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Geely May Need $1.4 Billion to Revive Volvo After Ford Deal

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Geely May Need $1.4 Billion to Revive Volvo After Ford Deal

March 10, 2010, 1:28 PM EST

By Ola Kinnander and Keith Naughton

March 11 (Bloomberg) -- Zhejiang Geely Holding Group Co. may have to spend at least 10 billion kronor ($1.4 billion) to revive Volvo Cars after buying the Swedish brand from Ford Motor Co., Volvo union officials and board members said.

The figure would be “an absolute minimum” for financing car development, marketing, production and distribution in the next year, and the money needed could be double that amount, Glenn Magnusson, head of the managers’ union at Gothenburg, Sweden-based Volvo, said in an interview.

Ford and Geely will probably sign a purchase agreement on the estimated $2 billion transaction toward the end of the month, according to three people familiar with the talks. Four unions said Feb. 5 that they would accept Geely as the new owner of Volvo as long as the Chinese manufacturer proves it can fund operations.

“We still want them to show us that they have the financial strength,” Magnusson said yesterday by telephone. “We haven’t seen anything yet and we are not satisfied.”

Anders Fogel, a partner at Brunswick Group in Stockholm who acts as Geely’s spokesman, said talks are proceeding according to plan, and that the carmakers are sticking to a target of reaching an accord by the end of March.

Ford is “still working toward a definitive agreement by the end of the first quarter and to close the sale by the end of the second,” said Mark Truby, a spokesman at the Dearborn, Michigan-based company.

Provincial Governments

Regulatory approvals would come after any signing, followed by a transfer of ownership by June 30, two of the people said, speaking on condition they not be identified because the talks aren’t public.

Geely has received funding in the past few days to cover the purchase price from a combination of Chinese financial institutions, underwritten by provincial governments, one of the people said, declining to specify any amount the manufacturer is providing. The Chinese automaker told Ford in December that it had enough funds to operate Volvo as a sustainable business, the person said.

Ford, which lost $30 billion in the three years beginning in 2006, put Volvo up for sale in late 2008, part of a strategy of dropping European luxury lines to concentrate on its namesake brand. The U.S. company acquired the division for $6.5 billion in 1999. Geely, China’s largest private automaker based on 2008 sales, wants to gain insights into Western vehicle development and manufacturing through buying a mainstream European brand.

Profit Target

Geely “will need to invest in Volvo’s operations at least as much as they’re paying to buy us,” Magnus Sundemo, a Volvo board member who represents the engineering union, said in a telephone interview. “We have big investment needs, especially if we’re going to grow significantly in China.”

The spending would be necessary to realize Geely’s goal of building 200,000 Volvo cars a year in China, and to rebuild dealers’ network, Sundemo said.

Thomas Ivonen, another labor representative on Volvo’s board, said in a separate interview that he agrees with Magnusson’s cost estimates. Part of the spending will have to go toward the introduction of smaller models, he said.

Volvo’s goal is to return to profit next year or “possibly late this year,” after which the carmaker can begin to fund its own investment needs, Magnusson said. The last time Volvo reported a profit was in 2005, when it had pretax earnings of $377 million.



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