BMW's $4.2b China bid highlights value parked in local JVs

The German group is paying a hefty premium for control of its Chinese joint venture despite rising trade tensions. Local carmakers should get a price bump.

Luxury carmaker BMW is coughing up a whopping €3.6 billion ($4.2 billion) for control of its main joint venture in China, illustrating the value of a placeholder in the world’s largest car market.

The Munich-headquartered auto manufacturer has agreed to raise its stake in BMW Brilliance China Automotive Holdings, from 50% to 75%, it said in a statement on Thursday.

The deal is positive for the shareholders of its local partner, Brilliance China Automotive, which faced the prospect of the venture, its main profit engine, expiring within four years.

Shares in Brilliance China Automotive have fallen by about 40% since April when China said that it would scrap the 50% foreign ownership cap for all partnerships by 2022. The Chinese company's own branded cars have not gained as strong a traction as beemers.

In other words, as a prerequisite of extending the partnership and pouring more investment into China, BMW negotiated that it would take control when the regulations allowed it to do so.

BMW’s offer values the joint venture at €14.4 billion, or 135% above Brilliance China Automotive’s entire market capitalisation of about $7 billion as of Wednesday.

While this simple calculation does not take into account the several billion euros in cash sitting on the joint venture’s balance sheet, it still illuminates hidden value at Brilliance, a person familiar with the transaction noted.

The average premium paid globally in M&A deals for light vehicle companies is about 15%.

Brilliance China Automotive will retain a 25% stake in the JV, which will of course be worth more now that BMW is ploughing in another $4.2 billion and has agreed to nurture new models within the framework of the JV. 

Deutsche Bank is advising BMW and Goldman is working with Brilliance.

The partners could have gone a very different way.

BMW’s joint venture with Brilliance China Automotive had the earliest expiry date of any of the global car manufacturer tie-ups in China. More to the point, under the new regulations, BMW could have set up a new company in China without any partner at all.

Instead, the contractual term of the joint venture, which was due to expire in 2028, will be extended to 2040 and BMW has committed to make the BMW iX3 in China, the electric vehicle version of the X3. 

Both BMW and Brilliance China Automotive have been keen to address investors concerns about rising US-China trade tensions.

Now an agreement has been struck on the structure of the JV, BMW feels confident enough to invest further. The German carmaker plans to boost production capacity at its existing plants in Shenyang, helping shield itself from the spiralling cost of importing into China from its plant in South Carolina.

A litmus test of how favourable this deal is to China is the support it will garner during the approval process.

Major shareholders will vote in favour of the deal, so the shareholder vote looks like a slam dunk. 

The Shenyang Municipal Government is pitching in according to a filing with the Hong Kong stock exchange. It will provide financial and other support including the acquisition of land use rights, coordinating with the relevant authorities for approvals and licences, and grant subsidies.

It also has high-level political support. China’s Premier Li Keqiang met with German Chancellor Angela Merkel in July to lay the groundwork for an agreement and with BMW’s Chief Executive Harald Krueger on Wednesday, so the risk of not closing is minimal.

No one is likely to put the brakes on this deal. 

¬ Haymarket Media Limited. All rights reserved.
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