Last week, GM reached an agreement to sell its Opel/Vauxhall business to PSA Group for EUR1.3 billion (USD1.4 billion). The deal includes the entire automotive operations of Opel/Vauxhall, comprising Opel and Vauxhall brands, six assembly plants and five component facilities and one engineering centre in Rüsselsheim, Germany. GM, however, will continue to retain ownership of its engineering centre in Turin, Italy.
The deal also included sale of GM Financials’ European operations for an additional EUR0.9 billion (USD1 billion). Overall, the transaction value to PSA will be EUR1.8 billion (USD1.9 billion). PSA’s major shareholders, the French state, the Peugeot family and Dongfeng Motors which together own 51%. 5% of voting rights have already voted in favour of the merger. The transaction, subjected to various closing conditions, including regulatory approvals and reorganizations, is expected to close by the end of this year.
The acquisition will make the French automotive group the second largest automaker in Europe with combined market share of 17.1%, next to market leader Volkswagen (22.5%), but ahead of Renault-Nissan (14.4%). Globally, the merged company will have sales volume of 4.3 million units. The deal will substantially increase PSA’s presence in Germany and the United Kingdom where Opel and Vauxhall have strong presence, respectively. However, this would also result in increased exposure for PSA in Europe compared with some of its rivals. The combined entity's dependency on Europe would rise to 74% of global sales from the already high level of 66% at present, almost double that of the VW Group (38%) and even more than the Renault Group (54%).
Economies of scale
PSA expects merger with Opel/Vauxhall to create annual synergies of up to EUR1.7 billion (USD1.8 billion). The French automaker estimates the maximum synergy, 30% of the total, to come from purchasing. The merged entity expects to gain from greater economies of scale and by combining purchasing functions and European sourcing. PSA also expect synergies of 25% in research and development (through convergence of platforms and powertrains, designing and full digitization of product development) and 20% in manufacturing (through plant modernization and improved efficiency). The remaining 25% of synergies is expected to be realized through optimizing capital expenditure and selling, general and administrative expenses (SG&A). In addition, the French automaker expects the deal to result in working capital optimization of EUR1.2 billion (USD1.3 billion).
Under the agreement, Opel/Vauxhall will continue to benefit from intellectual property licenses from GM until its vehicles make the shift to PSA platforms over the coming years. PSA expects about 50% of Opel/Vauxhall models to come on its platform by end of this decade and 70% by 2023. By 2027, all Opel/Vauxhall models are expected to be on PSA platform.
IHS Markit expects the B segment to be an important area of integration, with new Opel products being brought onto PSA's upcoming CMP platform. According to IHS Markit forecasts, over the lifespan of the first-generation CMP models, up to 7 million units could be built in Europe, with PSA accounting for 4 million units and the remainder coming from Opel. Overall, IHS Markit predicts more than 80% production synergies taking place with B-segment models on this architecture.
The next phase could come within the C segment by moving Opel's compact vehicles onto EMP2 from 2021 when the current-generation Astra is replaced. This would be a logical move and could see a further 1.5 million units rolled into PSA's currently forecast 3 million units for the lifecycle of this generation of vehicle.
GM and PSA are already sharing platform as part of the strategic agreement between the two in early 2012. Opel new Crossland X crossover shares platform with PSA Citroen’s C3 Aircross. There is also the expectation that GM and PSA will collaborate on electrification technologies and that supply agreements for Holden and certain Buick models will continue. PSA may also agree a long-term supply agreement on fuel cell systems with the JV between GM and Honda.
No immediate impact on suppliers
The sale of Opel/Vauxhall business is expected to have no immediate impact on the automotive supplier industry. Under the agreement, GM’s platform will continue to underpin Opel/Vauxhall models for next decade. However, as more and more models move to Opel platform in the future and PSA gradually combining purchasing at the two organizations, the impact will be seen. Automotive suppliers are expected to benefit from the mergers between PSA and Opel. Last week, Reuters quoted Dr. Elmar Degenhart, CEO of Continental, as saying that the German supplier expects to gain from increased synergies between the two as a result of the possible merger.
The French automaker has assured that the governments in Germany and the United Kingdom would not close manufacturing plants. IHS Markit also forecasts combined light vehicle production at the PSA and Opel/Vauxhall to increase from 2.98 million units in 2016 to 3.3 million units in 2020.
GM to focus on more profitable operations
In the past, GM explored various options, including potential sale, for Opel/Vauxhall, which had not made profit for nearly two decades. The US automaker had almost finalized a deal in 2009 to sell 55% stake in Opel/Vauxhall to a consortium led by the Canada-based supplier Magna, but later backed out after European Union raised concerns over the fairness of the deal.
GM claimed it was on track to return to profit for Opel/Vauxhall in 2016. However, the United Kingdom’s exit from the European Union, also referred to as Brexit, has affected its turnaround plan. Although GM expects Opel/Vauxhall to start making profit in a year or two, the automaker does not see sustained profit in Europe, where fast changing geo-political and regulatory climate demand more investments in products and technologies. In comparison, GM foresees better growth potential and profit opportunity in other markets, especially in North America and China. In North America, the company has reported operating margin of 10% for the past two years.
GM also does not see much alignment with European business. According to the company’s official, European automotive market has become so different from GM’s other markets that only 20% of the vehicles in Opel’s future portfolio would have been shared with the rest of GM. By selling Opel/Vauxhall to PSA the US automaker intends to spend its resources on higher growth potential markets and on more lucrative opportunities in mobility including car sharing and autonomous driving.
