China Automaker Acquires Volvo for $1.8 Billion; Pension Deficit to Reduce Price Tag

(March 29, 2010) – In a $1.8 billion deal, Zhejiang Geely Holding Co., China’s largest private-run carmaker, has agreed to buy Volvo Cars from Ford Motor Co., more than a year and a half after the companies began discussions. However, the value of the deal will be largely determined by Volvo’s pension deficit.

According to a news release on Ford’s Web site, the deal is subject to negotiations on Volvo’s pension deficit, debt and working capital, and Ford said the $1.8 billion price would be significantly reduced once deductions for those items were included. Under the transaction, Ford will receive a $200 million note and the remainder in cash from Geely. Yet, Ford will still be obligated to cover some existing Volvo pension plans and debt, while supplying parts to Volvo well into the future.

“Volvo is a great brand with an excellent product lineup,” said Alan Mulally, Ford’s president and CEO, in a news release. “This agreement provides a solid foundation for Volvo to continue to build its business under Geely’s ownership. At the same time, the sale of Volvo will allow us to further sharpen our focus on building the Ford brand around the world…”

Ford paid $6.5 billion for Volvo when it purchased the company in 1999, and since then Volvo has suffered continuous losses. The purchase by Hangzhou, China-based Geely represents the biggest oversees acquisition by a Chinese automaker and Geely’s stance as a global player on the automotive scene. The deal also shows opportunity for carmakers in emerging economies to shine amid America’s struggling auto market. In 2008, for example, India’s Tata Motors acquired Jaguar and Land Rover from Ford and last year, China’s Beijing Auto purchased technology from GM’s Saab unit.

The Chinese and US companies aim to complete the deal in the third quarter. While Geely will appoint a new board of directors, it will maintain Ford’s Volvo division as an independent company. Additionally, Volvo will retain its management and headquarters in Gothenburg, Sweden.

In 2009, China surpassed the US to became the world’s largest car market after thriving sales allowed automakers to expand into Western markets. Geely, one of the largest automakers in China, manufactures more than 30 models and operates six plants in the country.