Goldman Sachs buys CBs with warrants in Geely

Goldman Sachs will pay up to $334 million for convertible bonds with warrants that could give it a 15.1% stake in the auto company.

Goldman Sachs will invest up to HK$2.59 billion ($334 million) in convertible bonds with warrants of Hong Kong-listed Geely Automobile Holdings. Yesterday Geely released details of the proposed investment by Goldman Sachs in its equity, confirming a deal which has been speculated in newspapers since Monday.

Geely will raise up to HK$2.59 billion from the issue of convertible bonds with attached warrants, assuming all the warrants are exercised. Goldman Sachs will own 12.1% of Geely upon conversion of the bonds and 15.1% assuming all warrants are exercised.

The convertible bonds are for a total amount of HK$189.7 million. They carry a coupon of 3% and mature in 2014. Goldman Sachs can convert the bonds into equity shares at any time from the date of issue until seven days before maturity. If Goldman chooses to convert the bonds within the next 12 months, the resulting shares will be subject to a lockup until September next year.

The bonds will convert at a price of HK$1.90 per share, which is 6.1% over the closing price of Geely on September 15, the last trading day before the shares were suspended pending an announcement. The conversion price represents a 0.1% discount over the average closing price over the 30 trading days up to September 15.

The strike price for the warrants is HK$2.30 per share. The price represents a premium of 28.5% over the September 15 traded price and a premium of 20.9% over the 30-day average closing price up to September 15.

The warrants can be exercised any time from the date of issue for a period of seven years. They are freely transferable, in a minimum lot size of 250,000 warrants, and will be listed on the Hong Kong Exchange.

Goldman Sachs will route the investment through its principal investment area. The investment will be housed in GS Capital Partners VI which the US investment bank closed in April 2007 with $20 billion in committed capital, of which $11 billion was raised from qualified institutional investors and high-net-worth clients and $9 billion was sourced from the firm and its employees.

Goldman Sachs has negotiated the right to nominate one director to the board of Geely.

Geely said it would use the proceeds to fund capital expenditure and for potential acquisitions. This is Geely's second capital-raising in the last 12 months, following an equity placement in May in which it raised $138 million.

Upon conversion of the bonds, Goldman Sachs will be the second-largest shareholder in Geely after founder and chairman Li Shufu and his associates who own 43.75%. Other large shareholders are institutional investors Toscafund Asset Management with 6.64% and FMR with 5.22%.

Geely's parent, Hangzhou-based Geely Holding Group, has an annual production capacity of 300,000 entire vehicles including engines and transmissions and sells 30 models of cars. It is said to be in the running to buy Swedish automobile firm Volvo from its current owner Ford Motor Company which is running an auction for the business. If successful, Geely will follow in the footsteps of another Chinese firm Sichuan Tengzhong Heavy Industrial Machinery which has agreed to buy General Motors Hummer brand. The Tengzhong-Hummer deal was announced in June and is still awaiting approval.

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