GM Agrees to Sell Opel to Magna and Sberbank

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Tag: Opel, GM, GAZ, Putin, Merkel, sale, Sberbank, Agreement, deal, Germany, Russia, JHR, BAIC, Lost control

September 13, 2009
On Thursday GM announced that auto component supplier Magna International and the Russian bank Sberbank were selected to take over controlling interest in its European operations.   The future of GM’s European Opel and Vauxhall have been in an uncertain state since late last year when global sales collapsed in the last quarter of 2008 and the parent company was before the US Congress seeking state aid to prevent a failure of its US operations.  Last November, Opel requested aid from the German government to prevent a liquidity crisis at its European business.

Just prior to GM filing for Chapter 11 bankruptcy protection in June, Opel had been place in a trust as the German government provided a bridge loan to sustain the company while GM reorganized in the US.   Opel was also put up for sale pending the outcome of the GM bankruptcy.  Magna along with with Sberbank, private equity group RHJ International and the Chinese auto manufacturer BAIC sought to take over Opel.  Once Opel was placed in the trust GM lost control of Opel and the situation became politicized.  Magna was identified as the preferred suitor by the German government, however, GM was allowed by the trust to determine how it would proceed with Opel. The following outlines the background of the agreement.

In an official but brief statement GM said:

GM Board Recommendation to Sell Majority Stake in Opel/Vauxhall to Magna International/Sberbank he following excerpt is from GM’s press release announcing the decision to sell the operations:

·    GM to sell 55% stake in New Opel to Magna/Sberbank
·    Agreement on new ownership structure signals fresh start for New Opel
·    Employees to hold 10% stake in New Opel
·    Government supports financing through additional state guarantees
Zurich. General Motors today announced that its Board of Directors supports a bid from the consortium of Magna International Inc. and Sberbank to buy a majority stake in its European Opel/Vauxhall operations.

Several key issues will be finalized over the next few weeks to secure the binding agreements, including the written support of the labor unions to support the deal with the necessary cost restructuring for viability and the finalization of a definitive financing package from the German government. The definitive agreements should be ready to sign within a few weeks, with closing to follow within the next few months. Under the deal, Magna/Sberbank will purchase a 55 percent stake in New Opel; GM will hold a 35 percent stake and employees will be provided a 10 percent stake.

“The hard work over the past two weeks to clarify open issues and resolve details in the German financial package brought GM and its Board of Directors to recommend Magna/Sberbank,” said Fritz Henderson, GM President and CEO. “We thank all parties involved in the intensive process of the last few months -- especially the German government -- for their continued support that enables this new venture. I’d also like to thank the Opel and Vauxhall customers for their continued loyalty. GM will continue to closely collaborate with Opel and Vauxhall to develop and produce more great cars, such as the new Insignia and the new Astra,” Henderson added.

The agreement will keep Opel/Vauxhall a fully integrated part of GM’s global product development organization, allowing all parties to benefit from the exchange of technology and engineering resources. The new ownership structure constitutes a new lean, efficient and independent organization for the Opel and Vauxhall brands. The current portfolio of Opel/Vauxhall cars and the models in the pipeline are a strong basis for future success.

According to Automotive News, the following outlines Magna’s plan for Opel:

Strategy
·   Wants to use spare plant capacity at Opel by tapping into its expertise in contract manufacturing to build rival models for outside carmakers. It forecasts high growth rates, particularly in Russia, home of its consortium partners Sberbank, a state-controlled lender, and GAZ Group, the country's second-largest automaker.
Shareholding
·   Magna and Sberbank each will hold 27.5 percent. About 10 percent would be taken up by Opel workers and 35 percent will remain with GM.
State guarantees
·   The group needs 4.5 billion euros ($6.6 billion) of guarantees from the German government.
Equity investment
·   Would invest 500 million euros in Opel. Of this, 350 million euros would be an immediate equity injection. The rest would be debt that can be later converted into equity.
Jobs
·   About 10,000 of the total 50,000 jobs across Europe would be cut, with 25 percent of the job losses in Germany.
Plants
·   Could close factories in Antwerp, Belgium, and Luton, England, if it has no luck luring new contracts to those plants to make use of their capacities.

