Get Ready for More of This: Chinese Company Tengzhong to Buy GM's Hummer

General Motors Corp., seeking to shed assets to emerge from bankruptcy, agreed to sell the Hummer sport-utility vehicle brand to China’s Sichuan Tengzhong Heavy Industrial Machinery Co. Tengzhong will assume Hummer’s dealer agreements and a senior management team, the companies said in a joint statement yesterday. GM and Tengzhong also plan to form a long-term contract assembly and supply agreement. Hummer is worth an estimated $500 million, GM said in bankruptcy court documents.

Selling Hummer will secure more than 3,000 U.S. jobs and help GM move toward a goal of offloading four U.S. brands to exit bankruptcy as a leaner, more profitable company. The deal may also help Tengzhong grow in China’s SUV market, which surged 25 percent last year on rising affluence.

“There are a lot of new rich in China who like niche brands such as Hummer,” said Ricon Xia, a Daiwa Institute of Research (H.K.) Ltd. analyst in Shanghai. “A lot of private companies like Tengzhong have emerged because of the economic boom and they will strike more surprising deals like this one.”

Detroit-based GM has won court approval to sell assets as soon as next month after collapsing under $172.8 billion in debt and failing to adapt to consumer demands for cars that use less fuel. GM also plans to sell Saturn and Saab and wind down the Pontiac line. Sixteen potential buyers have expressed interest in Saturn, Chief Financial Officer Ray Young said on a conference call yesterday.

Tengzhong’s Expansion

For Tengzhong, a privately owned maker of special-use vehicles, structural components for highways and bridges, and construction machinery, buying Hummer will add a brand with cachet it can use to expand in emerging markets, said Desmond Wong, chief executive officer of Chicago-based Sino Strategies Group.

“This is a good acquisition for Sichuan Tengzhong and a good sale for GM,” said Wong. “They can do the manufacturing and marketing in the U.S., but in addition to that they can produce Hummer elsewhere for markets such as China, India and the Middle East.”

The Hummer sale should be completed by the end of the third quarter. Credit Suisse Group AG is acting as financial adviser and Shearman & Sterling is serving as international legal counsel to Chengdu, China-based Tengzhong. Citigroup Inc. is acting as financial adviser to GM.

Chinese Deals

Tengzhong follows SAIC Motor Corp., China’s biggest domestic automaker, and Geely Holding Group Co. in pursuing overseas acquisitions as Chinese automakers seek technology to build more sophisticated and profitable vehicles. Sichuan, where Tengzhong is based, is also a mountainous province full of winding roads suitable for off-road vehicles.

Still, Chinese automakers haven’t always benefited from overseas deals. SAIC bought rights for cars designed by U.K. automaker MG Rover Group Ltd. in 2005 to temper its reliance on partners GM and Volkswagen AG. Last year, GM and Volkswagen vehicles still accounted for more than 90 percent of sales. SAIC’s South Korean unit, Ssangyong Motor Co., entered receivership in February after sport-utility-vehicles sales plunged.

Geely, China’s biggest private automaker, in March agreed to buy Australian gearbox-maker Drivetrain Systems International. The carmaker is also in talks to buy Ford Motor Co.’s Volvo Car Corp. unit, according to people familiar with the situation.

U.S. Support

GM is getting more than $50 billion of loans from the U.S. government to help reorganize after filing for bankruptcy earlier this week. Bill Burton, deputy White House press secretary, reiterated in an e-mailed statement President Barack Obama’s pledge to take a “hands-off” approach to GM.

The U.S. government “is not going to get involved in the day-to-day business decisions of GM -- and this is an example in which it did not,” Burton said. “GM reached an agreement that will keep thousands of Americans working in a situation that could have ended instead with a devastating liquidation of this company.”

GM bought the license for the Hummer brand from AM General in 1999 and started selling the $140,000 H1, a 7,600-pound (3,400-kilogram) SUV patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger, now California’s governor.

While the H1 never sold more than 875 units a year, the model won enough of a following for GM to add the 6,600-pound H2 in 2002. The 4,700-pound H3 followed in 2005. GM also started building the H3 in South Africa in 2006 for Europe, the Middle East and Africa.

Rising gasoline prices eventually eroded demand. GM halted production of the H1 in 2006 as sales dwindled. Hummer’s U.S. deliveries peaked at 71,524 that year, according to Autodata Corp. U.S. sales of the SUVs, which start at about $31,000 for the H3, fell 51 percent in 2008 and 67 percent this year through April.

