* Guangzhou Auto may take up to 30 pct of Changfeng Motor
* Changfeng offers inland production base, SUV line-up
* China is encouraging auto sector consolidation
(Adds quotes, details, background)
By Fang Yan and Edmund Klamann
SHANGHAI, May 19 China's Guangzhou Automobile
has reached an initial agreement with Hunan Changfeng Motor Co
600991.SS to take a major stake, possibly up to 30 percent, in
the sport utility vehicle maker, a source with knowledge of the
matter said on Tuesday.
The deal would make Guangzhou Auto, a partner of Toyota
Motor (7203.T) and Honda Motor (7267.T), the largest shareholder
of Changfeng, which has a market capitalisation of 5.78 billion
yuan ($846.7 million), and help it to secure a foothold in the
country's inland area, the source told Reuters.
Final terms of the agreement have yet to be hammered out but
Guangzhou Auto's stake in Changfeng is unlikely to exceed 30
percent, said the source. Changfeng is currently 50.98 percent
owned by its state-run parent.
Japan's Mitsubishi Motors (7211.T), which owns 14.59 percent
of Changfeng, would remain a major shareholder after an equity
deal with Guangzhou Auto, the source said.
A spokesman for Guangzhou Auto declined to comment, while
Changfeng executives could not immediately be reached.
Changfeng's shares were suspended from trade on Tuesday
pending an announcement of a major restructuring deal. They have
nearly tripled since the beginning of this year, vastly
outperforming a 47 percent gain of the benchmark index .SSEC.
Beijing has been encouraging mergers and acquisitions among
the auto industry's more than 100 players, aiming to create a
few national champions able to compete with global giants at
home and overseas.
Big national auto groups such as Dongfeng Motor Group Co
(0489.HK) and FAW Group, a China partner of Toyota and
Volkswagen AG (VOWG.DE), have held merger talks with smaller
Changfeng, an SUV specialist based in central China's Hunan
province, had previously explored possible equity ties with
several other suitors, said the source.
Domestic players such as Beijing Automotive Industry Holding
Co, a Daimler AG (DAIGn.DE) partner, had also expressed interest
in buying into Changfeng.
"The candidate has now been nailed down to Guangzhou Auto as
it has deep pockets and very solid joint-venture partners," said
Guangzhou Auto makes the Toyota Camry and Honda Accord
sedans in tie-ups with the Japanese automakers in southern
Industry analysts said Changfeng, which supplies its Leopard
SUVs to China's military, would fill a gap for Guangzhou Auto in
SUVs, which are popular among young consumers in big cities.
It also would give Guangzhou Auto a production base in
inland provinces where automobile demand has started to pick up
as Beijing takes steps to encourage consumption through
subsidies to rural households and other measures, they said.
Changfeng, with annual production capacity of 100,000 units,
sold only 26,816 vehicles in 2008, up 4.01 percent from a year
earlier, company data showed.
(Reporting by Fang Yan and Edmund Klamann)