General Motors is no longer discussing deeper collaboration efforts with French automaker Peugeot-Citroen PSA. According to reports, the French government offered Peugeot a bailout in exchange for a promise to not cut any jobs in the country, which reportedly does not affect the recent deal between GM and Peugeot to combine purchasing power, logistics, as well as jointly develop four future vehicles.
As reported previously, GM and Peugeot were allegedly discussing merging GM’s European arm Opel with the French automaker into a new organization, an arrangement that would have resulted in The General contributing about $5 billion to the new entity. However, the bailout offer by the French government demonstrates that national politics throughout Europe remains a barrier to GM turning around its business during the region’s sovereign debt crisis.
In fact, a source told Reuters that the French government’s measures are impairing the plan of both automakers to strengthen their ties and that closer collaboration now isn’t likely to take place until at least 2014. Some analysts have recently rallied for GM to rid itself of the loss-making Opel, which hasn’t turned a profit in over a decade, even though offloading the unit is likely come to come at a high cost to GM. If GM were to sell Opel, the move is expected to have a sizable upside for GM stock, which has been gaining ground on its IPO price of roughly $33 a share. As of this writing, GM shares are trading at $24.30 on the New York Stock Exchange (NYSE).
Over the least year, GM has been negotiating with its European labor partners, mainly in Germany, to cut costs. The initiative has proven challenging due to the inherent difficulty of cutting jobs in western European nations. The latest estimates from Jefferies have placed GM’s European operations as running at 70 percent capacity — a circumstance that has resulted in much of GM’s financial troubles in the region.
GM expects its European operations to break even in 2015, with losses in 2012 estimated to come in between $1.5 to $1.8 billion. The firm has taken steps to temporarily reduce overhead, including cutting marketing and administrative costs. Meanwhile, GM’s original agreement with Peugeot is expected to save it $2 billion over 5 years.
The GM Authority Take
It’s always a sticky situation for all parties involved when unexpected events — such as Peugeot’s bailout offer from the French government — take place. As we see it, GM can either keep Opel and eat losses for the next few years, or dump it and eat a one-time loss (that’s rather large). Luckily, GM is in a position to do both — as it has roughly $30 billion in liquidity (cash and short-term investments).
But isn’t it ironic that both GM and its Peugeot have been (or in the process of being) bailed out?