PSA becomes Europe’s second-largest carmaker

After many months of speculation, General Motors and PSA confirmed today that German brand Opel, together with is U.K.-based Vauxhal Motors subsidiary, has been sold to the French company that produces Citroen and Peugeot. PSA will also purchase GM Financial’s European operations in a transaction that’s expected to be completed by the end of 2017.

GM will receive €1.32 billion ($1.4 billion as of March 2017) for Opel in the form of €650 million ($689 million) in cash and €670 million ($710 million) in PSA share warrants. An additional €900 million ($954 million) will be paid by PSA and BNP Paribas for Opel’s financing arm, which will be operated by the French bank. The whole transaction is valued at €2.2 billion ($2.33 billion).

“We are proud to join forces with Opel/Vauxhall and are deeply committed to continuing to develop this great company and accelerating its turnaround,” said Carlos Tavares, chairman of the Managing Board of PSA. “We respect all that Opel/Vauxhall’s talented people have achieved as well as the company’s fine brands and strong heritage. We intend to manage PSA and Opel/Vauxhall capitalizing on their respective brand identities.

“For GM, this represents another major step in the ongoing work that is driving our improved performance and accelerating our momentum. We are reshaping our company and delivering consistent, record results for our owners through disciplined capital allocation to our higher-return investments in our core automotive business and in new technologies that are enabling us to lead the future of personal mobility," said GM chairman and CEO Mary T. Barra.

General Motors admitted that selling Opel to PSA will free up resources for better opportunities in North America and China, as well as enable the automaker to return cash to shareholders. GM also claims that the European market has become so different from the company’s other major regions that only 20 percent of the vehicles in Opel’s lineup would have been shared with GM products. The company also expects the deal to free up around $2 billion in cash to use toward repurchasing its own shares. As a reminder, GM is in the middle of a buyback effort following its 2009 bankruptcy.

As far as its Buick and Holden brands are concerned, both sharing underpinnings with current Opel vehicles, the German carmaker will continue to provide parts. GM and PSA will also collaborate on electric car technology, so it’s safe to assume that the American firm and Opel will continue to have solid ties. However, some Opel models will be restricted from entering new overseas markets, while GM will be similarly barred from selling similar technology in Europe. All told, should GM plan to return to Europe with Chevrolet, it will have to develop its own vehicles without technology from Opel/Vauxhall.

PSA, which has now surpassed Renault to become Europe’s second-largest carmaker after Volkswagen, vowed to return Opel to profit after more than two decades of losses. Using the same strategy that saved PSA from going under, the French are targeting a two-percent profit by 2020 and six-percent profit by 2026. At the same time, PSA predicts joint cost savings of around €1.7 million ($1.8 million).

According to Tavares, the next-generation Opel Corsa will be the first vehicle to benefit from the new joint-venture. The subcompact will arrive in 2020.

Continue reading for the full story.

Why it Matters

GM Sells Opel To PSA, Leaves European Market
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While it’s difficult to predict what will actually happen in the long term, I’m guessing that both GM and PSA did a thorough simulation of their futures without and with the Opel brand, respectively. And it’s safe to assume that both parties are happy with what they think they can achieve this way.

For General Motors, the main benefit is no longer having to pour money into the bottomless pit that Opel and Vauxhall have been over the last years. Granted, the German brand seems to be on the right path and a turnover is indeed to be expected in a few years, but selling Opel is the right thing to do if GM wants to move on without having to worry about a new Chapter 11 bankruptcy. Investors have been asking GM to drop Opel and focus on more important projects and it seems that GM has given this a lot of thought. Sure, the American firm may no longer have a presence in Europe (outside Cadillac and the performance Chevy Camaro and Corvette duo), but focusing on North America and China, its largest markets as of now, makes a lot of sense.

As for PSA, buying Opel comes with loads of opportunities. For starters, the cooperation will spawn better cars that are cheaper to produce, meaning PSA will save a lot of money, while Opel could finally return to profit. This will also enhance PSA’s presence in Europe and probably bring a solid management program for all the brands involved. On the flipside, should Opel remain unprofitable in the long run (which isn’t very likely to be honest), PSA will take a big hit and could face bankruptcy again. In 2014, the French firm avoided it by selling 14 percent stakes to the French state and China’s Dongfeng.

All told, it remains to be seen how this works out for all parts involved.

Press Release

General Motors Co. (NYSE:GM) and PSA Group (Paris:UG) today announced an agreement under which GM’s Opel/Vauxhall subsidiary and GM Financial’s European operations will join the PSA Group in a transaction valuing these activities at €1.3 Bn and €0.9 Bn, respectively.

With the addition of Opel/Vauxhall, which generated revenue of €17.7 Bn in 20161, PSA will become the second-largest automotive company in Europe, with a 17% market share2.

Creates sound European foundation for PSA to support its worldwide profitable growth

“We are proud to join forces with Opel/Vauxhall and are deeply committed to continuing to develop this great company and accelerating its turnaround,” said Carlos Tavares, chairman of the Managing Board of PSA. “We respect all that Opel/Vauxhall’s talented people have achieved as well as the company’s fine brands and strong heritage. We intend to manage PSA and Opel/Vauxhall capitalizing on their respective brand identities. Having already created together winning products for the European market, we know that Opel/Vauxhall is the right partner. We see this as a natural extension of our relationship and are eager to take it to the next level.”

