General Motors has agreed to sell its unprofitable European car businesses Vauxhall in Britain and Opel in Germany to France's Peugeot SA Group.
The deal is worth 2.2 billion euros ($2.3 billion) and will mark GM's exit from Europe, while also creating a new European car behemoth large enough to challenge current market leader Volkswagen.
Under this agreement, GM's Opel/Vauxhall business and the European operations of GM Financial will go under the PSA Group, making it the second-largest automotive company in Europe. PSA Group will have a 17 percent market share.
Opel And Vauxhall Going Forward, Under PSA
"We are proud to join forces with Opel/Vauxhall and are deeply committed to continuing to develop this great company and accelerating its turnaround," says Carlos Tavares, PSA Managing Board chairman. "We intend to manage PSA and Opel/Vauxhall capitalizing on their respective brand identities."
"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," adds Mary T. Barra, GM chairman and CEO.
The PSA Group already makes Peugeot and Citroen cars and it will now get a better chance to challenge Volkswagen's dominance with Opel and Vauxhall under its belt. The move is a real gamechanger for PSA, but it benefits GM as well.
Brexit Role In GM Europe Exit
Britain's decision to leave the European Union, widely referred to as Brexit, has taken a heavy toll on the pound value and affected GM's business significantly. Barra acknowledges that Brexit played a part in its decision to strike this deal with PSA, as it prevented the company from reaching its break-even goal for the European business in 2016.
GM is the biggest automaker in the United States, but in Europe it hasn't been profitable for nearly two decades. Brexit dealt another blow to an already unprofitable business, so it's not a great surprise to see GM exiting Europe.
GM Takes $4 Billion Charge In PSA Deal
PSA agreed to pay 1.32 billion euros ($1.4 billion) for GM's Opel and Vauxhall brands, with 650 million euros in cash and the rest in Peugeot share warrants. At the same time, Peugeot and BNP Paribas SA will jointly acquire GM's financial operations in Europe for roughly 900 million euros. However, GM will still be liable for most of Opel's pension obligations.
GM said it will assume a $4 billion to $4.5 billion accounting charge related to the transaction, but the deal will still free up roughly $2 billion in cash. GM plans to use that money to buy back shares.
The deal will also see GM getting warrants to purchase 4.2 percent of Peugeot's capital. Still, these shares won't net GM voting rights, and GM agreed to sell any Peugeot stock it gets within 35 days of receipt.
PSA vows to make Opel and Vauxhall profitable again, but it remains to be seen how things will pan out. PSA is targeting a 2 percent operating margin within three years and 6 percent by 2026, supported by 1.7 billion euros in joint cost savings.
