General Motors' (NYSE:GM) problems in Europe are no secret. The company has been struggling for years to right its long-troubled German subsidiary, Opel, which has lost well over $15 billion since 1999.
Opel's problems are a microcosm of the problems experienced by the European auto market as a whole: too much capacity, too many workers, not enough cars and trucks being sold to carry the costs.
Late last year, it became clear that finding a long-term fix for GM Europe had risen to the top of GM CEO Dan Akerson's to-do list. But Opel's problems have bedeviled several generations of GM management, and some savvy GM-watchers have suggested that returning Opel to sustainable profitability could take many years.
Lately, though, the outlines of a possible solution for Opel have started to emerge -- one that could give Akerson and his team a big success where many others have failed, and soon.
An alliance that may be more than it has seemed
Is PSA Peugeot Citroen (OTC:PUGOY) going to be GM's key to dealing with the Opel mess after all?
It might turn out to be. When reports of a GM tie-in with the troubled (there's that word again) French automaker began to surface earlier this year, my first response was to wonder what the heck GM was thinking. Unlike GM, which has vast global scale, Peugeot is tied heavily -- too heavily -- to the faltering European auto market. If you buy the theory that one or more entrants in the European market need to go out of business to restore equilibrium, Peugeot was and is any analyst's leading candidate. Looking to Peugeot to solve Opel's problems seemed wildly off-base.
Attention waned when the initial deal between Peugeot and GM turned out to be relatively small potatoes: GM took a modest stake in the French automaker and announced plans to exploit purchasing and parts-sharing synergies between Peugeot and Opel. The two companies said that after five years, they expected the arrangement to save $2 billion a year. That's not trivial, but from a GM shareholder's perspective it was nothing to get excited about. More to the point, it wasn't going to solve Opel's problems.
In the past few days, however, reports have suggested that there was more to the deal than was initially reported. A Reuters report last Friday suggested that Opel and Peugeot's core manufacturing arm could be folded into a new joint venture, with each parent company taking a stake.
That would certainly be an interesting wrinkle -- but how would it benefit GM? Here's the kicker: Automotive News Europe reported on Monday that in exchange for a hefty investment -- as much as $10 billion -- GM could end up with just a 30% stake in the new venture. That's low enough that GM wouldn't have to consolidate the joint venture's financial results into its own.
In other words, it would wipe Opel -- and its huge, ongoing losses -- off GM's global balance sheet.
That could be a very smart deal indeed.
An elegant solution to a problem that has baffled many
Getting rid of Opel's losses would probably do wonders for GM's stock price. GM lost $361 million in Europe last quarter, and like rival Ford (NYSE:F), GM has warned that those losses are likely to continue for some time. Those losses have put a damper on GM's success in China and continuing strength in North America, and together with ongoing uncertainty over the fate of Opel, they have probably weighed down the price of GM shares.
But will this situation play out the way GM hopes? From GM's perspective, it's almost certainly the most promising option available, even if it requires a considerable chunk of change to make it happen. Most of the proposed fixes for Opel that have been floated in the media have involved plans to close factories, something that is fiendishly difficult to do in labor-friendly Western European countries.
That has led many investors to conclude that fixing Opel would take many years, if it happened at all. At least one high-profile analyst, Adam Jonas of Morgan Stanley, has suggested that GM should simply sell or fold Opel.
The problem with that, from GM's perspective, has always been that selling Opel would mean selling the rights to GM's intellectual property -- something that the General, like all automakers, jealously guards. Folding Opel into a joint venture, where GM can maintain some level of control while getting the company's losses off of its balance sheet, would be an elegant way to deal with the mess.
Dan Akerson will deserve a big feather in his cap if he can pull this off. Can he? We'll find out.