“We are confident that the Opel/Vauxhall turnaround will significantly accelerate with our support, while respecting the commitments made by GM to the Opel/Vauxhall employees,” continued Mr. Tavares.

Advances GM’s Transformation and Unlocks Value

“We are very pleased that together, GM, our valued colleagues at Opel/Vauxhall and PSA have created a new opportunity to enhance the long-term performance of our respective companies by building on the success of our prior alliance”, said Mary T. Barra, GM chairman and chief executive officer.

“For GM, this represents another major step in the ongoing work that is driving our improved performance and accelerating our momentum. We are reshaping our company and delivering consistent, record results for our owners through disciplined capital allocation to our higher-return investments in our core automotive business and in new technologies that are enabling us to lead the future of personal mobility.

“We believe this new chapter puts Opel and Vauxhall in an even stronger position for the long term and we look forward to our participation in the future success and strong value-creation potential of PSA through our economic interest and continued collaboration on current and exciting new projects,” Ms. Barra concluded.

Strengthens Each Company for the Long Term

The transaction will allow substantial economies of scale and synergies in purchasing, manufacturing and R&D. Annual synergies of €1.7 Bn are expected by 2026 – of which a significant part is expected to be delivered by 2020, accelerating Opel/Vauxhall’s turnaround. Leveraging the successful partnership with GM, PSA expects Opel/Vauxhall to reach a recurring operating margin3 of 2% by 2020 and 6% by 2026, and to generate a positive operational free cash flow4 by 2020.

PSA, together with BNP Paribas, will also acquire all of GM Financial’s European operations through a newly formed 50%/50% joint venture that will retain GM Financial’s current European platform and team. This joint venture will be fully consolidated by BNP Paribas and accounted under the equity method by PSA.

The transaction is another step in GM’s ongoing work to transform the company, which has delivered three years of record performance and a strong 2017 outlook, and returned significant capital to shareholders. It will strengthen GM’s core business, support its continued deployment of resources to higher-return opportunities including in advanced technologies driving the future, and unlock significant value for shareholders.

By immediately improving EBIT-adjusted, EBIT-adjusted margins and adjusted automotive free cash flow and de-risking the balance sheet, the transaction will enable GM to lower the cash balance requirement under its capital allocation framework by $2 Bn, which it intends to use to accelerate share repurchases, subject to market conditions.

GM will also participate in the future success of the combined entity through its ownership of warrants to purchase shares of PSA. GM and PSA also expect to collaborate in the further deployment of electrification technologies and existing supply agreements for Holden and certain Buick models will continue, and PSA may potentially source long-term supply of fuel cell systems from the GM/Honda joint venture.

Additional Information

Terms of the Agreement

Opel/Vauxhall automotive operations will be acquired by PSA for €1.3 Bn. GM Financial’s European operations will be jointly acquired by PSA and BNP Paribas for 0.8 times their pro forma book value at the closing of the transaction, or approximately €0.9 Bn.

The transaction has a total value of €2.2 Bn, for Opel/Vauxhall automotive operations and 100% of GM Financial’s European operations.

The transaction value for PSA, including Opel/Vauxhall and 50% of GM Financial’s European operations, will be €1.8 Bn.

In connection with this transaction, GM or its affiliates will subscribe warrants for €0.65 Bn. These warrants have a nine-year maturity and are exercisable at any time in whole or in part commencing 5 years after the issue date, with a strike price of €1. Based on a reference price of €17.34 for the PSA share5 , the warrants correspond to 39.7 MM shares of PSA, or 4.2% of its fully diluted share capital6. GM will not have governance or voting rights with respect to PSA and has agreed to sell the PSA shares received upon exercise of the warrants within 35 days after exercise.

The transaction includes all of Opel/Vauxhall’s automotive operations, comprising Opel and Vauxhall brands, six assembly and five component-manufacturing facilities, one engineering center (Rüsselsheim) and approximately 40,000 employees. GM will retain the engineering center in Torino, Italy.

Opel/Vauxhall will also continue to benefit from intellectual property licenses from GM until its vehicles progressively convert to PSA platforms over the coming years.

In connection with the transaction, GM will take a primarily non-cash special charge of $4.0-4.5 Bn.

Ongoing Pension Fund Commitments

All of Opel/Vauxhall’s European and U.K. pension plans, funded and unfunded, with the exception of the German Actives Plan and selected smaller plans will remain with GM. The obligations with respect to the German Actives Plan and these smaller plans of Opel/Vauxhall will be transferred to PSA. GM will pay PSA €3.0 Bn for full settlement of transferred pension obligations.

Closing Conditions

The transaction is subject to various closing conditions, including regulatory approvals and reorganizations, and is expected to close before the end of 2017.

Warrants

The issuance of the warrants is subject to the vote of shareholders at PSA’s General Meeting of May 10th, 2017. The three main shareholders of PSA (the French State, the Peugeot family and DongFeng) representing in aggregate 36.6% of the share capital and 51.5%7 of the voting rights of PSA have undertaken to vote in favor of the resolution related to the issuance of the warrants to GM. In the event the warrant issuance reserved to GM and its affiliates is not approved by PSA’s General Meeting, PSA will settle the €0.65 Bn in cash over five years.

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