How Geely spent months building up Daimler stake

Geely chairman Li Shufu kept his plan to buy shares of Daimler quiet till he became its single largest shareholder.
Geely chairman Li Shufu kept his plan to buy shares of Daimler quiet till he became its single largest shareholder.

SHANGHAI • When Daimler announced that Mr Li Shufu had acquired almost 10 per cent of the carmaker last Friday, it caught financial markets and - German regulators - by surprise.

Although the move seemed sudden, the head of the Chinese carmaker Geely had, according to multiple sources and documents reviewed by Reuters, spent months stealthily laying groundwork for the stake.

Two sources in Geely and one source close to the firm said a senior executive there, Mr Li Yifan, had for more than a year led a small team tasked with acquiring shares in Daimler.

By using Hong Kong shell companies, derivatives, bank financing and carefully structured share options, Mr Li Shufu kept the plan under wraps until he could, at a stroke, become Daimler's single largest shareholder.

The result was a US$9 billion (S$12 billion) investment that skirted disclosure rules requiring investors to notify the German authorities if their share of voting rights in a company passed 3 per cent, and then 5 per cent. Because of the way the stake was built, there is no indication that Geely breached those rules.

"The fact that Li would invest did not come as a surprise," said a senior Daimler executive, who did not want to be named because he was not authorised to speak to the media. "But how he went about it certainly was."

The shell company used to amass the stake, Tenaciou3 Prospect Investment, was incorporated on Oct 27 in Hong Kong. It had just one ordinary share, worth HK$1 (17 Singapore cents), according to documents filed to the Hong Kong Companies Registry. It also has a single director: Mr Li Yifan.

Reuters reported in November that Daimler rejected a proposal by Geely to acquire a stake or reach a technology-sharing deal.

The next month, Tenaciou3 signed agreements, subsequently filed with Hong Kong's companies registry, with Morgan Stanley and Bank of America Merrill Lynch that would help the it build its stake in a less-direct way.

Last week, Daimler named Tenaciou3 in a regulatory filing as the entity controlling Mr Li Shufu's 9.69 per cent stake.

A person with knowledge of the deal said Morgan Stanley had worked on the structure of the investments, helped Mr Li build up his position in the secondary market and provided financing.

Geely also hired former Morgan Stanley executives Dirk Notheis in Germany, and Bao Yi, who worked in China, to help the banks devise tactics that would avoid immediately triggering disclosure requirements in Germany, according to sources familiar with the matter.

Tenaciou3 purchased some shares on its own, but not enough to require disclosure. The banks then acquired additional shares in two ways without Geely having an entitlement to the shares and therefore no requirement to disclose the holding, according to two people familiar with the matter.

Some were bought directly and the risk was offset by an "equity collar" structure to protect the investment from losses. That involved selling options for the right to buy shares above the then-prevailing price while buying options to gain the right to sell the shares below the price. The banks also gained the right to acquire shares by buying derivatives, the sources said. Only when they were sold to Tenaciou3 did the stake need to be disclosed.

German Chancellor Angela Merkel said on Tuesday there were no obvious violations linked to the purchase, though financial regulator BaFin is probing if disclosure rules were broken.


A version of this article appeared in the print edition of The Straits Times on March 03, 2018, with the headline 'How Geely spent months building up Daimler stake'. Print Edition | Subscribe