As you might have already heard Tuesday morning, General Motors (NYSE:GM) is in talks to sell its European Opel division to PSA Group. Per a press release from the French automaker: "PSA Group confirms that, together with General Motors, it is exploring numerous strategic initiatives aiming at improving its profitability and operational efficiency, including a potential acquisition of Opel/Vauxhall."
If GM unloads its Opel division to the automaker behind Peugeot and Citroen, it essentially concedes that it won't be competing for the global auto sales crown anytime soon. So why is it interested in making this move?
It follows a trend of GM's moves
The report certainly raised a few eyebrows, and came as a surprise to many, but maybe we should have seen it coming. After all, General Motors pulled Chevrolet out of Europe after a string of poor strategic decisions that failed to drive sales higher. It also stopped selling its Chevrolet and Opel marques in Russia in 2015, and idled production plants indefinitely.
Those are just two examples of how General Motors has slowly thrown in the towel on Europe in recent years, and the U.K.'s decision to exit the European Union could have been the straw that broke the camel's back. And let's be honest, GM hasn't made money in Europe for a long time -- its total losses in the region since 1999 add up to around $20 billion.
Add to that the fact that GM has completely changed its overall strategy, shifting away from focusing on sales volume to focusing on margins and profits. That's why GM reduced its fleet deliveries by 12% in 2016 and prioritized boosting retail sales. It has also placed more emphasis on improving its return on invested capital (ROIC), which was a record 28.9% in 2016, a 170-basis-point increase over the prior year.
What's in it for PSA?
"I can see why GM may possibly seek to sell its European division," said George Galliers, an analyst with Evercore ISI, according to Bloomberg. "It is less clear why Peugeot would be interested in buying GM's assets. The purchase would give them capacity in Germany, one of the most expensive countries [in which] to produce cars[,] and would lead to excess capacity."
Galliers is right, but in PSA's defense, if it were to purchase GM's Opel division, the combined brands under its control would hold about 16% of the European car market, according to Bloomberg, making it the region's second-largest auto group. Such a move would boost the company's scale and buying power while providing opportunities for cost cuts and synergies.
This development is of high interest to investors. It could provide General Motors with a bag of cash and a clean exit from Europe, which has long been a thorn in its side. It could also mean that General Motors is confident in its strategy to provide investors a growth story based on smart mobility projects and driverless cars -- major catalysts for investors over the next two decades. Either way, stay tuned: This could get interesting.