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Peugeot owner exploring acquisition of GM’s Opel

Melissa Burden
The Detroit News

General Motors Co.’s move to peddle its long-held European Opel and Vauxhall business to French carmaker PSA Group is a major development that signals GM is serious about shedding chronically unprofitable operations.

GM and PSA, the maker of Peugeot and Citroen cars, confirmed discussions are “exploring numerous strategic initiatives aiming at improving profitability and operational efficiency, including a potential acquisition of Opel Vauxhall by PSA.” Both companies said there is “no assurance that an agreement will be reached.”

GM has lost money in Europe since the late 1990s, racking up losses of roughly $20 billion. It missed its goal to break even in the region last year because of currency issues related to the United Kingdom’s “Brexit” vote to leave the European Union. The automaker doesn’t believe it has a chance to break even until possibly 2018.

Under CEO Mary Barra, GM is pushing to become the world’s “most valued automotive company.” It has opted to exit other unprofitable ventures, including pulling out of Russia, ceasing manufacturing in Indonesia and Australia, and restructuring in Thailand. Just before Barra ascended to the top job, GM said it would largely pull Chevrolet from Europe.

“The recent actions by management have shown they’re willing to walk away from markets (where they aren’t profitable),” said David Whiston, an analyst with Morningstar. “I think this is just a much bigger example of that.”

A sale of Opel and its sister Vauxhall brand would essentially end GM’s presence in Europe, abandoning a business it has controlled for nearly 90 years because conditions have changed. The U.K.’s Brexit vote is likely to reshape trade relationships across the region. Carmakers in Europe face yet more costly regulatory uncertainty because of Volkswagen AG’s diesel emissions cheating scandal.

And with a car-centric portfolio and shifting buyer preferences for more SUVs and crossovers in Europe, GM would have to spend significantly to refocus its portfolio. The profit margin on GM’s business in Europe is small, too, compared to what the automaker now earns in North America and China.

GM has considered selling its money-losing European division before, including in 2009 to Canadian auto supplier Magna International. GM, which has more than 38,000 employees in Europe, ultimately opted to keep the unit in order to maintain a sizable presence there and remain a global automaker.

Much of GM’s car-engineering development is based in Ruesselsheim, Germany, including development of smaller, four-cylinder engines used in GM vehicles worldwide. It’s unclear if a deal to sell Opel would include that, or whether PSA would emerge as a critical engine supplier to GM.

GM-PSA alliance

Combining PSA and Opel would create an automaker with about 16 percent of European market share, ranking it second behind Volkswagen. PSA is interested in Opel because of its strong presence in Germany and the United Kingdom, and analysts say a tie-up would give the French automaker the advantage of larger economies of scale.

Five years ago, GM and PSA announced a 10-year alliance that aimed to save $2 billion annually by 2017. The companies were to share vehicle platforms, components, modules, and research and development efforts, plus create a global joint venture to buy goods and services from suppliers to save money.

GM and PSA have worked together since 2012 through an alliance that includes three European projects and has helped the companies save some money. The collaboration includes working on a subcompact and a compact crossover this year, and a small commercial vehicle next year.

Initially, GM bought a 7 percent stake in PSA for about $400 million, only to write that value down later the same year. Ultimately, GM sold its stake in the French automaker. In late 2013, GM and PSA announced they had scaled back the estimated annual savings from the alliance to $1.2 billion by 2018.

GM was on track to break even in Europe through the third quarter last year, but the Brexit vote by the United Kingdom to leave the European Union led the company to fall short of the goal. It lost $257 million pre-tax in Europe in 2016, but substantially narrowed its loss from 2015.

GM’s Chief Financial Officer Chuck Stevens told reporters in Detroit last week that the company would push to break even in Europe in 2018. This year, it expects another loss, as it predicts another $300 million Brexit impact.

The combined Opel and Vauxhall brands sold 1.16 million vehicles in Europe last year, about one-tenth of GM’s overall global sales volume. GM has said it aims to boost market share in Europe to 8 percent by 2022, from about 6 percent today.

Opel’s importance increased after GM announced in late 2013 it was pulling the Chevrolet brand from Europe, backing off on a planned expansion. GM did that to concentrate on its Opel brand. Executives repeatedly have said they are committed to Opel, and Barra’s first foreign trip as CEO in early 2014 was to Ruesselsheim to underscore that commitment.

If GM were now to sell Opel, it would leave the automaker with little brand recognition in Europe. It sold fewer than 2,300 Chevrolets there last year — mostly Camaros, Corvettes and Tahoes. GM’s other global brand, Cadillac, is working to establish itself in China.

Investor reactions

Any potential deal likely would encounter stiff resistance from labor in Germany, where “co-determination” laws give union representatives a say in corporate policy-making. IG Metall, the powerful German metalworking union, and the German Group Works Council said a sale could violate laws there.

“If this is the case that GM has been holding talks with PSA with the goal to sell Opel/Vauxhall, then this would be a clear violation of German and European co-determination rights,” they said Tuesday in a statement. “Nevertheless, we would unconditionally examine a potential sale of Opel/Vauxhall to PSA based on previous experiences with PSA.”

Analysts say a deal to shed Opel could potentially benefit GM. Investors cheered the news Tuesday, pushing GM stock up 4.8 percent to $37.24 in a market that traded only marginally higher on the day.

In a note Tuesday to investors, Citi Research analyst Itay Michaeli wrote: “At a strategic level we think this underscores our view that GM’s current earnings profile isn’t at some ‘max peak’ potential, and that management isn’t shy about taking major steps (such as past moves with Russia, Chevy Europe) to improve returns,”

Morningstar’s Whiston said it’s unclear what GM would do with cash from a sale. But he said it could be used to buy back stock, fund pensions or pay for self-driving and mobility development.

Jefferies International Limited said that while no financial information has been shared, the deal seems to have balanced risks and opportunities for both automakers. The firm rates GM stock a “hold.”

“A disposal of GME (GM Europe) would increase North America dependence,” Jefferies analyst Philippe Houchois wrote in a note to investors, “but possibly free up capital for shareholder returns.”

Twitter: MBurden_DN