hold on to those technologies which belong to Ford."

But the EO's inside source denied this was the case. He said, "the 1.8 billion US dollar price is one that both sides are satisfied with. To ensure its 'One Ford' strategy, Ford will sell Volvo without any hesitation. Geely will get all the technologies it wants. The net asset evaluation made by financial experts will verify this."

Consultant's Report

Geely has employed Deloitte & Touche as its financial consultant. The company has produced a report evaluating Volvo's net assets.

The report describes Volvo as a company with net assets worth 1.5 billion US dollars and a sustainable profit outlook.

The company's brand value may reach 10 billion US dollars and the company employs a high-quality research team of 4,000 people that are able to develop low-carbon-emission products, including ten complete cars and three engines which may reach the Europe 6 and Europe 7 standards - currently, China is only capable of producing cars of Euro 4 standard.

Volvo also have 2,400 distribution points in more than 100 countries across the world and a highly-automated production line with a production capacity of 600,000 cars per year.

The low-carbon-emission products include hybrid cars, electric vehicles and alternative fuel technologies which will be able to meet America's 2015 CAFE standards.

Someone working in the auto sector said no Chinese auto company has ever had access to so much advanced technology. If they are indeed included, this deal would be a bargain for Geely.

It's also reported that after being purchased by Geely, Volvo may well continue to maintain certain business relationships with Ford. For example, Ford might continue to buy diesel engines from Volvo.



Links and Sources
Geely:
Official Site
Zimbio: Image of Alan Mulally, President and CEO of Ford Motor Company

Correction: When originally published we wrote "
This has led to speculation that the latest renewable technologies co-developed by Volvo and Vattenfall might now be included in the Geely deal." The sentence has now been corrected and now reads, "This has led to speculation that the latest renewable technologies co-developed by Volvo and Vattenfall might not be included in the Geely deal."


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