Chinese firm rescues GM's Hummer brand

China's Tengzhong inks an agreement to take over General Motors' Hummer brand and management team for an undisclosed price.

China's Sichuan Tengzhong Heavy Industrial Machinery Company has agreed to buy the Hummer sport-utility vehicle brand and its management team from General Motors Corporation as the US automaker files for Chapter 11 bankruptcy protection. Financial details of the deal have not been announced.

Tengzhong will buy the Hummer brand, take over the dealer network and a senior management team, the companies said in a joint statement yesterday. Tengzhong will also enter a long-term contract assembly and supply agreement with GM. Tenure of the agreement was not disclosed.

Sichuan-based Tengzhong is a privately owned company and a manufacturer of road, construction and energy industry equipment. The acquisition of Hummer marks a diversification by the company into SUVs. Tengzhong is being advised by Credit Suisse, with Shearman & Sterling providing legal advice.

Hummer will continue to be headquartered in the US and the existing management will remain in charge of the business. By structuring the deal to allow the Hummer management to remain in the driver's seat and to allow GM to supply parts, the US auto major will be able to secure more than 3,000 jobs in the US. The majority of the jobs saved are likely to be at the plants which will have the long-term supply contracts thus their tenure will be linked to that of the supply agreement.

The deal is subject to regulatory approvals and is expected to close in the third quarter of 2009. At this stage the financial details have been withheld, but according to US media, GM said in its Chapter 11 bankruptcy filing that Hummer is worth an estimated $500 million.

General Motors filed for bankruptcy on June 2, a few weeks after Chrysler Corporation, and after fevered speculation about what would happen to the iconic US automaker. On a media call in May, chief executive officer Fritz Henderson said it was probable that GM would have to file for bankruptcy "but there is still an opportunity and still a chance for it to be done outside of a court process". GM is being advised by Citi.

On the same call, Henderson confirmed that the company had received three offers for the Hummer business and was in negotiations with two of the three bidders. GM said it had originally hoped to have reached an agreement on the Hummer sale in April.

In addition, GM is also trying to realise value out of the Saturn and Saab brands. On the media call, Henderson said that GM was supporting the distribution channel of the Saturn brand and expected some interest to emerge in what it termed "a truly and really solid distribution channel". The sale of Saab is being run by the Swedish business, which is itself in reorganisation in Sweden, and GM's head of communication Steve Harris suggested a number of parties are interested in Saab.

Harris explained that there was no dialogue underway with respect to Pontiac and that this brand will be wound down.

Asian buyers have already shelled out generously for once iconic automobile brands and in some cases have yet to extract value from these deals. In March 2008, India-based Tata Motors, a manufacturer of cars and commercial vehicles, struck a $2.3 billion deal to acquire the Jaguar and Land Rover businesses from Ford Motor. That deal was quite different from what Tengzhong is proposing as in the bullish environment then prevailing Tata Motors took on the Jaguar and Land Rover brands, the intellectual property rights, plants and about 16,000 employees. Tengzhong is not taking over plants thus does not have to address issues like environmental liabilities and pension plans.

Tata Motors raised part of the financing for the acquisition through a bridge loan from a consortium of banks including Bank of Tokyo-Mitsubishi UFJ, Citi, ING, J.P. Morgan, Mizuho Corporate Bank, Standard Chartered Bank, BNP Paribas and others, including local Indian banks. The bridge loan was due for repayment this week and Tata Motors reached an agreement with some members of the consortium to refinance the loan as other refinancing options explored by the Indian company, including asset and equity sales, are adversely impacted by the financial crisis.

Last week Tata Motors said its net profit in the fiscal year ending March 2009 fell by about half year-on-year, as the company struggled with high interest costs on its debt burden in an environment of slumping domestic demand. Tata Motors has been especially hard-hit by the liquidity crunch in India as product sales have suffered due to a lack of readily available vehicle financing.

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