Peugeot Makes Big Bet on GM's Unprofitable European Brands--6th Update

By Nick Kostov and Eric Sylvers 

PARIS -- Peugeot struck a more than EUR2 billion ($2.1 billion) deal to buy General Motors Co.'s unprofitable European operations, a daring move by a French auto maker that is still early in its own financial recovery.

The deal, announced Monday, ratchets up Peugeot's share of the growing European car market to 16%, passing French rival Renault SA for No. 2 in the region behind Volkswagen AG in terms of volume. The company officially known as Groupe PSA SA acquires the storied Opel and Vauxhall brands, Opel's auto-finance operation and access to advanced technology that is costly for a regional player to develop on its own.

It is the second major acquisition by a mass-market auto maker in recent months, coming on the heels of a $2.3 billion purchase of Mitsubishi Motor Corp. by Renault's alliance partner, Nissan Motor Co., in 2016. Those deals come after little consolidation activity among the world's auto makers, many of which say that more partnerships are needed to meet a growing list of regulatory mandates planed for markets across the globe.

For GM, the sale represents a retreat from a European market that hasn't returned a profit since the 1990s. Executives said Monday that the company can't keep pouring money into an operation with limited upside.

The Detroit auto maker will receive EUR1.32 billion for the automotive brands, EUR650 million of which is paid in cash and the remainder in Peugeot share warrants. Peugeot and BNP Paribas SA will team up to pay an additional EUR900 million for Opel's lending arm.

GM faces charges of at least $4 billion, however. Much of that charge is noncash and doesn't affect underlying operating results, GM said. But GM will be liable for much of Opel's pension obligations, which had been a major sticking point during negotiations.

The U.S. auto maker said the deal would free up about $2 billion in cash, which it plans to use for share buybacks. It shaves about $1 billion in engineering costs.

Shares in Peugeot rose 2.7%, or 52 European cents, to close at EUR19.58 in Paris on Monday. GM shares closed down 32 cents at $37.91 in New York.

Opel's sale leaves GM with nearly no presence in the world's third-largest vehicle market, but it is unclear if any of its major rivals -- most of which make money in the region thanks to a sharp rebound in industry sales in recent years -- will follow suit.

The acquisition is an aggressive move for Peugeot Chief Executive Carlos Tavares, who made a name for himself over the past three years as a cost-cutter, more intent on squeezing out savings from existing operations than building volume.

Now he will have to deliver on the promises he made to French and German politicians and unions to build a European champion that is better equipped to ride out the market's next downturn. The previous industry slump that followed the financial crisis nearly bankrupted Peugeot and opened the door for Mr. Tavares to take the helm.

He is betting he can steer a successful turnaround at GM's European operations, similar to the project he put in place at Peugeot about three years ago. Last week, he said he could expand the Opel brand beyond its home region and analysts have speculated that he could use it to make a push into the U.S.

To make the Opel purchase a success, analysts say Mr. Tavares will have to wield the knife and cut capacity by closing factories in Europe. He has promised to honor existing agreements between Opel and its workers in Germany and elsewhere in Europe, but most of those will run out in about five years.

But Mr. Tavares said Monday that he has no plans to close any factories following the acquisition and that the promised cost savings aren't based on eliminating jobs.

"Everybody will have a chance to reach the benchmark of efficiency," Mr. Tavares said at a news conference. "We do not need to shut down plants."

Also Monday, Mr. Tavares promised EUR1.7 billion in annual savings in areas such as purchasing, manufacturing and research and development by 2026 as Peugeot and Opel start to combine their operations.

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Mike Colias

contributed to this article.

Write to Nick Kostov at [e-mail] and Eric Sylvers at [e-mail]

(END) Dow Jones Newswires

March 06, 2017 17:29 ET (22:29 GMT)

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