To put it simply, behind any strategic adjustment, merger or divestiture of assets/businesses of any enterprise, there is usually a deeper logical connotation and practical need for enterprise development.

In other words, the purpose of corporate adjustments is often very clear.

Therefore, this action of merging Geely with Zeekr is no exception. This article mainly aims to discuss and demonstrate the purpose and strategy of this action, but it also reflects an inherent contradiction that plagues the capital market - the conflict of interest between major and minor shareholders.

This means that we can bypass the content and form of the "Taizhou Declaration" and directly focus on the results and changes before and after this Zeekr strategic integration transaction for all parties involved, from which we can roughly understand the purpose of this transaction.

First, this transaction involves four entities: Geely Holdings, Geely Automobile, Zeekr, and Volvo Cars. The transaction target is the sales equity of Geely and Zeekr, indicating that this is a merger of enterprises under the same control (or a merger within a group of enterprises).

During this process, Geely's locked-box valuation at the end of September 2024 is approximately RMB 18 billion. Zeekr will pay RMB 3.6 billion and RMB 5.4 billion to Geely Holdings and Volvo Cars, respectively, to acquire their respective 20% and 30% equity stakes in Geely.

After holding a 50% equity stake in Geely, Zeekr will subscribe to newly issued registered capital of Geely for approximately RMB 370 million and ultimately hold a 51% equity stake in Geely, thus achieving consolidated reporting.

Exempted from continued related-party transactions, Geely Automobile has signed component procurement and R&D service agreements with Geely-affiliated suppliers (including Ecarx, Zhejiang Huanfu, and Hangzhou Langge), with annual procurement caps of approximately RMB 6.4 billion, RMB 6.4 billion, and RMB 6.5 billion by 2027.

The above transaction has two payment stages. On the delivery date, Zeekr needs to pay 70% of the consideration amount (i.e., RMB 6.3 billion) to Geely Holdings and Volvo Cars, with the remaining 30% (i.e., RMB 2.7 billion) paid within the following year. The transaction is cash-based.

After Zeekr merges with Geely, Geely Holdings will transfer its 11.3% equity stake in Zeekr to Geely Automobile for USD 806.1 million. After the transfer, Geely Automobile will increase its equity stake in Zeekr to 62.8%.

In the entire strategic integration transaction, Geely Holdings will receive RMB 3.6 billion and USD 806.1 million (totaling approximately RMB 9.4 billion), Volvo Cars will receive RMB 5.4 billion, Zeekr will pay RMB 9 billion plus a RMB 370 million capital increase, and Geely Automobile will pay USD 806.1 million.

As of Q3 2024, Geely Automobile's bank balances and cash amounted to RMB 39.3 billion, while Zeekr's cash and cash equivalents were only RMB 5.6 billion. This means that Zeekr cannot fully pay the 70% consideration in the first phase of the transaction, so it needs to complete the transaction through partial borrowing.

Furthermore, this borrowing can be from internal sources within Geely Holdings (such as the parent company of Geely Holdings, Geely Automobile, Volvo Cars, or Geely Technology), or external borrowing (such as banks, third-party financial institutions, etc.). However, regardless of the source, it further increases the liabilities for Zeekr's small and medium shareholders.

As of Q3 2024, Zeekr's total assets were RMB 32.7 billion, total liabilities were RMB 41.9 billion, the total deficit of shareholders was RMB 9.2 billion, and the company's cumulative losses were RMB 26.3 billion. Therefore, Zeekr's debt-financed merger with Geely will only exacerbate the scale of shareholder deficits, further diluting the rights and interests of small and medium shareholders.

Objectively speaking, if the intention within an enterprise group is to integrate resources, it can be accomplished without using cash reserves. For example, Zeekr could exchange equity in Geely with Geely Holdings and Volvo Cars through a private placement of new shares.

Of course, this would still dilute the equity of existing shareholders, but at least it could avoid using the company's cash reserves and not bring additional pressure on the company's normal operations. However, this would eliminate the operational space for cash flow or allocation within the group.

Meanwhile, as the general lock-up period for US-listed companies is six months, Zeekr's investors are now unrestricted. The significant drop in share price also reflects that original investors are not convinced by Zeekr's strategic merger transaction, which may involve issues such as investment cycles, ROE, and expected post-merger effects.

This is probably the direct reason why Zeekr's share price fell by more than 30% cumulatively over the two trading days following the announcement of the strategic merger transaction.

Image: K-line chart of Zeekr (NYSE:ZK); Source: Xueqiu

From this perspective, as the ultimate controlling shareholder of Zeekr, Geely Holdings can directly obtain RMB 3.6 billion and USD 800 million in cash or claims (although this possibility is relatively small) through this strategic merger. The cost, however, is "overdrawing" Zeekr's cash reserves or its gradually improving operating conditions, leading to the emergence of differences or conflicts between major and minor shareholders in Zeekr.

