GM sells European brands to Peugeot

Monday March 06, 2017
Written by Angela Charlton & Tom Krisher, The Associated Press
Mar. 6, 2017 - General Motors is selling its unprofitable European car business to the French maker of Peugeot, marking the American company’s retreat from a major market and raising concerns of job cuts in the region.

With the 2.2 billion euro ($2.33 billion) deal announced Monday, GM is giving up brands — Opel in Germany and Vauxhall in Britain — that have given it a foothold in the world’s third-largest auto market since the 1920s. The brands, however, have lost $20 billion since last making a full-year profit in 1999.

For PSA Group, which makes Peugeot and Citroen cars, the acquisition will turn it into Europe’s No. 2 automaker after Volkswagen and caps a remarkable turnaround after it was bailed out just three years ago.

The deal is “a game-changer for PSA,” said its CEO, Carlos Tavares.

GM Chairman and CEO Mary Barra told analysts that the sale may not be GM’s last. She said the company has work to do on some international businesses and could make a similar deal for them if they can’t be fixed.

She told reporters in Paris that the decision to all but exit Europe “was a difficult decision for General Motors but we are united in belief that it is the right one.”

Britain’s vote to leave the European Union, which caused a plunge in the pound, weighed on the decision, Barra said.

With Britain’s exit from the European Union and stricter pollution regulations coming in Europe that will require massive investments in electric vehicles, the risks of staying in Europe outweighed the benefits, GM President Dan Ammann told analysts.

Increased regulatory costs “will continue to be a burden for the foreseeable future” that would be a drain on capital, Ammann said, adding that GM wants to focus its finite resources on places where it is more strongly positioned.

PSA will join with French bank BNP Paribas to run GM’s European financial business. PSA also will take over 12 manufacturing facilities that employ about 40,000 people, according to a joint statement by the companies.

Executives insisted that no job cuts are currently foreseen, but analysts say they’re inevitable over the long term.

GM will keep its manufacturing centre in Turin, Italy. GM and PSA will continue to collaborate on electric car technologies and maintain existing supply agreements on some Buick models.

GM can still offer ride-hailing and other new mobility services in Europe, and it will continue to sell some high-performance Chevrolets and Cadillacs there in low volumes. PSA will be able to sell cars in the U.S. if it wants, after Opel and Vauxhall models move to PSA-designed underpinnings.

Shares in General Motors Co. were down 0.6 per cent to $38 in early trading Monday. They’re up 10 per cent since the first of the year, indicating that investors already were anticipating benefits from the deal. PSA’s shares were up 3.4 per cent at 19.46 euros.

For GM, the agreement indicates that Barra decided to focus on profits over market share.

Asked whether the arrival of the Trump administration played a role in GM’s decision to sell, Barra said GM looked at “the changing landscape from a regulatory, a geopolitical and customer preference standpoint” before making a decision.

GM will take proceeds from the sale and to accelerate its stock buyback program. The move also frees about $1 billion in capital spending which could go toward development of autonomous cars and ride-hailing services, as well as pension obligations.

Opel and Vauxhall last year sold just under 1.2 million vehicles, amounting to only 5.6 per cent of the market, according to GM. GM has recently shown a willingness to pull out of unprofitable regions — it abandoned Russia in 2015.

“Unloading Opel-Vauxhall and the European part of the financing greatly improves GM’s balance sheet, allowing investments in growing markets such as China and India,” said Rebecca Lindland of Kelley Blue Book.

The deal marks a major recovery for PSA, rescued out just three years ago by Chinese investors and the French state. CEO Tavares, recalling PSA’s “near-death experience,” said he hopes to parlay his success to similar savings at Opel, cutting costs through scale and better use of factory capacity.

The companies expect annual savings of 1.7 billion euros by 2026. Amid uncertainty over Brexit, Vauxhall — and its 4,500 jobs — appears most vulnerable to any future cuts.

The leader of the Unite union in Britain said it will focus on persuading new management that it makes sense to continue “building in Britain.”

In a sign of the importance of the deal to Britain’s government, the both Barra and Tavares discussed it with British Prime Minister Theresa May, who insisted on the importance of keeping Vauxhall jobs.

Factory closures are a concern in Germany as well, especially in an election year.

German Economy Minister Brigitte Zypries and the governors of three German states said in a statement that PSA made commitments regarding “locations, employment and investments.” PSA executives also held talks with unions before finalizing the deal.

However, Christian Stadler of Warwick Business School warned: “I would expect job cuts. PSA has done it before and there is no other way to realistically achieve the cost savings they have in mind.”

“The U.K. is definitely in a bad position as Brexit makes it less competitive than Germany and the unions are stronger in Germany,” he said.

GM is picking up most of its $6.5 billion in underfunded pensions in Europe. It may take a 4.5 billion euro writedown on the deal.

The deal, subject to regulatory approval, is expected to be completed at the end of this year.

Krisher reported from Detroit. Danica Kirka in London and Kristen Grieshaber in Berlin contributed.

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