GM exits Europe with Opel-Vauxhall sale
General Motors Co. is exiting the third-largest automotive market in the world with the sale of its money-losing European business to French carmaker PSA Group. With the $2.2 billion sale announced Monday, GM said it will focus on more profitable markets and products, as well as new technologies like electric cars, fuel cells and autonomous vehicles.
GM’s decision to say goodbye to the Opel-Vauxhall business it’s controlled for nearly 90 years – and accounts for 10 percent of GM’s global sales and 18 percent of its workforce – is intended to bolster overall profitability and returns to shareholders.
It will leave GM with only a few specialty models in Europe – Chevrolet Camaros, Corvettes and selected Cadillacs – which last year totaled about 2,300 in sales. That’s a tiny fraction – 0.2 percent – of the volume of its Opel-Vauxhall business, which sold 1.16 million vehicles in 2016. GM sold 10 million cars globally last year.
The move comes after GM lost money every year in Europe since 1999 – $257 million pretax last year and about $20 billion in all. And it follows other strategies to exit low-performing operations under GM Chairman and CEO Mary Barra: GM has opted to pull out of Russia, stop manufacturing in Indonesia and Australia, and restructure in Thailand. Just before Barra took charge, the automaker said it would largely pull Chevrolet from Europe.
Barra also has her eyes on improving other operations: “We continue to – with every region, every country, every product line – make sure as we invest capital, it’s going to generate appropriate returns,” she told reporters in a call.
The deal is expected to close by the end of the year, pending regulatory approvals. GM shares closed down 0.9 percent to $37.91 Monday.
Most analysts see the sale as a positive for the Detroit automaker.
“GM is a better and stronger company without Europe,” Evercore ISI analyst George Galliers wrote in a note to investors Monday.
He wrote that investors should “welcome GM’s decisiveness” and view it as a positive as the “transaction provides GM with an inexpensive exit from a business which has struggled to make money, let alone cover its cost of capital, for many years.”
The carmaker said Monday it isn’t precluded by the sale to offer mobility services such as car-sharing or ride-hailing in Europe, though it shared no specific plans. It also will keep its engineering center in Torino, Italy, which is focused on diesel engines for the global market.
GM’s vehicle portfolio is highly car-centric in Europe at a time when buyers prefer SUVs and crossovers. GM would have to spend significantly to refocus its lineup. It has small profit margins in the region compared to North America and China. And carmakers in Europe face regulatory uncertainty because of Volkswagen’s diesel emissions cheating scandal and the need to invest substantially more in electric vehicles.
“We’ve decided that mass-market, high-volume opportunity in Europe is no longer compelling for our company when you weigh the significant risks along with our competitive position,” GM President Dan Ammann said in a Monday call to financial analysts.
Barra told analysts in the call that selling Opel-Vauxhall will strengthen its overall core business, “unlock significant value for our shareholders” and help it to deploy resources to more profitable efforts such as advanced technologies. GM will gain about $1 billion in capital spending money with the sale and it plans to continue developing electric vehicles, fuel cells, autonomous vehicles, its car-sharing service Maven and its investment with ride-hailing company Lyft Inc.
Barra said in the call, “It allows us to focus more resources on fewer brands and models – and very importantly, on brands and products that are most profitable today and provide higher potential returns going forward including trucks and crossovers.”
Selling Opel to PSA
As recently as 2009, GM considered selling Opel. But it opted then to keep Opel in order to maintain a sizable presence in Europe, to retain its position and status as a global automaker.
GM and PSA Group, which have partnered in an alliance since 2012, have been in discussions for several months on the sale.
The purchase includes all Opel-Vauxhall operations and its brands; six assembly plants and five component-manufacturing facilities; and an engineering center in Rüsselsheim, Germany. About 40,000 employees work in those operations.
PSA will have intellectual property licenses for Opel-Vauxhall until its vehicles convert to PSA platforms in the future. The maker of Peugeots and Citroens will be able to sell cars in the U.S. after it converts to the new platforms, though PSA Chairman Carlos Tavares told reporters in a call that it has no immediate plans to do so.
GM expects to take a mostly non-cash special charge of $4 billion to $4.5 billion. It said it also expects to quicken the pace of its share buyback plan.
The companies said GM will keep most Opel-Vauxhall pension plans except for a German active employees and some smaller plans that will be transferred to PSA. GM will pay PSA about $3.18 billion to settle transferred pension obligations and GM will keep $6.5 billion in unfunded pension liabilities.
PSA and BNP Paribas will buy GM Financial’s European division through a newly formed joint venture that will keep GM Financial’s platform and staff.
The Detroit carmaker will be able to purchase shares of PSA through ownership of warrants, which Morningstar analyst David Whiston said will allow GM to participate in any upside PSA has with Opel. The companies plan to work together on electrification. PSA will build Holdens and certain Buicks for GM, the companies said. PSA may buy fuel-cell systems from a GM-Honda joint venture. GM keeps its OnStar brand in Europe.
PSA Group will gain large economies of scale with the acquisition, and synergies in purchasing, manufacturing and research and development. It expects annual savings of $1.8 billion by 2026. With Opel and its sister Vauxhall brand in the U.K, PSA will have about 17 percent market share in Europe, putting it second in the region behind Volkswagen AG.
Some risk in sale
In 2012, GM and PSA announced a 10-year alliance that aimed to save $2 billion annually by 2017. The companies worked on shared vehicle platforms and have created three common models expected to hit the market next year. They worked on components, modules and research and development efforts. And they created a global joint venture to buy goods and services from suppliers to save money.
GM missed its break-even target for Europe last year due to currency issues related to the United Kingdom’s “Brexit” vote to leave the European Union. Executives have said GM doesn’t expect to break even in Europe until 2018.
Analysts say the sale does pose some risk for GM.
“The sale of Opel will leave GM with a smaller and less diversified business that is more heavily dependent on the performance of its U.S. and China operations,” wrote Stephen Brown, primary analyst for Fitch Ratings Inc. “…If there is a significant downturn at some point in the U.S. or China automotive markets, GM will not be able to rely on Europe as an offset to challenges in those regions, as many of its competitors will.”