Is it time for General Motors (NYSE: GM) to cut its losses in Europe and move on?
At least in public, GM executives have said over and over that it's not. They say they're confident that they can restore the company's profoundly troubled European subsidiary, German carmaker Opel, to sustainable profitability -- given enough time.
But at least one influential voice thinks that time is running out.
Rethinking the expensive decision to keep Opel
Morgan Stanley analyst Adam Jonas knows the ins and outs of the auto business better than just about anybody on Wall Street. His statements and reports are taken very seriously by major investors, and even by many within the auto industry.
So it was big news in Detroit when, on Thursday, Jonas came out and said what many have been quietly thinking: It's time for GM to dump Opel and move on.
A new report issued by Jonas and his team calls the "separation" of Opel and GM the "best option" for stakeholders in both firms in the face of widening losses at Opel.
But is it? From GM's perspective, the case isn't so simple.
GM nearly sold Opel to auto supplier Magna International (NYSE: MGA) in the months following its bankruptcy in 2009, but changed its mind at the last minute. Jonas says that calling off the sale was a $10 billion-$20 billion mistake, but it seemed like a reasonable idea at the time. Some within GM's senior ranks, including board member Dan Akerson, now GM's CEO, saw Opel as an important contributor to GM's global economies of scale. Akerson and others persuaded GM's board to nix the sale at the last minute.
Opel was also seen as a potential center for new model development, one that GM could draw on much as rival Ford (NYSE: F) draws on the talents of its European branch for smaller cars like the current Focus and Fiesta, both of which were designed in Germany. And while Ford has its own problems in Europe, nobody is suggesting that it throw in the towel: That globalized product approach is a key piece of the "One Ford" plan that has revitalized the Blue Oval's business over the last few years.
GM made it clear last year that it plans to restructure its global operations along lines similar to Ford's -- and that Akerson and his team see Opel as a critical part of that plan. But, in the face of losses that GM seems powerless to stop any time soon, is it time to rethink that decision?
So should GM cut its losses?
Jonas makes a strong argument that it is time to rethink the decision to keep Opel. GM Europe lost $361 million last quarter, and it could lose as much as $1 billion more before the end of the year -- with no solution to its chronic problems in sight. That has weighed heavily on GM's stock. The Morgan Stanley report suggests that dumping Opel could lead to a 50% appreciation in GM's share price.
But, it would be an expensive move. GM is highly unlikely to sell Opel for big bucks. Rather the reverse: The analysts estimate that it could cost the General as much as $13 billion to offload its German subsidiary. That's a hefty sum, but it's one that GM could afford if necessary. GM had over $30 billion in cash and equivalents on hand as of the end of last quarter.
So will it happen? Don't count on it. At least for the moment, GM is standing by its beleaguered European branch. GM's PR folks reiterated the party line on Thursday -- that GM is committed to fixing Opel -- a position that Opel's new CFO, Volkswagen (OTC: VLKAY) veteran Michael Lohscheller, re-reiterated in an interview with Reuters on Friday.
But, while I think the case for selling Opel isn't clear-cut, I do think that it would help GM's stock price in the near term. And a boost to GM's stock price could help Akerson achieve another one of his biggest goals: getting the U.S. Treasury to finally sell the 32% of GM it still owns.
GM's stock has risen a bit recently, but it's still hovering near its post-bankruptcy low. But, if Akerson can harness GM's potential, it could have significant upside in coming months as new products hit showrooms and improvements continue around the world. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, get instant access to this premium report now.
