Groupe PSA and General Motors (GM) have confirmed today (6 March) that a framework has been agreed for the French automaker to acquire the operations of Opel/Vauxhall.
IHS Markit Perspective:
- Significance: PSA and GM have confirmed that a framework has been agreed for the French automaker's acquisition of the operations of Opel/Vauxhall.
- Implications: The pair have satisfactorily worked through many of the complex areas such as values, pensions and technology, but some questions remain in other areas.
- Outlook: The deal will give PSA far greater scale in Europe and opportunities to improve synergies there, although future headcount and production sites are likely to depend on how quickly efficiencies can be generated.
Groupe PSA and General Motors (GM) have confirmed today (6 March) that a framework has been agreed for the French automaker to acquire the operations of Opel/Vauxhall. The deal will not only comprise the Opel/Vauxhall subsidiary, valued at around EUR1.3 billion (USD1.38 billion), but also GM Financial's European operations which will become a 50:50 joint venture (JV) between PSA and BNP Paribas; this has been valued at EUR0.9 billion. Overall, the transaction value to PSA will be EUR1.8 billion. However, GM or its affiliates will subscribe to EUR0.65-billion-worth of warrants with a nine-year maturity that are exercisable five years after the issue date in whole or in part, and correspond to 39.7 million shares in PSA, or 4.2% of its fully diluted share capital. However, GM has also agreed to sell the shares within 35 days of the warrants being exercised. This buys GM into the ongoing success of the company following the acquisition. However, it will be subject to a vote at PSA's General Meeting in May, and in the event of this not being approved by PSA shareholders, the automaker will settle the deal with EUR0.65 million in cash over five years. The French state, the Peugeot family and Dongfeng Motors, which represent 51.5% of the voting rights, have voted in favour of the resolution.
The transaction will take in all of Opel/Vauxhall's automotive operations. This includes the Opel and Vauxhall brands, six assembly facilities, five component manufacturing operations, its engineering centre in Rüsselsheim (Germany), and 40,000 staff. GM added that it will retain its powertrain engineering centre in Turin (Italy). Opel/Vauxhall will also continue to benefit from intellectual property licences from GM until its vehicles make the shift to PSA platforms over the coming years. There is also the expectation that GM and PSA will collaborate on electrification technologies and that supply agreements for Holden and certain Buick models will continue. PSA may also agree a long-term supply agreement on fuel cell systems with the JV between GM and Honda.
On the contentious issue of pensions, all of Opel/Vauxhall's European and U.K. pension plans that are funded and unfunded will remain with GM, with the exception of the German Actives Plan and selected smaller plans which will be transferred to PSA. GM will also pay PSA EUR3.0 billion for the full settlement of its transferred pension obligations.
In connection with the transaction, GM will take a primarily non-cash special charge of USD4.0- to 4.5 billion.
The transaction is subject to various closing conditions, including regulatory approvals and reorganisations, but is expected to close before the end of 2017.
Outlook and implications
The agreement signals the end of GM's long-standing ownership of Opel (88 years) and Vauxhall (92 years), but from the comments made by the US automaker's senior executives, it saw a decreasing rationale for its involvement in Europe. During the press conference, GM's president Dan Ammann noted the divergence in its product line-up with the rest of the world, and which would ultimately see only 20% of synergies with its global business over the coming years. This situation is said not to have been helped by the regulatory environment in the region in terms of emissions, as well as consumer demands for vehicles, which are advanced yet relatively compact, something that PSA is heavily involved. By not continuing to focus investment on these markets, GM's chief executive officer (CEO) Mary Barra has said, "We are reshaping our company and delivering consistent, record results for our owners through disciplined capital allocation to our higher-return investments in our core automotive business and in new technologies that are enabling us to lead the future of personal mobility." Personal mobility is a field into which GM is already moving with the likes of Maven and Lyft. It has also mentioned improving returns to shareholders by accelerating share repurchases. This will all be achieved by the immediate improvement in adjusted earnings before interest and tax (EBIT)-adjusted, adjusted EBIT margins and adjusted automotive free cash flow and de-risking the balance sheet, that will enable it to lower its cash balance requirement under its capital allocation framework by USD2 billion.
This acquisition by PSA will initially drastically increase its sales footprint in the EU and EFTA, turning it from a 1.9-million upa business in 2016 to a 2.95-million upa business. This would see it easily exceed the 1.83 million units sold by the Renault Group in 2016 to reaffirm its position as the second biggest-selling group in the region, although it would remain behind the 3.89 million units sold by Volkswagen (VW) Group. It will also increase PSA's market share in EU+EFTA from around 11% to around 17%. As for how the pair would slot together on a market basis, although the move would do little for PSA's size in its domestic market France, it would increase its positions in Germany, Spain, and the UK as well as offering a small boost in Italy. However, this growth in scale would bring it hugely increased exposure compared with some of its rivals. The combined entity's dependency on Europe would rise to 74% of global sales from the already high level of 66%, almost double that of the VW Group (38%) and even more than the Renault Group (54%). Although PSA is already taking steps to grow outside Europe through a number of endeavours, it is not clear whether or how the Opel brand will be involved in this push particularly given the potential clashes between vehicles using the same intellectual property.
