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Guangzhou Auto Offers $3.3 Billion for Rest of Denway Ahead of Own Listing

Guangzhou Automobile Group Co., the Chinese partner of Toyota Motor Corp., offered stock valued at HK$26 billion ($3.3 billion) for the rest of Denway Motors Ltd. to gain auto ventures in the world’s largest car market.

Denway fell a record 24 percent in Hong Kong trading after the offer disappointed some investors. The bid values the automaker at as much as HK$41.2 billion, according to Guangzhou Auto, which plans to seek its own listing after buying the 62 percent of Denway that it doesn’t already own.

The acquisition will bring partnerships with Toyota and Honda Motor Co. into a single company, strengthening Guangzhou Auto’s ability to raise funds and compete with SAIC Motor Corp. and China FAW Group Corp. Denway fell after the offer valued Guangzhou Auto stock at a higher multiple of earnings than rival carmakers, whose shares have slumped this month.

“Investors expected a higher premium,” said SinoPac Securities Asia Ltd. analyst Vivien Chan. “Denway is also catching up with the across-board declines in automaker shares over the past two weeks while it was suspended.”

Denway dropped HK$1.08 to a seven-month low of HK$3.41.

Guangzhou Auto is offering to swap 0.37861 of its shares for each Denway stock and values its offer at HK$5.16 to HK$5.49 per share. That’s as much as 20 percent more than the last traded price of Denway stock before suspension.

“My confidence is relatively high that rational shareholders will all support the deal,” Guangzhou Auto Chairman Zhang Fangyou said today in Hong Kong.

Bid Valuation

The bid values Guangzhou Auto stock at 12.5 times to 13.5 times forecast earnings for 2010. Geely Automobile Holdings Ltd. trades at a prospective price-earnings ratio of 11.3, Great Wall Motor Co. at 9.1 times and Dongfeng Motor Group Co. at 9.2.

The acquisition would create a company with a combined value of as much as $10.6 billion, based on estimates by Anglo Chinese Corporate Finance Ltd., an adviser on the deal.

Guangzhou Auto aims to seek a listing in Hong Kong by the end of July, Lu Sa, secretary to the board of directors, told reporters today in Hong Kong. The swap ratio of Denway shares is reasonable and attractive to investors, Lu said.

Selling shares in China will depend on the stability of the market, Zhang said. The company may attempt another capital- raising exercise should it need to expand and increase market share, he said.

July Listing

Chinese carmakers traded in Hong Kong have declined since Denway was suspended on April 28, pending the share-swap announcement. BYD Co., the automaker backed by Warren Buffett, has dropped 15 percent. The stock fell 4.2 percent today.

Geely Auto, a unit of the Chinese company that bought Volvo Cars, is down 21 percent since Denway’s suspension.

Guangzhou Auto, China’s sixth-largest automaker, and Honda plan to expand capacity at a venture by as much as 56 percent, or 200,000 vehicles a year, two people familiar with the matter said on May 13.

The Chinese company may record profit of 3.76 billion yuan this year, without taking into account the privatization of Denway, according to today’s statement. Guangzhou Auto had profit of 2 billion yuan in 2009.

Rising affluence has been spurring demand for vehicles in China, which overtook the U.S. to become the world’s biggest automobile market last year. Automakers are turning to financial markets for funds to build more factories. China’s auto sales may grow more than 10 percent in the next two years, Zhang said.

By the end of 2010, Guangzhou Auto expects to have annual production capacity of more than 1 million vehicles, according to today’s statement.

JPMorgan Chase & Co., Morgan Stanley and China International Capital Corp. advised Guangzhou Auto on the deal. Denway is working with BNP Paribas.

--Tian Ying in Beijng and Wendy Leung in Hong Kong. Editors: Neil Denslow, Kae Inoue.

To contact Bloomberg News staff for this story: Tian Ying in Beijing at +86-10-6649-7571 or ytian@bloomberg.net. Wendy Leung in Hong Kong at +852-2977-6903 or wleung12@bloomberg.net

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