Geely’s Li Shufu faces media heat for $9bn Daimler stake

Chinese billionaires who want to buy overseas assets without irking Beijing need to keep their eyes on the road.

China Energy Reserve & Chemicals Group, a unit of state oil behemoth China National Petroleum, has bowed out of the consortium that paid a record $5.2 billion for Hong Kong tower The Centre barely four months after the deal was struck, the South

China Morning Post reported. Back in November, I alerted readers that China Energy, a Beijing specialist in the storage of oil and natural gas, was neither particularly closely connected to its illustrious part-owner (the parent of PetroChina), nor a cash cow. In the first half of 2016, the company generated only 95 million yuan (Dh55m) of net income on 2bn yuan of sales.

The Centre joins a list of aborted deals by companies from Anbang Insurance to HNA, in an environment where China’s government has soured on debt-fuelled overseas acquisitions. That hasn’t stopped others from trying.

The latest is billionaire Li Shufu, who’s paying $9bn for a stake in Daimler. His Geely Group structured the stock purchase through a collar trade, Ruth David, Dinesh Nair and Jonathan Browning of Bloomberg News reported. It is no coincidence that conglomerate HNA used the same tactic to finance its investment in Deutsche Bank.

To be sure, Geely is in better shape than HNA, which is in financial distress after a $45bn overseas shopping spree that it is now trying to reverse. Instead of buying high-end foreign hotels and real estate, Geely is at least sticking to its core business, seeking a strategic stake in a leading direct competitor.

But being in the same industry is no longer good enough to get Beijing’s approval.

Mr Li must be feeling some heat right now, as Chinese media persists in asking how he has managed to pay for the Daimler holding.

Since December, Geely has spent more than $12bn on acquisitions, even though it held only 3bn yuan of net cash at the end of September, estimates Sanford C Bernstein analyst Robin Zhu.

Last weekend, chief financial officer Li Donghui went on CCTV, often a platform for populist sentiments, to defend Geely. He said the company had deployed “overseas capital market arrangements” to fund the Daimler purchase. In other words, it was not moving money out of China.

Still, the acquisition may be less strategic than it first appeared, given the news that Mr Li earlier held talks on potentially taking over Fiat Chrysler Automobiles.

There are almost no Western car makers more divergent in their shapes and strategies, as my Gadfly colleague David Fickling writes. Call me pessimistic, but it’s not difficult to imagine that Beijing one day will turn around and accuse Geely of overpaying for Daimler. By any measure, buying shares on the open market isn’t a capital-efficient way to accumulate a strategic stake.

The more usual and economical route is to negotiate a share placement, often at a discount to the market price. With Daimler rejecting its overtures, Geely should have passed. In this context, one can see why the company used a collar. While the derivative structure caps gains should Daimler shares soar, it also limits potential writedowns in the event of declines. A large impairment would hurt Geely’s net income – and might draw further scrutiny and censure.

So, to pacify Beijing, overseas acquisitions need to be strategic and cheap while posing no systemic risk to China’s banking system. But there is one loophole – that is to use the auspices of “One Belt, One Road”, the pet project of President Xi Jinping, who is now poised to stay in power for life. HNA just announced it will lead two funds that will invest 20bn yuan in the initiative.

That’s one road that does not have potholes.