Tengzhong, the Chinese buyer of General Motor's Hummer brand, aims to close the deal by early 2010, with regulatory approval looming as the first of what will likely be multiple hurdles on the road ahead.
Sichuan Tengzhong Heavy Industrial Machinery is not just seeking Beijing's go ahead for a deal which runs counter to China's energy efficiency drive but will also have to turn around GM's struggling gas guzzling Hummer.
Tengzhong could get itself into a black hole by financing the development of a greener Hummer all by itself and it would be hard to get loans from Chinese banks. If that is the case, I don't think the government will give the green light, John Zeng, an analyst with consulting firm IHT Global Insights.
The little-known Chinese machinery maker has been in touch with the Chinese government after signing the landmark deal to acquire the brand last week, a spokeswoman from Tengzhong said on Monday.
We have started communicating with the relevant regulatory bodies and will continue to support the application process in accordance with the requirements, she said, adding Tengzhong hoped to close the deal late this year or early 2010. It first announced its intent to buy Hummer in June.
The Tengzhong spokeswoman said the company would also explore opportunities to set up a Hummer manufacturing base in China targeting the Chinese market.
Analysts said the sketchy details disclosed in the announced agreement suggest a number of potential risks down the road, including uncertainty over the prospects for regulatory approval.
All we know is that it owns the Hummer brand and the right to use the technologies, and that by itself does not sound like a good deal as some of the existing models like H2 are gas guzzlers that are going downhill, Zeng said.
Both GM and Tengzhong chose to keep financial terms, including Tengzhong's future investment in Hummer, to themselves.
Tengzhong's purchase agreement with General Motors Co, signed on Friday, underscores the fast rise and global ambitions of the Chinese auto industry, populated by a wide range of fast-growing, aggressive car makers such as Geely Automobile <0175.HK>, SAIC Motor Corp <600104.SS> and BYD <1211.HK>.
The deal marks the first time Chinese investors have stepped in as major buyers into the distressed U.S. auto industry, and comes after China surpassed the United States to become the world's largest auto market.
Initial sentiment toward the sale was negative in China, with many questioning why a Chinese firm with no experience running a major Western brand would want to buy a struggling name known for its large gas-guzzling vehicles.
But the mood has turned more neutral since then, with regulators saying such purchases should be allowed when they make commercial sense.
Yao Jian, a Commerce Ministry spokesman, told reporters in June that overseas acquisitions by Chinese firms were rational and normal in the global industry downturn.
The Tengzhong spokeswoman did not specify which government bodies had been contacted for approval of the deal.
NO APPLICATION YET
China's Ministry of Commerce has authority over the purchase while the National Development and Reform Commission would have to approve any new major investment in the country, such as building a new manufacturing base.
Tengzhong would also need to get a vehicle-production license from the Ministry of Industry and Information Technology.
A spokesman for the Ministry of Commerce said the ministry had yet to receive an application for approval of the deal.
The spokeswoman from Tengzhong declined to comment on whether it would restructure the terms of the deal if it were rejected.
Under the terms of the deal the Hummer business would be sold for about $150 million, according to a Reuters source, far less than GM's earlier estimate that the brand could fetch more than $500 million. Tengzhong will gain a globally known brand, intellectual property, a trademark and manufacturing expertise with the deal.
Lumena Resources Corp <0067.HK> Chairman Suolang Duoji will hold 20 percent of the investment vehicle buying Hummer and Tengzhong will hold the remaining 80 percent.
Analysts have said the new Hummer -- which will be headed by GM executive Jim Taylor -- will face a difficult task of revamping a macho brand associated with the excess of the past economic boom in the United States.
Provisions of the deal also preserve about 3,000 U.S. manufacturing jobs until at least the middle of 2011.
Hummer has its origins in a multipurpose vehicle known as the Humvee that was used by the U.S. military. GM bought the brand in 1999 and its sales peaked in 2006, but they have been hit hard since then by a slumping U.S. economy and higher gas prices.
Through September, its U.S. sales were down 64 percent this year.
(Editing by Edmund Klamann and Valerie Lee)