With respect to the deal, the Detroit News published:

· Magna and Sberbank will put in $730 million for a combined 55 percent stake in the New Opel.
· Magna anticipates that Opel will be profitable in 2011. At that time, it will start repaying loans and expects to have repaid them by 2014.
· Under the agreement, Opel and its British Vauxhall operations will remain an integrated part of GM's global product development system, with all players benefiting from economies of scale and an exchange of technology and engineering resources.
· For Magna, the deal represents a breakthrough in its effort to become a full-scale automaker. It has produced certain models, such as the BMW X3 small SUV, for its clients, in limited numbers.

Reuters provided some details on the agreement from statements by GM's John Smith:

·  GM chief negotiator Smith says expects closing of deal no later than November 30
·  says GM will support opel product pipeline through 2014
·  says deal has US providing intellectual property support to Russia's Gaz as
well as Opel
·   says U.S. market totally restricted for Opel
·  says if Canada allows, Opels can be sold there starting Q4 2012
·  says agreements precludes sale of high volume models Insignia, Astra in
China through 2015
·  says Magna consortium to provide 450 million EUR cash on closing, 50 million
EUR loan convertible later
·  says Magna plans foresee Opel profitable from 2011

In summary, Magna's plan to restructure Opel includes about 10,000 job cuts across Europe.  GM has confirmed that Magna and Sberbank would end production at Opel’s plant in Antwerp, Belgium but would keep all four German plants open.  Half of Opel's workforce is based in Germany.  Opel employees about 50,000 workers across Europe and only intends to cut about 2,500 workers in Germany.

Discussion:

Beyond a very limited press release, GM did not provide much detail about the decision to spin off Opel beyond the ownership structure of the new entity.  GM also has not filed any documents with the SEC elaborating on the deal.  However, earlier in the day prior to the official announcement by GM, there were reports from confidential sources that GM’s agreement to sell to Magna/Sberbank would come with conditions on the deal.  However, those conditions have not been made public beyond high level statements from GM's negotiator John Smith presented above.

Essentially, at this time we do not know what assets constitute New Opel with respect to this deal.  Late last year I was told GM lawyers were carving out Opel from GM Europe as the financial crisis unfolded and the parent company was forced to seek a bailout from the US government.  Furthermore, it is unclear what was actually carved out of GM Europe.

The business rationale for Opel's new majority owners is for Magna with their partner Sberbank who is linked with the Russian automaker GAZ is to expand Opel in Russia.  Howevver, since the financial crisis began a year ago, leading to the current global recession, the automobile market in Russia has collapsed.  Just prior to the economic problems, Russia was poised to overtake Germany and become the single largest market in Europe.

Through August, vehicle sales in Russia are down 51% compared to last year with just under one million vehicle sold this year.  Opel and GAZ saw sales drop 60% to 28,000 and 37,000, respectively.  The best selling transplant brand in Russia is Chevrolet.  It also saw its sales drop 54% for the year to 74,000 vehicles.  For comparison the best selling vehicle line in Russia is the government subsidized Lada, selling 241,000 vehicles this year which is down 44%.

The Russian economy has been adversely affected by the current economic troubles as credit tightened and commodity price tumbled especially oil and natural gas.  Through the second quarter 2009, the Russian economy has contracted by just over 10%.  

Much like the auto market in the US, it is highly unlikely that the Russian economy will recover anytime soon and that makes Magna’s expectations of Opel’s return to profitably by 2011 unreasonable.  The Russian economy would have to improve a lot in order to generate the sales required to improve Opel’s revenues.  Based upon available data to explain the auto bubble in the country, in 2005 Chevrolet sales were 66,000 improving to 235,000 by 2008.  In a few short years, the Chevrolet brand became a leading brand in the country.  

GM within the last year opened a brand new production facility in St. Petersburg Russia. The new plant was to produce 70,000 Chevrolet Captiva sport utility vehicles and the Opel Astra, with plans to manufacture the Chevrolet Cruze compact car this year.   GM was also producing 100,000 vehicles a year in joint ventures with ZAO Avtotor and OAO AvtoVAZ. In 2008 GM increased its market share in Russia  to 10.9% from 6.5% in 2006. In 2008 the Chevrolet Lacetti was Russia's second best-selling foreign brand car after the Ford Focus.

Even though the Russian economy will not recover anytime soon and see the growth prior to last years crisis, the new St. Petersburg plant remains a very valuable asset to GM.  At this time it is not known if this is part of the New Opel.  With GM losing control of Opel, the St. Petersburg plant remains a viable facility to supply Western Europe with vehicles produced with low cost Russian labor, and continue to grow the Chevrolet brand.  It also must be remembered that Chevrolet Europe is a subsidiary of GM’s Korean operations.

