SAIC & Nanjing Automobile Group agree to tie -up

Top Chinese car maker SAIC Motor Corp and smaller rival Nanjing Automobile Group have agreed in principle on a tie-up under which Nanjing Auto would own no more than 10 percent of SAIC, two sources close to the talks said on Wednesday.

If it goes ahead, the deal could be a step towards creating a national Chinese car champion that would eventually compete head-on with global giants. The government is seeking to strengthen the industry by encouraging tie-ups and mergers.

Under the deal, Nanjing Auto, owner of the classic MG car brand, would fold its vehicle and auto parts operations into Shanghai-based SAIC in exchange for a stake in SAIC.

They did not provide financial details. A 10 percent stake in SAIC is worth 16.9 billion yuan ($2.3 billion), according to the company"s closing share price on Wednesday of 25.76 yuan.

A binding agreement is expected to be signed by the end of this month after senior executives of the two companies met to work out details last week, the sources said.

"Nanjing Auto is likely to get between 5 and 8 percent of SAIC Motor," said one of the sources. "The stake will not exceed 10 percent." The stake would transferred from SAIC's parent group, he added.

A spokeswoman for SAIC, asked for comment, said: "Apart from a July 26 letter of intent to cooperate with Nanjing Auto, no new agreement has been signed so far." She said she did not know when a deal might be announced.

Officials at Nanjing Auto, which is also government-controlled declined to comment. SAIC"s ventures with General Motors and Volkswagen AG are China's biggest car sellers, with combined sales of 441,584 cars in the first half of 2007, or 14 percent of the market.

But the company faces tough competition in the commercial vehicle area from local rivals FAW Group and Dongfeng Motor whose Jiefang and Dongfeng truck brands are strong.

Nanjing Auto's MG brand cars, acquired from failed British car maker MG Rover, its internally developed Yuejin light trucks and its Iveco light buses made in a venture with Fiat could be valuable additions to SAIC's portfolio, industry analysts believe.

NANJING FIAT

SAIC is growing rapidly and in March rolled out its first own-brand sedan, based on acquired technology. It plans to make 2 million vehicles annually by 2010, up from expected production of over 1.5 million this year, its chairman said in October.

The SAIC group signed a letter of intent in September to buy a controlling stake in engine maker Shanghai Diesel Engine Co Shanghai Diesel said on Monday that detailed negotations on the purchase were underway.

In addition to the bus operation, Nanjing Auto operates a loss-making venture making cars with Fiat, one of the very few car joint ventures that has not taken off in the world's second largest auto market.

One of the sources said assets that Nanjing Auto would inject into SAIC included its 50 percent holding in the Fiat car venture. A Nanjing Auto executive said last month he did not rule out an eventual dissolution of that venture.

"Some of the assets are valuable and some are less so," the other source said without elaborating. A Fiat executive based in China declined to comment on the prospects for its car venture.

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