PSA “Wins” Battle To Buy GM’s Opel-Vauxhall.
But GM Pleased To Have Dumped Chronic Loss-Maker.
Can PSA Make The Merger Work?
“is it possible to create one competitive firm out of two relatively weak ones”
Both sides of the Peugeot/Opel Vauxhall merger were smiling after the news broke, but it will probably take years before the conclusive winner emerges.
Initially, General Motors shareholders must have been delighted that it has finally managed to dump its chronic, perpetually loss-making European operations on France’s PSA Group. GM’s Opel-Vauxhall brands have lost close to $20 billion this century while persistently promising break-even next year.
GM swallowed its pride and finally admitted defeat in Europe, but this was also an indictment of business conditions here, where over-regulation, union influence on management, and ever tightening fuel efficiency rules make it hard to make money on low margin mass market cars.
PSA CEO Carlos Tavares was happy to see his West European market share zoom to more than 16 per cent, and excited at the prospect of increased scale and its promise of more efficiency and high profits.
“We’re confident that the Opel-Vauxhall turnaround will significantly accelerate with our support,” PSA Chief Executive Carlos Tavares said in a statement.
Many analysts believe in the long run this can only be achieved by drastically cutting production, and this is likely to concentrate on Opel and Vauxhall factories.
PSA will buy GM’s European business valued at €2.2 billion euros. The maker of Peugeot, Citroen and DS cars said it would return Opel and Vauxhall brand to profit, with an operating margin of 2 two per cent within three years and six per cent by 2026, underpinned by €1.7 billion in joint cost savings.
GM will be saying good luck with that plan.
Last year was apparently the final straw for GM, when the latest promise that Opel Vauxhall would break even fell short again, but this time because it was hit by a big foreign exchange loss after Britain voted to leave the European Union. Opel-Vauxhall lost $257 million in 2016, blaming Britain’s Brexit vote for $500 million in foreign exchange losses.
GM management in the U.S. were probably wondering how the company failed to hedge against possible foreign currency losses, and would have noted Ford Europe, long a loss maker too but not on the scale of Opel Vauxhall, made a profit of $1 billion in 2016.
GM will receive €1.32 billion euros for the manufacturing business. PSA and BNP Paribas will pay a further €900 million euros for the Opel financing arm and operate it as a joint venture, fully consolidated by the French bank.
PSA and Opel-Vauxhall already share some production in an existing European alliance. The transaction also sees GM retain most of Opel’s pension deficit, estimated by analysts at $10 billion.
GM will also take an accounting charge of $4 billion to $4.5 billion in relation to the deal, expected to close in late 2017.
“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,” Matthias Holweg of the SAID Business School said.
Most vulnerable plants
Holweg said the main options are to consolidate central functions, use joint platforms (some already exist), and consolidate production. Cost reduction is the main avenue for improvement, which could involve moving central functions like engineering from Germany to France, closing marginal plants, with the most vulnerable being ones in the U.K., Portugal, Madrid, Spain and Eisenach, Germany. There could be plant consolidation in Spain where PSA and Opel have plants.
Analysts initially said the terms of the deal look good for PSA.
Philippe Houchois, analyst with investment researcher Jeffries said acquisition terms look better than expected for PSA. GM agreed to retain most of the pension obligations, he said.
But SAID’s Holweg paints a less happy picture for the future.
“As it stands, the merger will create one very large car maker that is very exposed to the mature, saturated European market: PSA sells 2 out of 3 cars in Europe, GM Europe sells all of its cars here. It was PSA’s dependency on Europe that led to its existential crisis of 2013. This deal could exacerbate the problem of being reliant on a hypercompetitive, saturated market,” Holweg said.
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