Nevertheless, as Ammann has also said, while licensing agreements on GM technology will remain for now, these will eventually shift to PSA platforms. Although a timeline has yet to be set for the transition, IHS Markit anticipates that the B segment will be an important area of integration that will be brought onto PSA's upcoming CMP platform. We forecast that over the lifespan of the first-generation CMP models, up to 7 million units could be built in Europe, with PSA accounting for 4 million units and the remainder coming from Opel. A move onto this platform by Opel's subcompact models could come before the end of 2019, not only to gain synergies but also because of the incoming Euro 6d regulations, and to avoid the expensive redevelopment of the ageing Corsa and others. Overall, we see more than 80% production synergies taking place with B-segment models on this architecture. Nevertheless, the timing of development and introduction in this timeframe would be exceptionally tight. However, the relationships built up between the two companies in earlier product JVs could well help meet this target.
There are also a high degree of synergy for vehicles in other segments further down the line. The next phase could come within the C segment by moving Opel's compact vehicles onto EMP2 from 2021 when the current-generation Astra is replaced. This would see a further 1.5 million units rolled into PSA's currently forecast 3 million units for the lifecycle of this generation of vehicle. Even further into the future, the pair's D-segment models are also likely to be combined, although given the recent unveiling of the Opel Insignia Grand Sport and the impending introduction of the second-generation Peugeot 508, this seems unlikely to take place before 2024. Vehicles in these segments could yield synergies of more than 60%, we believe.
This would help it towards the substantial economies of scale and synergies in purchasing, manufacturing and R&D that PSA is pushing for. Annual synergies of around EUR1.7 billion are being targeted by 2026, although a significant portion is expected to be delivered by 2020, which is expected to accelerate the turnaround of Opel/Vauxhall. By doing so, PSA is expecting Opel/Vauxhall to achieve a recurring operating margin of 2% by 2020 and 6% by 2026, as well as generating a positive operational free cash flow by 2020.
One of the main focuses of questions at the press conference following the announcement has been maintaining its current production footprint and job security in Europe. The chairman of PSA's Managing Board, Carlos Tavares, has said that plans are not based on any changes. However, he did add that it would require the buy-in of its workforce and management to achieve the efficiency levels required at sites across the region, using a similar blueprint to the one he has enacted at PSA over recent years, which will be used as a benchmark. This suggests that while there are no plans to close plants, they may need to do so if metrics are not hit.
Using IHS Markit's current forecast as a baseline, some PSA and Opel locations look more secure than others at the 2020 mark, a point at which decisions will need to be made on many next-generation vehicle locations and evidence of success in achieving efficiencies is likely to be seen. Spanish sites Zaragoza and Vigo are in a good position; despite their vast size they look set to be fully utilised at this point with B- and C-segment vehicles, respectively. The Trnava (Slovakia) plant, which manufactures B-segment vehicles, will also be highly utilised, but there certainly seem to be opportunities for consolidation between other subcompact sites at Poissy (France), Madrid (Spain), and Eisenach (Germany). Current forecasts show little visibility about a replacement for the Citroën C4 Cactus at Madrid, while it is thought that the Poissy site could become an electric vehicle (EV) facility building e-CMP architecture.
A number of plants that have the capability to build vehicles in the C and D segments are well positioned. These include facilities in Sochaux (France), Mulhouse (France), and Gliwice (Poland), which would be expected to start transitioning to next-generation vehicles at this point, and PSA is likely to be keen to maintain the relatively low cost and flexibility this site offers. Questions can be raised about the future of the Rennes (France) facility, as although it has an allocation of models until 2024, choices might have to be made in an attempt to gain synergies, with Rüsselsheim (Germany) being a more preferable location if PSA intends to use Opel's Germanic roots as a marketing tool.
The Brexit vote does not make the future of Ellesmere Port (UK) easy to safeguard given a lack of clarity on trading arrangements between the UK and the EU. Another UK plant that could face an uncertain future is the Luton facility, which currently builds light commercial vehicles based on Renault designs. Any consolidation is likely to mean that this relationship with Renault will be dissolved further down the line, and the vehicles built at this plant would most likely be moved onto a PSA platform already built out of Valenciennes (France), making this site favourite to build these vehicles. Even so, Tavares gave some additional hope for the two UK sites following a hard Brexit situation, noting that if the UK government begins to attract more component suppliers to the UK, these bases could help avoid some impact from the tariffs.
IHS Markit will undertake further analysis in the coming days and weeks that will look at the impact on GM and PSA on a global basis, as well as the implications to their powertrain strategies.
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