As expected, General Motors (NYSE:GM) and French automaker Peugeot S.A. (NASDAQOTH:PUGOY), more commonly known as PSA Group, announced on Monday that PSA will acquire the German automaker Opel AG from GM, along with the European arm of GM's financial-services unit.
Here's a first look at the structure of the deal.
The key points of a $2.3 billion transaction
It's a complicated deal, but here are the important points:
- PSA will buy Opel and its British sister brand, Vauxhall, for 1.32 billion euros.
- GM Financial's European operation will be acquired jointly by PSA and French bank BNP Paribas (NASDAQOTH:BNPQY) for 0.8 times its pro forma book value at the time of the closing of the transaction. That's expected to be about 900 million euros.
- The total value of the transaction will be about 2.2 billion euros ($2.3 billion).
- PSA will pay about $900 million in cash, and the remainder in warrants to buy PSA stock. The warrants are essentially time-limited options; the idea is to give GM the chance to profit if PSA's stock price rises over the next several years as a result of the deal. GM will not retain an ownership stake in PSA.
- The deal is expected to close in the fourth quarter of 2017.
For GM investors, there are a few additional important points:
- GM will retain $9.8 billion of Opel's pension liabilities, related to already-retired Opel employees. Those liabilities are currently underfunded by about $6.5 billion; GM will fund and discharge them over time.
- PSA will take over the pension plans for active Opel workers in Germany, but GM is paying PSA another 3 billion euros to "de-risk" those pension plans.
- GM will take a one-time charge of between $4 billion and $4.5 billion related to the deal. That's comprised mostly of non-cash charges related to previously deferred tax assets and pension-related losses that will become unrealizable. The charges will impact GM's net earnings for 2017, but because they're mostly accounting charges, they won't have a significant impact on GM's operating income or cash position.
- GM will reduce its cash-reserve target to $18 billion from $20 billion after the sale, as it no longer needs to maintain a reserve for Europe. That $2 billion will be added to GM's ongoing share-repurchase program as a way to return it to investors.
What PSA gets -- and doesn't get -- for its money
PSA gets all of Opel/Vauxhall's automotive operations. That includes all rights to the two brands, six assembly plants, five component-manufacturing factories, and Opel's engineering center in Russelsheim, Germany. About 40,000 employees will move from GM to PSA in the transaction.
PSA also gets -- under license -- the right to build and sell Opel vehicles that incorporate GM technology, until Opel's product portfolio can be moved to PSA architectures. But there's a catch: PSA wants to take Opel into new markets like China, but it's restricted from selling the GM-based Opels outside of the company's current territory, which is mostly Europe. As it redevelops Opel's products onto its own platforms, the restrictions go away.
What GM isn't including in the sale
GM will retain one of its European facilities, an engineering center in Torino, Italy that is GM's global center of diesel-engine expertise. GM executives said that the Torino facility (and a few other parts of GM) will continue to do work for Opel on a contract basis until the products are transitioned to PSA architectures.
GM will also retain the small operation that sells higher-end Chevrolet products (mostly Corvettes and Camaros) and Cadillacs in Europe. That operation's sales volumes are currently tiny, but might grow in time.
The upshot: PSA gets Opel -- and its risks -- for cheap
The 1.32 billion euro purchase price for Opel values the German automaker at about 7% of its 2016 revenue. That's very low. For comparison, PSA's current market cap of about 16.9 billion euros is about 31% of its 2016 revenue (54.03 billion euros); GM's $56.7 billion market cap is about 34% of its $166.4 billion 2016 revenue.
On the other hand, the discount is arguably appropriate given that Opel hasn't turned a profit since 1999. PSA thinks that it can realize about 1.7 billion euros a year of synergies by 2026, with much of that coming by 2020, when it thinks Opel's cash flow will turn positive. But there's a lot of risk involved: Opel's product line has a lot of overlap with PSA's, and it's not clear that the combined company will be able to make effective use of its production capacity.
For GM, which (taking the pension adjustments into account) is paying PSA around $800 million to take Opel off its hands, it's a not-bad deal that allows it to walk away from a subsidiary that has burned over $20 billion since 1999.
More importantly, selling Opel will allow GM to focus its investments and attention on more profitable opportunities. That may well make this deal look like a brilliant one in retrospect.