Wall Street Journal Article on "Taking Stock" - An Interview with Tom Digenan

Where is the market heading? How does an investor play potential bubbles? And what are some of the biggest potential surprises that could be awaiting investors over the next 12 months?

These were some of the issues that The Wall Street Journal asked Marquette alumnus, Thomas Digenan, manager of the UBS U.S. Equity Fund, based in Chicago.

What’s your perspective on where we stand in terms of the markets and the economy?

THOMAS DIGENAN: Before I even get into that, I’ll just give you a little perspective, a frame of reference in terms of how we do things. Everything we look at is from a discounted cash-flow analysis: How much would I pay for a business if I was a cash buyer of the business? And when I look at the market, we look at it in a similar way in terms of, if I was to value the overall market, how much would I pay for it, what kind of future cash flows are going to accrete to me as the owner?

The big challenge in looking at the market in this type of environment is that, whatever your valuation methodology, you have to have certain assumptions. And when we value a business, one of the assumptions that we have is that these companies are going concerns. Well, that’s not such a safe assumption in this type of economy.

One of the things that’s really fascinating in this type of environment is that, from a portfolio-positioning standpoint, right now I want to be long risk, short safety, and that’s if I’m looking at the portfolio at 30,000 feet. But if you’re looking at it at ground level, you want to be long safety. And the example I would give is, I wouldn’t necessarily buy an exchange-traded fund on auto-parts manufacturers, but there are some auto-parts manufacturers I’d buy as much as I could, because the survivors are going to benefit. And there are survivors. So I think that to the extent you can do the work and identify the survivors from the non-survivors, you’ll be compensated for that.

So at 30,000 feet, we find the market very attractive right now. And that’s all we’re trying to do, compare price to fair value.

One of the themes that has emerged in the past few years is bubbles. You had the Internet and tech bubble. You had the real-estate bubble. Before that, you had the Japanese stock-market bubble. So, is it wise to look for where bubbles are going to be and chase those?

MR. DIGENAN: The one thing I would say, if you’re trying to predict the next bubble, just say, “Where is capital free?” Wherever capital is free, people don’t tend to spend it wisely. If I give my 12-year-old $200 and say, “Go to the store,” he’s probably going to waste it. And I think we saw that. Capital was free for tech. Capital was free for housing. So look for the next area where capital is free.

The one thing I think that’s really important when we’re in this type of extreme is that, whatever your investment philosophy, you have to look at it and you have to have some true north—“This is what we stick with.” And ours is comparing price to fair value. And I would say our biggest challenge is that, when price exceeds fair value, even if we’re in a bubble, we can’t chase it, because we try to make money off what we know, and what we know is price and fair value.

Is the Worst Over? When you look at the market right now, there’s still a fair amount of fear. Do you think the worst is over in terms of the crises we saw in the fall and again in February-March? Or do you think we’ll retest the lows?

MR. DIGENAN: If the economy—if the worst is not over, the market is going to go through what the lows were. But I think we are through the worst on the economy. In the market, I think my biggest challenge is from an investment standpoint, when you do have a lot of people saying, “Well, we’ve had this run-up, but it’s a bear-market rally, and it’s going to give back here,” and they’re holding off. They’re waiting.

I have no insight into what the market’s going to do in the short run, but the one thing I would be cautious of is it’s these same people that didn’t want to go in in March. They were kind of waiting. There were a lot of people that had capitulated in March, and they were completely out. And what I told advisers at that point was, if you have a client, and they’re getting out of the market, and they’re demanding out of the market, have them write you a letter. And sign it, and date it. And basically, that letter has to say, “I’m not equipped to handle the risks of equity investing.”

That’s OK. It’s not a bad thing. Some people are not equipped to handle the risk of equity investing. And then when the S&P hits 800 or 900 or 1000 or 1100, and they want back in, you cannot let them back in. You can’t. It isn’t punishment. It’s basically a realization that these people are prone to that type of behavior. And if you do let them back in, you only let them back in if they’ve been re-educated, if they said, “Look, I realize that I wasn’t looking at price to fair value in looking at this short-term trade.”

We’re going to close with one surprise about something that might happen in the next 12 months that’s unexpected.

MR. DIGENAN: I think commercial real estate would probably be it. It still has potential to be a very large problem. That could be the one area that could really lead to maybe some counterparty risks.

Is California Bust?

California's state revenues are down 27 percent, with CNBC's Jane Wells; Peter Morici, former ITC chief economist; and CNBC's Larry Kudlow.

