China Watch : SAIC Motor and GM in final talks about IPO stake

Automotive News Europe/Reuters, 11th November, 2010

DETROIT/NEW YORK (Reuters) – General Motors Co. is in the final stage of talks to sell equity to Chinese partner SAIC Motor Corp. as part of its landmark initial public offering, two people familiar with the matter said.

The two Government-funded automakers are currently finalising how much of a stake SAIC Motor would buy in GM after discussions involving technology sharing and SAIC Motor’s ambitions to move beyond the China market, the people said. However, any agreement between GM and SAIC Motor would need Chinese Government approval and could still fall apart, the people cautioned.

GM is set to price its roughly $13 billion IPO on the 17th November, 2010 and start trading the next day. Its executives and bankers are courting investors, including overseas sovereign wealth funds expected to buy nearly $2 billion worth of shares, sources previously told Reuters. GM and its bankers have not set a maximum value for investment by sovereign wealth funds, one source said on Wednesday.

The potential investment in GM by China’s top automaker would expand a 13-year old joint-venture in China and their newly established relationship in India to a broader global stage. Analysts said the closer ties with SAIC would underscore GM’s leading position in the world’s biggest and fastest-growing car market, China.

However, the deal also carries risks since it involves a sale of a stake in a company bailed out by U.S taxpayers in 2009 to a state-funded Chinese automaker and could face political scrutiny in Washington.

GM technology

SAIC Motor is keen to have access to GM’s technology and eventually expand beyond its home market and sell vehicles abroad, the people said. One person familiar with the matter said previously that SAIC Motor had initially reached out to GM to explore the prospect of taking a “single-digit” stake in GM. The size of SAIC Motor’s prospective investment was not known as of Wednesday.

The final round of talks have been led by SAIC Motor Vice-Chairman Chen Hong and could conclude as soon as the weekend, that source said. The sources were not authorized to speak with the media and declined to be named because the talks are private. Representatives for GM and SAIC declined to comment.

This would not be SAIC Motor’s first overseas foray. The carmaker stumbled a few years ago when it bought control of South Korean carmaker SsangYong, only to see it go bankrupt.

The U.S. Treasury, which owns 61 percent of GM’s common stock as a result of its $50 billion U.S. taxpayer-funded bailout, is expected to cut its stake to just over 40 percent in the IPO.

Possible political backlash

The Treasury has said that IPO investors would be sought across “multiple geographies with a focus on North American investors” but it would not be involved in discussions about how shares are allocated.

While selling a big chunk of shares to overseas state-backed investors such as SAIC Motor could trigger a political backlash, GM’s advisers and underwriters have argued those investors could help provide long-term stability to the price of GM’s stock.

One of GM management’s key pitches for investors during the roadshow is the automaker’s strong position in China and other emerging markets. It has a 13 percent share in four key emerging markets – China, Brazil, India and Russia – which are expected to account for 45 percent of global sales growth through 2014, according to IHS Automotive. GM’s closest rival, Volkswagen AG, has market share in those emerging markets of just under 10 percent.

“To have investors from those regions in the company is just straight-out smart,” said Van Conway, a turnaround specialist at Conway MacKenzie based in Birmingham, Michigan. “It is a worldwide organization. You want them to be successful in all of the continents. That is one of GM’s strengths.”

Access to emerging markets

Marvin Zhu, Senior Market Analyst with J.D. Power Asia Pacific, said a new equity tie between SAIC Motor and GM would bring their already very successful partnership to the next level. “It also shows SAIC’s commitment to the partnership and would help it win more support from GM on the technology side,” Zhu said.

“I think it’s premature for SAIC to enter the North America market at the moment, but a closer tie would no doubt help it gain access to other emerging markets where there is demand for SAIC’s products.”

The two automakers announced last week they would jointly develop more clean energy vehicles and components, including the development of a next-generation electric vehicle design whilst, in a sign of continuing progress in GM’s turnaround after bankruptcy restructuring, GM also posted a $2 billion third-quarter profit on Wednesday.

[Source: Automotive News Europe/Reuters]

Clive Goldthorp

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