It’s a done deal: today, after weeks (or possibly even longer) of negotiations, General Motors has officially announced that it has sold its Opel-Vauxhall subsidiary to French automaker PSA Group for €1.3 billion as well as GM Financial‘s European operations for €0.9 billion. The transaction has a total value of €2.2 billion and is being painted as beneficial for both parties.
For GM, the deal immediately improves its financial health (such as EBIT-adjusted, EBIT-adjusted margins and adjusted automotive free cash flow) while also de-risking the balance sheet. It also further enables the automaker to lower the cash balance requirement under its capital allocation framework by $2 billion, which it intends to use to accelerate share repurchases, subject to market conditions.
For PSA, which presently markets the Peugeot, Citroen and DS Automobile brands, the acquisition of Opel-Vauxhall, which generated revenue of €17.7 billion in 2016, instantly makes it the second-largest automotive company in Europe with a 17 percent market share, second only to the Volkswagen Group. The deal thereby creates a sound European foundation “for PSA to support its worldwide profitable growth”.
Furthermore, General Motors describes the transaction as “advancing [its] transformation” and “unlocking value” by reshaping the company,
“We are very pleased that together, GM, our valued colleagues at Opel/Vauxhall and PSA have created a new opportunity to enhance the long-term performance of our respective companies by building on the success of our prior alliance”, said Mary Barra, GM chairman and chief executive officer.
“For GM, this represents another major step in the ongoing work that is driving our improved performance and accelerating our momentum. 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.”
“We believe this new chapter puts Opel and Vauxhall in an even stronger position for the long term and we look forward to our participation in the future success and strong value-creation potential of PSA through our economic interest and continued collaboration on current and exciting new projects,” Ms. Barra concluded.
Strengthening GM’s Core Business
Both automakers are positioning the deal as “strengthening each company for the long term”. The General describes it as “another step in GM’s ongoing work to transform the company, which has delivered three years of record performance and a strong 2017 outlook, and returned significant capital to shareholders.”
As such, the automaker states that the transaction “will strengthen GM’s core business, support its continued deployment of resources to higher-return opportunities including in advanced technologies driving the future, and unlock significant value for shareholders.”
Immediate Gains For GM
The transaction will immediately improve GM’s EBIT-adjusted, EBIT-adjusted margins and adjusted automotive free cash flow while also de-risking the balance sheet, enabling GM to lower the cash balance requirement under its capital allocation framework by $2 billion, “which it intends to use to accelerate share repurchases, subject to market conditions.”
Long-Term Benefits For GM
The deal also enables GM to “participate in the future success of the combined entity through its ownership of warrants to purchase shares of PSA.”
Existing Supply For Holden And Buick Brands
Long-Term Collaboration Opportunities
The deal also makes references two long-term collaborative efforts. The first surrounds “further deployment of electrification technologies” while the second involves PSA potentially sourcing fuel cell systems from the GM/Honda joint venture.
Benefits For PSA
“We are proud to join forces with Opel/Vauxhall and are deeply committed to continuing to develop this great company and accelerating its turnaround,” said Carlos Tavares, chairman of the Managing Board of PSA. “We respect all that Opel/Vauxhall’s talented people have achieved as well as the company’s fine brands and strong heritage. We intend to manage PSA and Opel/Vauxhall capitalizing on their respective brand identities. Having already created together winning products for the European market, we know that Opel/Vauxhall is the right partner. We see this as a natural extension of our relationship and are eager to take it to the next level.”
“We are confident that the Opel/Vauxhall turnaround will significantly accelerate with our support, while respecting the commitments made by GM to the Opel/Vauxhall employees,” continued Mr. Tavares.
Specifically, the transaction will allow substantial economies of scale and synergies in purchasing, manufacturing and R&D. Annual synergies of €1.7 billion are expected by 2026 – of which a significant part is expected to be delivered by 2020, thereby accelerating Opel/Vauxhall’s turnaround. Leveraging the successful partnership with GM, PSA expects Opel/Vauxhall to reach a recurring operating margin of 2 percent by 2020 and 6 percent by 2026, and to generate a positive operational free cash flow by 2020.
PSA, together with BNP Paribas, will also acquire all of GM Financial’s European operations through a newly formed 50%/50% joint venture that will retain GM Financial’s current European platform and team. This joint venture will be fully consolidated by BNP Paribas and accounted under the equity method by PSA.
The following terms of the agreement were released by both automakers.
The transaction includes all of Opel/Vauxhall’s automotive operations, comprising:
- Opel and Vauxhall brands
- Six assembly facilities
- Five component-manufacturing facilities
- One engineering center (Rüsselsheim, Germany)
- Approximately 40,000 employees
GM will retain the engineering center in Torino, Italy.
- Opel/Vauxhall automotive operations will be acquired by PSA for €1.3 billion.
- GM Financial’s European operations will be jointly acquired by PSA and BNP Paribas for 0.8 times their pro forma book value at the closing of the transaction, or approximately €0.9 Bn.
- The transaction has a total value of €2.2 Bn, for Opel/Vauxhall automotive operations and 100% of GM Financial’s European operations.
- The transaction value for PSA, including Opel/Vauxhall and 50% of GM Financial’s European operations, will be €1.8 Bn.
In connection with this transaction, GM or its affiliates will subscribe warrants for €0.65 billion. These warrants have a nine-year maturity and are exercisable at any time in whole or in part commencing 5 years after the issue date, with a strike price of €1. Based on a reference price of €17.34 for the PSA shares, the warrants correspond to 39.7 MM shares of PSA, or 4.2 percent of its fully diluted share capital. GM will not have governance or voting rights with respect to PSA and has agreed to sell the PSA shares received upon exercise of the warrants within 35 days after exercise.
The issuance of the warrants is subject to the vote of shareholders at PSA’s General Meeting of May 10th, 2017. The three main shareholders of PSA — the French State, the Peugeot family and DongFeng — represent in aggregate 36.6 percent of the share capital and 51.5 percent of the voting rights of PSA have undertaken to vote in favor of the resolution related to the issuance of the warrants to GM.
In the event the warrant issuance reserved to GM and its affiliates is not approved by PSA’s General Meeting, PSA will settle the €0.65 billion in cash over five years.
Intellectual Property Licenses
Opel/Vauxhall will also continue to benefit from intellectual property licenses from GM until its vehicles progressively convert to PSA platforms over the coming years.
In connection with the transaction, GM will take a primarily non-cash special charge of $4.0-4.5 Bn.
Pension Fund Commitments
General Motors retains responsibility for all of Opel/Vauxhall’s European and U.K. pension plans, funded and unfunded, with the exception of the German Actives Plan and selected smaller plans. PSA will take over the obligations for Opel-Vauxhall German Actives Plan and selected smaller plans.
GM will pay PSA €3.0 billion for full settlement of transferred pension obligations.
The entire transaction is subject to various closing conditions, including regulatory approvals and reorganizations, and is expected to close before the end of 2017.