China's Geely Buys Australian DSI

Geely, one of China's largest private auto-makers, acquired the world's second largest gearbox manufacturer in secret in late March.

The oversea acquisition happened while China's state-owned mining giant Chinalco awaited the results of a review by the Australian government of its takeover of Rio Tinto, an Australian mineral resources firm.

Li Shufu, founder and chairman of Geely Holdings, signed an agreement to purchase all shares of Australia's Drivetrain Systems International (DSI) on March 27, though Geely did not disclose the deal's value.

A source close to Geely's top management told the EO that under the pressure of owing salaries to its 400 employees and poor performance, DSI did not quote a high price.

DSI saw 27 million US dollars in net assets by the end of December 2008, but it still owed 72 million US dollars in salary and debt to employees and creditors.

Geely said that after the deal it would retain the DSI brand and maintain independent operation of it.

This was the second oversea acquisition that Geely has staged in the last three years. In late October 2006, Geely acquired a 23% stake in Manganese Bronze Holdings, the leading maker of London's black taxi, and became its largest shareholder.

And it wouldn't be the last--Geely would search for more targets both domestic and foreign, one source from Geely told the EO.
How Geely secured enough funds for the deal has been put under the scrutiny.

Li Shufu said those came from 3 billion yuan in loans, 2 billion yuan from the capital markets, and 7 billion yuan that would have otherwise been payable to its suppliers."

But these loans and payables put Geely's debt to net worth ratio climb to over 90%.

A source close to the deal told EO that Geely would likely to resort to bridge loans from international investment banks and loans from domestic banks. Later, Geely would cash out on the upsurge in its stock price to increase its cash flows.