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Hummer buy a rocky road for obscure China firm

(Agencies)
Updated: 2009-06-05 16:51

BEIJING/SHANGHAI - A little-known Chinese heavy machinery maker could face a bumpy road ahead in its quest to buy General Motors' Hummer brand, facing pitfalls ranging from regulatory to financing issues.

Just three days after Sichuan Tengzhong Heavy Industrial Machinery and GM announced their surprise deal, analysts and Chinese media were buzzing with talk that the two companies may have jumped the gun.

Hummer buy a rocky road for obscure China firm

A salesman stands next to a Hummer for sale at an auto trading centre in Shanghai June 3, 2009. [Agencies]

Tengzhong was in advanced talks with banks, a spokeswoman from Tengzhong, told Reuters.

"However, as you would appreciate, the funding can't be finalized prior to a definitive agreement being signed," she said.

GM said on Tuesday that it did not expect any regulatory scrutiny from the United States government on the deal with Tengzhong.

But many China watchers say that resistance could actually come from China itself, as Beijing pushes for development of more energy-efficient technologies that go contrary to Hummer's line-up of big, gas-guzzling vehicles.

As the world's second-largest energy user, China is trying to encourage its citizens and industry to be more fuel efficient to lower its energy bill and improve its environment.

The Hummer deal may not get government approval as Beijing is not encouraging its automakers to make acquisitions overseas, the official Shanghai Securities News reported, citing people with knowledge of the matter.

"Some people may have views and speculation but the Chinese government has a process that we respect," the Tengzhong official said. "We have only just signed an MOU (memorandum of understanding), but as we develop our proposals with GM and Hummer we will continue to work with the appropriate authorities."

FACING HURDLES

Some analysts said Chinese leaders may also be reluctant to let a company with no experience running an overseas operation take on such a high profile and risky acquisition.

"Obviously, Tengzhong is not a well-established company, and its business doesn't fit well with Hummer, so the deal looks tricky," said Jeffery Wang, Shanghai-based managing director of investment bank Business Development Asia.

"Apart from that, buying Hummer should be a poor business decision in the long run, as ... I don't think Tengzhong has the ability or resources to turn the business around. ... I don't think any banks would be willing to fund the acquisition by a company without a solid background."

Little is know about Tengzhong. Based in the Chinese province of Sichuan, it makes special-use vehicles, highway and bridge structural components, construction machinery and energy equipment. Tengzhong was formed in 2005 through a series of mergers and, according to its website has 4,800 employees.

Another source familiar with the deal said it still faces many hurdles.

"There's still a lot of wood to chop on this deal," said the source, commenting on condition that his name not be used due to the sensitivity of the deal.

"It's funny how things change so much in a year. A year ago, Capitol Hill would have had all sorts of scrutiny for this deal. Now it's China who will give this deal scrutiny," said the source.

But one analyst pointed out that Beijing could still let the deal through from a regulatory perspective, as part of its increasing tendency to take a more hands-off approach to companies' overseas acquisitions.

"China has loosened control over outbound investments and has been encouraging private enterprises to make overseas acquisitions, so I don't see any major regulatory obstacles to the deal," said Alex Wang, a lawyer at Paul Hastings.

"The regulators' role is shifting toward market supervision, rather than making business decisions on behalf of companies." he said.