The viability of Opel in Russia is suspect as a growth brand as the market conditions remain depressed.  Russia as a production site for Opel is very promising to supply Western Europe.  However, under the supervision of the German government, New Opel will not be able to properly restructure the company and close the necessary facilities in Germany to reduce capacity to allow for serious Russian production.

How would the automaker GAZ fit into this?  GAZ is not a significant manufacturer of passenger vehicles in Russia.  Last year the company sold 69,000 vehicles.  It is primarily a commercial vehicle operations selling buses and construction equipment.  Last year the company generated only $4.7 billion in revenue.  The company’s most advance light vehicle is the Volga Siber which is essentially the previous generation Chrysler Sebring.  Chrysler sold the tooling to GAZ when it switched production to an updated model.  Essentially, GAZ does not have the technical resources to develop a modern automobile.  The new plant in Nizhny Novgorod was developed with Magna and the location has the potential to produce Opels, however, production should serve Western Europe.  The plant has a capacity of 100,000 vehicle.

The German government had preferred Magna because its bid preserved the most jobs in Germany as Chancellor Merkel stands for re-election at the end of this month.  There also appears to be cross boarder collusion between Germany and Russia.  A backlash by EU countries adversely affected by Germany's heavy handed approach to GM has already begun.  Spain and Belgium where Opel has operations that are likely to close under Magna and Sberbank have already protested as the new owners will attempt to consolidate production in Germany and grow in Russia.

Protests by EU members over the German arranged deal could derail the sale of Opel to the winning bidders.  Moreover, Magna and Sberbank could fail to agree to GM’s conditions of restricting the sale of Opel vehicles in the US and China or restrictions that have not been released.  GM plans to sell or currently sells Opel vehicles in those markets as Buicks.

The future of Opel under its new majority owners is far from certain.  It must be remembered that Europe has propped up its industry with substantial incentives to lure buyers into the showrooms since the start of the year.  Their cash for clunkers programs was implemented earlier than the US and offered more money.  These programs throughout Europe, which are about to expire have propped up the industry such that sales are only down 11% through June.  Sales in the US through August after the cash for clunkers program experience a 30% drop in sales for the year.  Suffice it to say, the economies in Europe and the US are not robust and I expect a serious hangover in auto sales for both regions as sales were pulled ahead.

The automotive industry in Europe is in need of a significant restructuring and consolidation to reduce the overcapacity.  In the case of Opel, GM has been losing money and restructuring the division for the better part of a decade without much success.  Opel needs to file for bankruptcy and give the new entity a serious attempt at ridding themselves of their legacy costs, obligations and unprofitable operations.  For GM to maintain full control of Opel, pushing it into bankruptcy protection to restructure was likely the best option if they could gain access to the DIP financing.  Since that was not likely a viable option because of the credit markets and politics involved, GM did what it had to do and reduced their exposure to Opel and still maintain some economies of scale. 

The biggest failure in the Opel crisis is how dysfunctional the European Union has been at not establishing a coordinated response to GM-Opel as the US government did with GM and Chrysler.  There is no rational reason to explain why the German government is forcing GM to sell its operations and not just underwrite a direct loan to GM.  Legally GM US is distinct from its international operations so the hesitation that GM will transfer bailout money from one operation to another is a weak excuse for the Germans to pursue an agenda to break up Opel from GM.  In the end the German government’s decision is going to result in a weaker entity.  Changing the ownership structure is not going to improve Opel’s prospects.  Magna and Sberbank do not bring experience or resources to the table.  Beyond debt from the German government, neither is even bringing serious cash to the deal.  If turning Opel around were easy, GM had plenty of opportunities to do it under better economic conditions.

Much like I continue to be bearish on the Fiat-Chrysler prospects I have the same opinion of the New Opel.  Opel has little intellectual property.  Beyond contractual requirements to allow access to New Opel to GM’s intellectual property at a cost per unit basis, if GM were to pullout of New Opel, the entity would have to redevelop its own platforms and powertrains or license from others.  GM owns the knowledge and that is the company’s trump card. 
Chrysler is also still paying Daimler royalties on intellectual property and will continue to for some time.

Even with the pending sale of Opel, GM continues to be a global company with global technology centers to develop new programs.  Even though, GM Europe under Opel leadership developed the company’s small and midsized vehicle architectures that is utilizes globally, the knowledge could be transferred as it did with its Korean and Chinese operations.

