PSA: Acquisition of Opel from GM boosts PSA to second place in the European market

Brexit triggers GM's sale of Opel as part of its strategy to focus on growth areas

2017/06/07

Overview

Carlos Tavares, CEO of PSA, and Mary Barra, CEO of GM
Carlos Tavares, CEO of PSA, and Mary Barra, CEO of GM, agreeing to the sales of GM's European operations to PSA (Photo: GM/PSA)

  In March 2017 PSA reached an agreement with GM to acquire its European operations (Opel/Vauxhall, hereafter referred to as Opel). Once the acquisition is complete, the new PSA will have global vehicle sales of around 4.3 million and have the second largest share (17.1%) in the European market. Through shared platforms and joint purchasing, the OEM announced it will create a synergistic effect of EUR 1.7 billion annually by 2026, and increase the operating margin of Opel's automotive division to 2% by 2020 and 6% by 2026. Furthermore, PSA will strengthen its operations in Europe, where its HQ is located, in order to further expand to growing markets around the world.

  In March 2016 GM announced it would make its European operations profitable in 2016 after 16 years of losses. However, after the U.K. chose to leave the E.U. in a referendum in June 2016, GM decided to sell its European operations. The U.K. is Opel's largest market by nation, with sales of 290,000 vehicles and production of 200,000 in 2016. The depreciation of the British Pound has caused the price of parts needed for production in the U.K. to increase, and sales of exported vehicles from Continental Europe to the U.K. has decreased due to the Euro exchange rates, leading Opel to experience a loss of USD 257 million in 2016. When the U.K. officially leaves the EU, tariffs will be placed on imports and exports and this will result in complex customs clearance procedures.

  Since coming under the control of CEO Mary Barra and President Dan Ammann in January 2014, GM has made clear its stance on either withdrawing from or reducing investments in projects with no future prospects, and focusing investments in growth areas such as the SUV/pickup truck business in North America, Chinese operations, autonomous driving, and new mobility. The OEM has already reduced investments in Russia, Thailand, India, Indonesia, and Australia. GM decided to sell its European operations as part of its strategy to focus on profitability rather than size.

  PSA and Opel both have excess production capacity and closing plants will be a focal point in the rationalization of the OEM's production systems. The U.K. plant faces profitability issues due to Brexit and it is thought that it is highly likely to be closed.


Related reports:
PSA: Achieved 2021 operating margin target ahead of schedule, shifting to an aggressive stance (June 2017)

LMC Automotive
LMCA Client Alert: Analysis of the proposed acquisition of Opel by PSA (February 2017)



PSA: Acquisition of Opel to give the company the second highest share of the European market

A
game-changing alliance for PSA and Opel/Vauxhall
A game-changing alliance for PSA and Opel/Vauxhall (based on 2016 figures) (Source: PSA)

  In March 2017 PSA announced it would acquire Opel, GM's European subsidiary.

  Although the deal is scheduled to be finalized in Q4 of 2017, once it is completed PSA will have global sales of 4.3 million vehicles, sales of EUR 55 billion for its automotive division, and market share of 17.1% in the European market, second only to VW.

  PSA believes that its alliance with Opel will be a game-changer. The OEM emphasized it will be a "step-change in innovation capability," and create a "stronger home base to address international growth opportunities" (see right image).

  The acquisition will cost EUR 2.22 billion, with Opel (including Vauxhall from the U.K.) costing EUR 1.32 billion, and the European finance business costing EUR 900 million. The finance business will be purchased jointly with BNP Paribas. Furthermore, GM will pay PSA EUR 3 billion for the shortage of pension funds it owes to Opel employees.

The PSA-Opel/Vauxhall Alliance (based on 2016 figures)

PSA Opel New Alliance
Global sales (MM units) 3.1 1.2 4.3
European market share (note1-1, 1-2) (#3) 10.7% (#7) 6.5% (#2) 17.1%
Auto Revenue (EUR Bn) 37.1 17.7 54.8
Auto EBITDA (EUR Bn) (note2-1) 4.0 (Note 2-2、2-3) 0.8 4.8
Source: PSA & Opel/Vauxhall Alliance: Towards A Better Future 2017.3.6
(Note) 1-1. Excluding Russia and Turkey.
1-2. VW was first in the European market share in 2016 at 22.5%, Renault-Nissan was third at 14.4%.
2-1. EBITDA - Earnings before interest, taxes, depreciation, and amortization.
2-2. This is estimated to be the value of Opel if it followed IFRS accounting standards and capitalized 40% of its research and development (R&D) expenses. GM processed all of its EUR 1.4 billion R&D costs that incurred by Opel in 2016 based on the generally accepted accounting principles (GAAP) in its settlement of accounts. Under IFRS standards, roughly 40% of regular R&D expenses are recorded as intangible assets, and relevant assets are amortized over the effective period (up to 7 years) from the production start date (normally two years after capitalization) of a product.
2-3. However, the difference noted above is due to the difference in accounting period when expenses are posted, and the total R&D expenses over a certain period (for example, seven to eight years) do not change.