Wall St. vs. Uncle Sam: Tensions Rise as Banks Seek to Escape from TARP

Banks are raising capital at a furious pace as Wall Street firms seek to pay back TARP funds and get out from under what they consider onerous government oversight.
As JPMorgan CEO Jamie Dimon said yesterday in a conference call with analysts: "We believe we've met all the terms to get out of TARP. If we don't get out of TARP, we would be very surprised. We don't think we should be surprised."

The government will almost certainly allow banks to repay TARP, but the timing is uncertain and the process may not be so straightforward, says Kate Kelly, a Wall Street Journal reporter and author of Street Fighters: The Last 72 Hours of Bear Stearns. Ironically, Kelly tells us banking executives feel they are "underrepresented" in Washington D.C . and reports on one who only half-jokingly plans to ask for a refund on his campaign contributions.

Many on Wall Street are fearful of "retroactive rule-making" by the government, Kelly says, citing as an example this week's requirement to sell equity in the private markets - in addition to non-FDIC insured debt, as previously prescribed. This pushback from Wall Street may come as shock to Americans disgusted by the government's kid gloves treatment of banks and their creditors -- especially compared with Detroit.

This outrage is one of the issues potentially muddling the rush to repay TARP, Kelly says: The Fed is concerned about another leg down in the economy and understands there is neither the popular nor political will for more bailouts, especially of Wall Street. There's also the matter of the taxpayer losing any potential return on its warrants if the banks are allowed to repay TARP, as The NYT's Eric Dash reports.

Meanwhile, the capital raises from private sources rolls on. In just the past 48 hours:

- Several firms sold stock to raise capital, including JPMorgan ($5 billion), Morgan Stanley ($2.2 billion), SunTrust Banks ($1.4 billion), and American Express ($500 million).
- Goldman Sachs (which previously raised $5 billion in a stock sale) sold $1.9 billion of its stake in Industrial and Commercial Bank of China.
- Bank of America said it has raised close to $33 billion, including $7 billion over the past six days alone.

Commodities Outlook - Platinum and Palladium Rally

Keep your eye on these metals.... Analysis and discussion with Rob Kurzatkowski of OptionsXpress Holdings (Bloomberg News).

Housing Outlook - Pending Home Sales Rise Most Since 2001

Interview with National Association of Realtors Chief Economist Lawrence Yun concerning the encouraging housing data.

Stocks Surge Again on Hope the Worst Is Behind Us

Stocks soared Monday morning, continuing the powerful rally off the March lows. The advance is likely to continue and take the S&P as high as 1100 by year-end, says Jon Najarian, co-founder of OptionMonster.com. Such a move would translate to a Dow above 10,000 - and probably well above after Monday's removal of GM and Citigroup and insertion of Cisco and Travelers into the price-weighted index.

In addition to technical factors such as the changes to the Dow and the S&P having eclipsed its 200-day moving average on Friday, stocks were rallying as continued upward momentum has investors previously on the sidelines scrambling to get long.

More fundamentally, the market is responding to a series of better-than-expected economic reports, including U.S. construction spending, the ISM manufacturing index, and purchasing managers surveys in China and Europe.

But rather than fundamentals, Najarian believes the market is rallying "on hope" and says rising oil prices represents the greatest near-term threat to any nascent recovery. Friday's jobs report is also a potential obstacle to further gains, he says. Still, the trader doesn't recommend stepping in front of the proverbial freight train, which was picking up speed Monday morning.

GM Bankruptcy: End of an Era or New Beginning for Detroit?

GM's bankruptcy filing Monday was widely expected but nonetheless has been accompanied by a lot of hand-wringing over the "end of an era."
Clearly there's much to be concerned about, not the least of which being:

- GM's $173 billion of debt vs. $82.3 billion of assets -- as revealed in Monday's bankruptcy filing.
- More job losses as GM closes dealers, closes or idles 12 plants, and the UAW accepts more layoffs as part of its deal with the government and the automaker.
- The perils of government ownership: With the Uncle Sam now the majority owner of GM, the opportunity for political mischief - such as the pressure on GM to sell its Opel unit to Magna - and just plain old bureaucratic inefficiency could stifle any attempt to revive the automaker.

But what if GM's bankruptcy really is a new beginning? As Henry and I discuss in the accompanying video with Jon Najarian of OptionMonster.com, Chrysler's "quick rinse" bankruptcy and even rising oil prices provide an opportunity to think optimistically about the future for U.S. automakers.