GM agrees to sell Opel, Vauxhall to PSA

March 06, 2017 12:00 AM

Ania Nussbaum

Reuters

GM CEO Mary Barra with PSA CEO Carlos Tavares at Monday's press conference. Barra said Opel would have been profitable in 2016 if it weren't for Brexit.

Editor's note: A headline on an earlier version of this story mischaracterized PSA's payments as the total value of the deal.

PARIS -- PSA Group is betting that size is the answer to Europe’s saturated car market as it buys General Motors’ ailing Opel unit despite years of losses.

The French carmaker will pay 1.8 billion euros ($1.9 billion) for Opel, its U.K. sister brand Vauxhall and a stake in the local financing business. CEO Carlos Tavares, who turned around the maker of Peugeot and Citroen vehicles following a bailout in 2014, is bolstering his defenses in a peaking market that’s being transformed by technology, new competitors and Brexit.

Payments by French bank BNP Paribas, which will operate Opel's finacing arm with PSA, will bring the total value of the deal to $2.3 billion.

“It gives us the opportunity to become a real European champion,” Tavares said after announcing the deal, which reinstates PSA as the region’s second-biggest auto manufacturer. “Our plan is to build a common future for Opel and Vauxhall and fix the existing issues.”

Picking up GM’s 1.2 million annual deliveries allows PSA to solidify its turnaround by spreading the costs for developing new vehicles across a larger network, while achieving the savings necessary to compete in a peaking market whose challenges include high wages and wafer-thin profit margins. Gaining scale is vital for mass-market carmakers as they try to stay ahead of self-driving, electric-car innovations and compete with new entrants including Uber Technologies Inc.A

Reuters

Mary Barra and Carlos Tavares at Monday's press conference with Opel Chairman Karl-Thomas Neumann, who is staying on at the helm of the company.

Bringing the two automakers together will yield projected annual savings of 1.7 billion euros by 2026 by combining development costs, factory investments and purchasing. That will help Opel generate an operating profit margin of 2 percent by 2020 and 6 percent by 2026. Initially the deal will be a drag, with PSA’s profit margin from automaking likely to drop to 3.8 percent from 6 percent, according to an estimate from UBS AG.

While job and production cuts are likely as the two companies offer a similar slate of mass-market cars from high-cost locations in Germany, France and the U.K., it’ll take years for savings to filter through. Implementing the savings measures will cost about 1.6 billion euros.

“This move, on the paper, is a good deal for PSA,” in part because it gives the French carmaker access to GM’s expertise on electrification and fuel cell technologies, Bryan Garnier & Co. analyst Xavier Caroen wrote in a note to clients. However, “implementing synergies will take time, diluting group’s PSA margin on the short term, while risk of further cannibalization between brands could occur.”

Bloomberg

PSA shares rose as much as 5.25 percent to 20.06 euros, the highest level since July 2011, lifting the company’s valuation to 16.8 billion euros.

The deal propels PSA to second place with a 16 percent market share, behind only Volkswagen AG’s 24 percent and pushing it past Renault SA following a steady decline in recent years.

Tavares’s focus on growth comes after a bailout three years ago by the French state and Dongfeng Motor Corp. and a painful restructuring that included freezing pay, weeding out unprofitable models and shutting a plant. PSA went from net losses starting in 2012 to profit in 2015, and generated 2.7 billion euros in cash in 2016. This year, for the first time since 2011, the company will pay a dividend.