Geely Used $9 Billion-Collar Trade on Daimler Purchase

Updated on
  • Bank of America said to lead deal with help of Morgan Stanley
  • Record derivatives transaction to help Geely limit risk
Geely's Stake in Daimler Is China's Top Overseas Auto Deal

Chinese billionaire Li Shufu’s Geely Group structured the purchase of its 7.3 billion-euro ($9 billion) stake in Daimler AG through complex derivative transactions that allowed the buyer to build a large equity holding while limiting the risks, people with knowledge of the matter said.

Li Shufu

Photographer: Qilai Shen/Bloomberg

Geely entered into a so-called collar trade for the entire stake, making this the largest deal of its kind in a single stock globally, the people said, asking not to be named as the financing details haven’t been disclosed. Bank of America Corp. led the transaction with the help of Morgan Stanley, they said.

Geely disclosed a 9.7 percent stake in Daimler last week after Bloomberg first reported that the Hangzhou-based company was poised to become the largest investor in the German automaker. The collar trades -- used in a hedging strategy that requires puts and call options of the same size and with the same expiration -- allowed Geely to build up the stake quickly while potentially avoiding breaching German rules that require shareholders to disclose holdings exceeding 3 percent, they said.

Representatives for Geely, Bank of America and Morgan Stanley declined to comment.

Read this: Geely Said to Have Approached Fiat Chrysler Before Daimler

German Chancellor Angela Merkel Tuesday said financial regulator Bafin was reviewing whether there were “any gaps in the transparency of reporting requirements” tied to Li’s stake in Daimler. “Beyond that, we’re open to trade partners and don’t immediately see any violations,” she said.

Shares of Daimler rose 0.7 percent to 70.84 euros as of 11:01 a.m. in Frankfurt trading. The stock has advanced 3.2 percent in the past year.

The collar trades reduce Li’s potential losses from a decline in Daimler’s price, but may also cap prospective gains if the stock climbs. Buyers in such transactions typically pass on the risks of the stock falling to the banks, which get lucrative fees in return.

Abu Dhabi’s Aabar Investments PJSC entered into collar trades to finance its acquisition of Daimler shares in 2009, and has used a similar strategy to finance investments in Italy’s UniCredit SpA in the past decade. More recently, the embattled Chinese conglomerate HNA Group Co. disclosed in December that it had entered into its third series of collar trades with UBS Group AG to finance its investment in Deutsche Bank AG.

Li’s Ambitions

Li’s acquisition of the stake in the owner of Mercedes-Benz, which marks the biggest investment in a global automobile manufacturer by a Chinese company, boosts the prospects of his carmaker Zhejiang Geely Holding Group Co. The photographer-turned-tycoon wants Geely and Daimler to cooperate in the areas of battery-powered cars, online services, trip-sharing, and digital technologies.

The Chinese company already owns Volvo Cars AB, whose refreshed line-up of vehicles have made it a popular alternative to the German luxury stalwarts. And in December, Li became the biggest shareholder in Sweden’s Volvo AB, the world’s second-largest truckmaker.

Li’s Zhejiang Geely held informal talks about a potential takeover of Fiat Chrysler Automobiles NV before China’s biggest private automaker turned its attention toward Daimler, according to people familiar with the matter. He approached the Italian-American carmaker in the middle of last year, but opted not to make a formal offer as the two parties had different views on future valuations of Fiat Chrysler, they said.

— With assistance by Vinicy Chan, and Eyk Henning

(Updates with shares in sixth paragraph.)
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