GENERAL Motors (GM) has sealed a $US2.3 billion ($A3.0 billion) deal to offload Opel and Vauxhall to the PSA Group. Aside from the brands, the sale includes 11 factories that employ almost 40,000 people.
Also sold is GM’s European finance operation to a 50-50 joint venture between PSA and banking giant BNP Paribas.
GM’s motives for the sale are clear. It is time to cut their losses, sacrifice some volume, and move on to make money in other parts of the world – especially China and the US.
The company has made it clear that it is no longer prepared to tip money into non-performing entities.
All of this serves to underline just how badly GM must have wanted to escape its European money pit. The company last saw a profit in Europe in 1999 and is reported to have lost about $US20 billion ($A26.3 billion) there since then.
GM will, however, become the only one of the world’s largest five car-makers without a footprint in Europe, and some analysts have suggested that GM risks missing out on a growing European market when Chinese and US sales are thought to have peaked.
The company has agreed to retain liability for most of Opel’s pension obligations, estimated by various analysts to be about $US10 billion ($A13.16 billion). According to a report in Automotive News, GM will pay about $400 million ($A526 million) per year for 15 years to fund the German and UK pension plans.
Also, only just under half of the Opel/Vauxhall sale will be paid for in cash with the rest coming in PSA share warrants convertible in five to nine years.
The implications of these terms are that GM is not totally turning its back on Europe.
By having the options to exercise the warrants, GM can still get a share of Europe if PSA is able to make a success of the total operations including Opel and Vauxhall as well as Peugeot and Citroen, and reap the reward in dividends rather than making cars.
GM will still be a niche player in Europe with Camaro, Corvette and Cadillac, and the company will also retain an engineering centre in Italy that specialises in diesel engine development.
So what’s in the deal for PSA and how will the French car-maker generate money from Opel/Vauxhall when GM couldn’t?
When concluded by the end of this year, the deal will vault PSA from fourth to second largest European car-maker after Volkswagen with a 17 per cent market share.
Combining two already significant businesses into one overall group should eventually allow for better economies of scale, or what business types like to call ‘synergies’.
PSA is forecasting 1.1 billion Euros ($A1.53 billion) in new synergies by 2020 and 1.7 billion Euros ($A2.36 billion) per year in new synergies from 2026 onwards.
Synergy in this context is a fancy word for getting a lower price from suppliers because you are buying more products, and saving money by combining back room functions, closing facilities and laying off workers.
‘Capturing synergies’ is rarely as easy as claimed when the deal is done, but PSA will be in a better position politically than GM could ever have been to get it done in Europe.
Despite that, PSA chief executive officer, Carlos Tavares, is talking down the cost-cutting option.
“It is simplistic to talk about shutting plants,” he said.
“We have to look at all areas of operations – logistics, quality, process – and there are many things you can do and the workforce and management have to believe they are being given a chance.”
Mr Tavares does, however, have a track record in this area.
PSA narrowly averted bankruptcy in 2014 by selling 14 percent stakes to the French state and China’s Dongfeng. He has since cut about 3,000 French assembly line jobs a year, getting the wage bill down from 15 per cent of revenue to 11 per cent.
This deal will certainly make PSA bigger, but only time will tell if it can make Opel/Vauxhall profitable.
TIMELINE – WHAT GM SOLD
1968: Earthmoving companies Terex and Euclid
1979: Frigidaire home appliances
1999: Delco electronics (public company)
1999: Delphi electrics (public company)
2000: Detroit Diesel
2003: Hughes Electronics Corp
2004: Closed Oldsmobile
2005: 20 per cent of Fiat Automobiles
2006: An 8 per cent shareholding of Isuzu
2006: GMAC Finance (retains 10%)
2007: Allison (transmissions, aero turbines)
2008: 3 per cent of Suzuki
2009: Closed Pontiac
2009: Closed Saturn
2010: Sold Saab to Dutch group, Spyker Cars
2010: Closed Hummer
2013: Seven per cent of PSA (bought in 2012)
2017: Closing Holden manufacturing
2017: Opel and Vauxhall
Comment by Daniel Cotterill