PSA Takeover Of Opel-Vauxhall Progresses As Optimism Gains.
“PSA is about to try this at Opel (and Vauxhall). PSA paid almost nothing for it and is convinced it’s been badly run”.
PSA Group is closing in on its takeover of GM’s Opel-Vauxhall and investors’ thoughts are returning to the question of how the merger might work out.
When the merger was announced in March it appeared likely that the only way it could work was if much excess capacity was eliminated because of the many overlaps in the business. Analysts were scratching their heads wondering why PSA made the bid, given Opel-Vauxhall lost almost $20 billion this century while constantly promising to return to the black, next year.
“One of the main reasons is scale,” said BMI Research in a report.
“PSA’s strategy in recent years has centred around cost-cutting and expanding. Economies of scale in terms of purchasing and R&D will help with costs, while the addition of the Opel and Vauxhall brands will help with expansion,” BMI said.
After the merger plan was announced Matthias Holweg of the SAID Business School at Oxford University had this to say.
“The takeover of GME (General Motors Europe) by PSA raises the fundamental question of whether it is possible to create one competitive firm out of two relatively weak ones,” Holweg said.
PSA CEO Carlos Tavares talked of using Opel to allow it to expand outside current markets and enter markets where French brands don’t have a foothold.
Analysts weren’t very impressed with that strategy.
And BMI pointed out that under the terms of the deal, Opel can’t enter markets where GM is present while it is still selling models designed by GM.
Wait for the next Astra
“This means serious expansion will have to wait until there are Opel-Vauxhall models designed and built on PSA platforms. One of the first could be the next generation Astra which has been delayed to 2020 so that it can be moved to a PSA platform,” BMI said.
The European Commission approved the deal earlier this month.
Investment researchers Evercore ISI and Bernstein Research, after some months to think about it, both had glass-half full thoughts on the deal’s possibilities.
Evercore ISI said it felt positive from an operational point of view and believed the merger would improve overall profitability.
Bernstein Research’s Max Warburton was excited by the prospects, saying Peugeot would maintain its excellent profitability in 2017 and apply the same methods to turn Opel around. PSA was the highest margin mass-market manufacturer in Europe in 2016, thanks to its massive cost cutting, price increases and improvements in mix.
Peugeot has fought back from the brink of bankruptcy and was saved by a $3.2 billion state-backed rescue plan after racking up more than $7.4 billion in losses over a couple of years. France and Chinese carmaker Dongfeng each bought 14 per cent of the company in 2014. The Peugeot family stake was reduced to 14 per cent.
The new French government has said it plans to start a sale of €10 billion worth of public share holdings and its shares in PSA are thought to be high on the list because they have more than doubled in value
Robust core profitability
“PSA is about to try this (rescue plan) at Opel (and Vauxhall). PSA paid almost nothing for it and is convinced it’s been badly run. The deal will close in the second half and PSA will get to work quickly, cutting fixed costs, promotional spending and waste. Despite weak volumes, we believe core (PSA) profitability will remain robust in 2017. Opel (and Vauxhall) will surprise in 2018 and 2019,” Warburton said.
PSA has said it would return the Opel and Vauxhall brands to profit, with an operating margin of 2 per cent within three years and 6 per cent by 2026, underpinned by €1.7 billion in joint cost savings.