GM also has Chevrolet in Europe which has been a growth brand in Europe since it purchased Daewoo earlier this decade.  Chevrolet has made up for much of the lost volume at Opel in the last 10 years particularly in Russia.  That growth in Eastern Europe will not return soon and the recovery in Western Europe will be slow and that is the basis for my prospects for Opel.  Moreover, I am suspect of Magna and Sberbank’s ability to raise capital to fund new products with GM.  I will be clear that Opel is not self sufficient with positive cash flow and is expected from some reports to lose $3 billion this year.

As far as GM’s balance sheet, they might lose about 70% of Opel’s revenue but they will also lose their associated debt and loses.  For GM, losing control of Opel is a wash as there is no good solution to fix the situation.  The German government and labor have prevented GM from really fixing the entity and it ultimately will also hamper Magna's ability to do so.  It is this dysfunction of many European governments that GM is writing off.  Opel under GM needed to close plants in high labor cost areas and move to locations in Eastern Europe which they have done with their successful Chevrolet brand.  For the new post bankruptcy GM, Chevrolet is the future and Opel the past.

At this time, not much has been said officially by GM on the deal and the devil is in the details and the details of GM’s decision have not been released.  Opel has been a liability for GM for a decade.  This is in sharp contrast to twenty years ago, when Opel was a financial powerhouse for the company.  That changed in the late 1990s after Opel revolted against the parent company's attempt to integrate the German subsidiary into the company's global structure and some poor product decisions.  In an ideal world, GM could have restructured Opel properly with little resistance but their hands were tied and expensive to do outside of bankruptcy.  The biggest positive is that Magna needs GM to pull off any successful restructuring of Opel and that will give GM the economic of scale it needs to continue to drive down cost.

My biggest question is, after Magna failed at gaining control of Chrysler when Daimler sold the business to Cerberus a couple years ago and seeing what happened, why would they want to take over Opel?  Why would the German government not see what happened there considering it involved Daimler?  It must be remembered BMW walked away from Rover and Daimler from Chrysler.  One would assume those fiascos would be still fresh in the memory of Germany's leadership.   

The situation may change after the German elections are held this month and a more rational dialogue surfaces on the fate of Opel.  It must be remembered that Europe is dominated by companies that are a lot like Chrysler prior to bankruptcy – large debt, little cash and low margins.  The German government's decision in many ways just maintains the status quo which is not what the European auto industry needs to be viable.



References:
Russian Auto Bailout Protects Jobs, Not Efficiency, NY Times, April 6, 2009

Ford and GM Record Massive Sales Drop in Russia, Autoevolution, August 11, 2009

Russia Is Now Europe's Biggest Car Market; Chevrolet Best-Selling Brand,Edmunds, July 9, 2009

Global Slowdown Hits Car Sales in Russia, Edmunds, July 9, 2008

GM to sell 55% stake in Opel to Magna, Sberbank, Automotive New, September 10, 2009

Global Slowdown Hits Car Sales in Russia, Edmunds, January 20, 2009

Putin welcomes GM's Opel decision, Detroit News, September 11, 2009

GM to sell Opel to Magna with conditions: Sources, The Economic Times, September 10, 2009

GM Opens 0 Million Russian Plant to Boost Sales, Bloomberg, November 7, 2008

What Magna plans for Opel, Automotive News, Automotive New, September 10, 2009

GM sells Opel to Magna, Sberbank, Detroit News, September 11, 2009 

Key recent events at Opel, Automotive New, September 10, 2009

Fight looms over German state aid to Magna-led Opel, Automotive New, September 12, 2009

Entire contents © 2007 - 2009 The Automotive Lyceum All Rights Reserved



Comments
Sun Sep 20, 2009 8:13 pm
Name: Rick | Comment: GM is a privately owned company (though one the government has an ownership stake in). They don't need to file with the SEC. Only publicly listed companies need to do that.

Mon Sep 21, 2009 4:51 amFOR RELEASE: 2009-08-07

GM Statement Regarding the Filing of General Motors Company's Current Report on Form 8-K

General Motors Company (GM) today filed with the Securities and Exchange Commission (SEC) a Form 8-K with details on a number of matters that have occurred since the new company launched on July 10, 2009 as well as a comprehensive review of the business. GM agreed to provide this qualitative, non-financial information as part of its understanding with the SEC regarding the company’s filing requirements and those of Motors Liquidation Company (formerly General Motors Corporation), which sold substantially all of its assets to GM.

For more information see link below:
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewmonthlyreleasedetail.do?domain=74&docid=56115



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