Based on this outcome and looking back at the source of Zeekr's borrowings, it is highly likely that some of the borrowed funds for this merger will come from companies under Geely Holdings or from banks and external third-party financial institutions. If the borrowing were from Geely Holdings' parent company, the purpose of this strategically merged transaction led by Geely Holdings would be unclear, and the cost (or exposed issues) would be excessive.

From an interest rate perspective, the borrower is likely to be a company under Geely Holdings. If Geely Holdings' internal cash flow is not abundant, the borrower will be a bank or an external third-party financial institution.

Subsequently, the follow-up issue of the strategic merger is how Zeekr will "repay" the loan?

To answer this question, we can make a rough judgment based on the changes before and after Zeekr merges with Geely's financial statements.

For a long time, Zeekr's owner's equity has been negative, mainly because Zeekr operates with an asset-light model, relying on the industrial foundation of the entire Geely system. Therefore, there is a large amount of payables to related parties in its current liabilities.

Theoretically, when Zeekr reaches a certain scale, the proportion of these payables to related parties will gradually decrease, making Zeekr's owner's equity positive.

However, this process requires sustained and steady growth in Zeekr's sales volume and a longer development cycle.

In fact, Zeekr has only been listed for half a year. Although its sales volume has increased significantly this year (with sales increasing by approximately 81% year-on-year in the first three quarters of this year), the amount of cash and cash equivalents on hand has only increased from RMB 3.3 billion at the end of 2023 to RMB 5.6 billion in Q3 2024, with a still very limited absolute scale.

Moreover, its total R&D expenses, selling, and administrative expenses for Q3 2024 exceeded RMB 4 billion, with a non-GAAP operating loss of approximately RMB 1.2 billion, indicating significant operational pressure.

Therefore, in the short term, it is basically impossible for Zeekr to "repay" the loan through the surplus of its main business. This means that Zeekr is likely to obtain supplemental funds through equity financing (i.e., additional issuance).

As of H1 2024, Geely's asset/liability scale was RMB 46 billion/RMB 39.3 billion, with a net asset value of RMB 6.7 billion, including approximately RMB 4.2 billion in cash and cash equivalents. After Zeekr merges with Geely, the asset/liability scale of its consolidated financial statements will likely increase to around RMB 80 billion, with net assets decreasing to a scale of negative RMB 3 billion.

In other words, through the strategic merger transaction, the quality of Zeekr's balance sheet can be rapidly improved.

At the operational level, as of H1 2024, Geely's revenue was RMB 21.3 billion, with a net loss of RMB 100 million; while Zeekr's revenue was RMB 20 billion during the same period, with a net loss of RMB 1.8 billion. Simply calculated, the combined annual revenue scale of the two has reached nearly RMB 100 billion. In the future, through partial business synergies and resource integration, they can basically achieve an overall turnaround soon.

From 2020 to 2023, Geely's sales volumes were 175,000, 221,000, 180,000, and 220,000 units, respectively. The decline in scale in 2022 and the rebound in 2023 were both due to the proportion of new energy vehicles.

In the first ten months of 2024, Geely's cumulative sales volume was 227,000 units, a year-on-year increase of nearly 38%, with new energy vehicles (i.e., plug-in hybrid models) accounting for nearly 59%. The penetration rate of new energy vehicles has been increasing month by month (even exceeding 70% in some months).

This means that new energy is helping Geely achieve scale growth. In the future, the proportion of Geely's fuel vehicles will continue to decline, and Geely may become a new energy vehicle brand dominated by plug-in hybrid models and supplemented by pure electric models, which aligns with Zeekr's potential and space for synergy, cost reduction, and efficiency enhancement.

As a result, the valuation of the integrated Zeekr in the capital market will be greatly improved, meaning that Zeekr can quickly obtain capital replenishment through additional share issuance, thereby achieving the aforementioned "repayment". Additionally, with Geely Automobile directly holding a 62.8% equity stake in Zeekr, after the additional issuance, Geely Automobile (or the Geely system) will still be able to maintain control over Zeekr.

It is expected that Zeekr will conduct an additional issuance around half a year after the strategic merger. After all, the cash reserves available for its normal operations are still very limited.

Overall, from the perspective of the Geely system, this strategic merger transaction between Zeekr and Geely is at least a win-win situation. First, the parent company of Geely Holdings will directly receive RMB 3.6 billion and USD 800 million in cash, which it can use for financial turnover or optimization.

Second, Zeekr's scaling cycle will be significantly shortened, and the quality of its balance sheet will be rapidly improved, significantly impacting its valuation and further financing. As the core growth pole of the Geely system facing the future, Zeekr is expected to gradually become a major asset contributing to Geely Holdings.

However, from the perspective of Zeekr's original small and medium shareholders, their shareholding determination will be tested, mainly due to trust issues with major shareholders (i.e., the Geely system).

In fact, this is an old problem of conflict of interest between major and minor shareholders. Due to differences in the interests of all parties, it is difficult for them to unify their goals between overall and partial interests, as well as long-term and short-term interests.

This strategic transaction of merging Zeekr with Geely once again confirms that this remains and will continue to be a core contradiction in the capital market.