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Tengzhong will likely buy Hummer through offshore entity
Alysha Webb | 2009/7/22

Los Angeles -- Sichuan Tengzhong Heavy Industrial Machinery Co. has applied for approval from China's National Development and Reform Commission for its acquisition of Hummer, Tengzhong's corporate communications firm Brunswick Group LLP told Automotive News China.

Under the existing regulations in China, the Commission's approval is needed if the Chinese company wants to build the Hummer in China.

Tengzhong has yet to seek the approval from China's Ministry of Commerce were it to invest in the troubled U.S. brand from within China. But this may not be necessary.

The Chinese company is likely to acquire Hummer through an offshore entity, says Tim Payne, a managing partner at Brunswick Group LLP.

In June Chinese media reported both Tengzhong and Lumena Resources Corp., a Sichuan-based chemical company, are controlled by Li Yan, who also has a Tibetan name--Suolang Duoji. Chinese media also say it is Li who wants to buy Hummer.

And Li, a Sichuan native in his late 40s, does own an offshore company.

In mid-June, Lumena Resources launched an IPO on the Stock Exchange of Hong Kong raising HK$1.15 billion ($148.9 million).

According to Lumena Resources' IPO prospectus, Li owns a controlling 43.1 percent interest in Lumena Resoruces through his wholly owned offshore company, the British Virgin Islands-incorporated Nice Ace.

In response to Chinese media reports, Lumena Resources says in a public statement in June Li does not own any interest in Tengzhong.

But the statement adds: "As confirmed by Mr. Suolang, he would or might participate in the proposed Hummer acquisition in his personal capacity alongside Sichuan Tengzhong as a member of a consortium."

To date, no price has been announced for the Hummer dealí¬both parties signed a confidentiality agreement. But Tim Payne says $150 million to $200 million "is about right." The acquisition will likely be made through an offshore entity, he says.

A"private equity approach"

Why Tengzhong wants to buy Hummer?

Tengzhong's owners were working with Credit Suisse Hong Kong on another deal when the European investment bank told the Chinese firm that Hummer was for sale.

Tengzhong's entrepreneurial owners were looking for a good investment. For Hummer, Tengzhong's long-term approach stood out among its various suitors. 

"The investment horizon on an Asian company is not six months or one year like American investors," says Jim Taylor, CEO of Hummer. "They are more patient."

Tengzhong's announcement in early June that it would buy Hummer was greeted with skepticism in China and the West. But from signing up top investment banks to paying for a long-term product planning strategy, Tengzhong is taking the usual steps any investor would take before a major acquisition.

"They have been serious and thoughtful about this acquisition from the start," says Shah Firoozi, president of The PAC Group. The consultancy in Shanghai  has been working with Tengzhong for several months on plans that will "enable Tengzhong to expand the current Hummer portfolio and market it globally," says Firoozi.

Says a former GM executive who helped bring the two parties together: "It makes sense" to Tengzhong to buy Hummer.

Tengzhong, a privately-owned conglomerate based in the southwest China province of Sichuan, has grown over the past several years by acquiring companies as diverse as a bridge components maker and a wind energy firm. It views the Hummer acquisition as a similar investment, says Taylor, who will continue as president after the acquisition.

The Chinese company is taking a "private equity approach" by allowing the current management, including Taylor, to stay on after the sell, he says.   Taylor figures that will cushion the culture clash between Hummer and its new owners.

(Tengzhong executives think) "we're going to buy it and you are going to run it," he says.

Yang Jian contributed to this report.

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