GM Decides Not To Sell Opel to Magna and Sberbank

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Comments: 1

 Tag: Opel, GM, GAZ, Merkel, Sale, Sberbank, Agreement, Deal failed, Germany, Russia, Restructure, European Union, EU

November 4, 2009

Yesterday, GM’s Board of Directors decided to terminate the sale of its European division Opel to Canadian parts supplier Magna and Russian partner Sberbank.  In September GM had agreed to sell a majority position in the operations, in exchange for financial support from the German Government.  However, shortly after the agreement was announced, concern was raised by the European Union and some member states with Opel operations over the terms of the funding pledged by Germany.  Germany had stated it would provide Opel €4.5 billion in financial assistance at the close of a deal with Magna.  In the run up to the German national election it appeared the impetus was to preserve jobs in the state and help assure the re-election of German Chancellor Angela Merkel at the end of September.

In a press release, GM’s Board of Directors decided to retain Opel and proceed to restructure the operations.  The company stated:

GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” said Fritz Henderson, president and CEO. “We understand the complexity and length of this issue has been draining for all involved. However, from the outset, our goal has been to secure the best long term solution for our customers, employee, suppliers, and dealers, which is reflected in the decision reached today. This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall’s long-term future.”

On a preliminary basis, the GM plan entails total restructuring expenses of about € 3 billion, significantly lower than all bids submitted as part of the investor solicitation. GM will work with all European labor unions to develop a plan for meaningful contributions to Opel's restructuring. While Opel continues to outperform against its viability plan assumptions and immediate liquidity is stable, time is of the essence.

“While strained, the business environment in Europe has improved.” Henderson said. “At the same time, GM’s overall financial health and stability have improved significantly over the past few months, giving us confidence that the European business can be successfully restructured. We are grateful for the hard work of the German and other EU governments in navigating this difficult economic period. We’re also appreciative of the effort put forward by Magna and its partners in Russia in trying to reach an equitable agreement.”

Henderson added that GM also hopes to build on its already significant business in Russia and to resume work directly with GAZ to contribute to both the modernization of its operations and the joint development of the Russian vehicle market on a mutually attractive basis. More details on the next steps in the restructuring will be provided as the plans and developments warrant.

Conclusion:

This site has questioned the merits of the transaction when Magna first surfaced as a bidder back in the spring.  The decision by GM’s board does not come as a surprise. As discussed earlier (See: GM Agrees to Sell Opel to Magna and Sberbank), many arguments were made why Magna and Sberbank were not good partners for Opel based upon market conditions in Europe and Russia as well as lack of experience.  More importantly it was believed Opel needs a substantial house cleaning that would be hampered by restrictions placed on the company in order to receive state aid.

At the time GM announced the sale agreement it was believed the deal was burdened with much uncertainty that it was a mistake.  It was hoped that after the elections in Germany cooler head would prevail and GM would decide to retain Opel.  In September I wrote:

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.

GM’s decision to retain Opel is certainly the best outcome for the company as it attempts to maintain its economics of scale and a true global footprint post bankruptcy.  However, at this time Opel’s financial position is unknown and one has to take GM’s statements on the division's financial position in good faith.  When GM releases earnings later this month, that picture will be clearer. 

Assuming Opel is in a better position financially and GM has the ability to raise cash to restructure the operations, the company is going to have overcome angst from the labor union.  On the announcement that GM would not sell Opel to Magna, the union is already calling for work stoppages tomorrow.   There is also the backlash from Germany and Russia over GM’s about face.  GM will certainly have an uphill battle as it has to gain concessions from the union to remain competitive in Europe.  It is expected
GM restructuring plan for Opel will include the closure of its Antwerp plant as well as the two in Germany. Efficient manufacturing facilities in the UK and Spain would remain open. This is a more balanced restructuring than the one proposed by Magna which intended to only close factories outside of Germany.

Two additional positives I see are related to product and business development.  The first is, Opel is in the middle of a product renaissance.  It recently launched the award winning Insignia and will soon release new volume product over the next year as the new Astra and Meriva lineup look promising.

The second is GM stated in yesterday's press release it will work closely with the Russian automaker GAZ which is affiliated with Sberbank.  If or when the Russian auto market picks up, GM could position itself for long term growth with GAZ as a partner.  This could also deflect some backlash from the Russian government as GM could help strengthen the local industry.

Opel will pose a challenge for GM but retaining the division is the right step for the company.  With GM in full control of Opel, this will also better assure a brighter future for the division than under Magna and Sberbank.  I have been consistent is saying, more consolidation in Europe is an imperative and GM's decision at least prevents the market from becoming more fragmented. Europe will remain a competitive market and could face a near term crisis as the Cash-for-Clunkers programs end.

References:
GM scraps plan to sell Vauxhall and Opel to Magna, Times Online, November 2009
Victorious Merkel should be bold, Financial Times, September 2009
Germany fumes over General Motors ditching Opel sale to Magna, Detroit News, November 2009

 

 

 

 

 

 

 

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Comments
Thu Nov 05, 2009 4:23 pm
Name: haypops | Comment: In the past much of Russian industry has been controlled by former KGB officials with no business expertise. Possible changes in the Russian economy to address this issue as well as encourage more international investments may make the GM-GAZ entity the sleeper in this deal. Thanks for the clear perspectives on this and the Ford report too.

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