Peugeot maker agrees to buy GM's Opel in 2.2b euros deal

[PARIS] PSA Group agreed to buy General Motors Co's Opel unit in a transaction valued at 2.2 billion euros (S$3.269 billion), creating Europe's second-largest carmaker in a bid to better compete in the region's saturated market.

PSA will pay 1.3 billion euros for Ruesselsheim, Germany-based Opel and its UK nameplate Vauxhall, with the rest for the financing unit, which is being evenly split with BNP Paribas SA, the US manufacturer and the Paris-based maker of Peugeot and Citroen vehicles said in a joint statement. The shares rose as much as 5.25 per cent to 20.06 euros, the highest level since July 2011.

GM, which has owned Opel for almost 90 years, is cutting ties after the division missed a target to break even in 2016, contributing to losses that have totaled about US$9 billion since 2009. PSA is betting that adding Opel's roughly 1.2 million in annual deliveries will solidify its own turnaround by spreading the costs for developing new vehicles across a larger network.

While job and production cuts are likely as the two companies offer a similar slate of mass-market cars from high-cost locations in Germany, France and the UK, PSA said it'll honour existing labour agreements.

"Our plan is to build a common future for Opel and Vauxhall, and fix the existing issues," PSA Chief Executive Officer Carlos Tavares said on a call with analysts.

While he stopped short of guaranteeing that all of Opel's plants would remain open, Mr Tavares said PSA would keep Opel's product plans and that closing factories is a "simplistic" solution.

The combination of the two automakers is expected to bring annual savings of 1.7 billion euros by 2026, through combining development, factory investments and purchasing. That will help Opel generate an operating profit margin of 2 per cent by 2020 and 6 per cent by 2026. Implementing the savings measures will cost about 1.6 billion euros.

GM Charge For GM, the deal continues efforts to shed underperforming assets and doesn't come without cost. The US automaker will take a non-cash charge of US$4 billion to US$4.5 billion related to the transaction, which is expected to close by the end of the year.

GM is on the hook for much of Opel's pension obligations and will pay PSA 3 billion euros to settle certain retirement plans. Still, the deal will free up about US$2 billion in cash, which GM plans to use for share buybacks, according to the statement.

PSA will pay about 1.13 billion euros in cash for Opel and the French carmaker's share of acquiring the financing unit. An additional 650 million euros will be financed by issuing to GM warrants in PSA shares, which can be exercised after five years.

The two companies will also be aligned through an ongoing agreement for Opel to supply its Australian Holden unit as well as the Buick brand with certain models.

The deal would reinstate PSA as Europe's second-biggest carmaker after Volkswagen AG, pushing it past Renault SA following a steady decline in market share in recent years. After streamlining operations following a 2014 bailout by the French state and Dongfeng Motor Corp, Mr Tavares is shifting focus to growth.

With the addition of Opel, PSA is set control 16 per cent of the European auto market, putting it behind only Volkswagen's 24 per cent. The deal is the second run at linking the two carmakers after savings from a purchasing and development cooperation project fell short of expectations, prompting Detroit-based GM to sell its 7 per cent stake in its French counterpart in 2013.

Still, that cooperation is now starting to pay off. In February, Opel unveiled the new Crossland X compact sport utility vehicle, which shares underpinnings with PSA's Citroen C3 hatchback. A larger Opel SUV is set to follow later this year, which will be built at a PSA facility in France.

At Opel, Mr Tavares will seek to replicate the turnaround he engineered at PSA, including cutting jobs, freezing pay and eliminating slow-selling, unprofitable models.

The French company went from net losses starting in 2012 to profit in 2015, and generated 2.7 billion euros in cash in 2016. This year, for the first time since 2011, the company will pay a dividend.

"We are confident that the Opel/Vauxhall turnaround will significantly accelerate with our support," Mr Tavares said.

"It gives us the opportunity to become a real European champion."

BLOOMBERG