Conditions for PSA's acquisition of Opel from GM

Acquisition of Opel/Vauxhall   Acquired for EUR 1.32 billion, including production facilities and the right to use both brands.
Acquisition of GM's European Financial Services   PSA and BNP Paribas established a fifty-fifty joint venture that will acquire GM's European financial services for EUR 900 million. The new joint venture company will be a subsidiary subject to consolidation by BNP Paribas, while also being PSA's subsidiary, applicable to equity method.
  GM will lose sales finance functions in Europe and simultaneously end its sales of Chevrolet brand vehicles.
GM to acquire PSA's stock warrants   GM will acquire a warrant for 39.7 million shares of PSA's stock (equivalent to 4.2% of total shares). GM will sell its PSA shares within 35 days of exercising its warrant rights. This means that, if PSA succeeds in acquiring Opel and its stock prices increase, GM will also see returns on the profits.
GM to compensate for Opel's pension fund shortage   GM will compensate PSA EUR 3 billion in pension fund shortages based on estimates calculated with IFRS standards.
Source: PSA & Opel/Vauxhall Alliance: Towards A Better Future 2017.3.6


Expecting a synergistic effect of EUR 1.7 billion annually in 2026

Realizing platform consolidation within 8 years
Realizing platform consolidation within 8 years
(Source: PSA)

  PSA believes that large-scale automakers have an advantage saturated European market and plans to generate a synergistic effect of EUR 1.7 billion by 2026 through the consolidation of Opel. PSA vehicles and Opel vehicles will share a common platform and the consolidation will be completed by 2025.

  In 2016 PSA spent EUR 1.9 billion combined with EUR 1.4 billion from Opel in R&D expenses for a total of EUR 3.3 billion, but thanks to the effects of the consolidation, efficiency will be increased by EUR 400 million, reducing R&D expenses to EUR 2.9 billion.

  PSA announced that through such initiatives, it will reconstruct the brand and raise Opel's operating margin to 2% by 2020 and 6% by 2026.

Rationalization plan after the acquisition

Platform consolidation Vehicles jointly developed with GM   PSA jointly developed a B segment SUV, C segment SUV, and a B segment LCV with GM prior to the acquisition of Opel. The vehicles will be launched between 2017 and 2018 (see next item).
Future plans   The OEM plans to consolidate 50% of its platforms by the end of 2020 and 70% by the end of 2023. It aims to complete this process at the end of 2025 (eight years later).
Development expenses Increase efficiency of R&D expenses through joint development   In 2016, PSA spent EUR 1.9 billion, combined with EUR 1.4 billion from Opel in R&D expenses for a total of EUR 3.3 billion. PSA will increase efficiency by EUR 400 million through the joint development of platforms and powertrains to reduce expenses to EUR 2.9 billion (targeted at 5% of sales).
Investments in new mobility technology   Part of the reduced EUR 400 million from R&D expenses will be allocated to future technologies such as autonomous driving, EVs, connected cars, and shared mobility.
Effects of consolidation Synergistic effect   By unifying the purchasing, production, R&D, and management departments, PSA plans to realize a synergistic effect of EUR 1.7 billion by 2026 (of which EUR 1.1 billion, or 65%, will be realized by 2020).
Working capital   PSA will reduce its total working capital by EUR 1.2 billion by the end of 2022.
Operating margin of automotive division   PSA will increase the recurring operating margin (IFRS standard) of Opel's automotive division to 2% by 2020 and 6% by 2026.
Source: PSA & Opel/Vauxhall Alliance: Towards A Better Future 2017.3.6
(Note) PSA and GM will continue to cooperate in developing parts and making joint purchases for EVs. Additionally, the OEM will introduce FCVs resulting from the GM/Honda alliance.


Release of three jointly developed vehicles born out of an alliance with GM

  PSA and GM have cooperated in areas including joint development, and three vehicles developed as a result of this cooperation, the B segment SUV Crossland X, the C segment SUV Grandland X, and the B segment LCV next-generation Combo, will begin production between 2017 and 2018. When PSA vehicles that are siblings of these three models are included, they will account for 20% of PSA and Opel's total vehicle sales. Purchasing will also be conducted jointly.

  As PSA and Opel's sales of MPVs are decreasing, the OEM plans to make the switch to the expanding SUV/Crossover segment.

The
sub-compact Opel Crossland X crossover
The sub-compact Opel Crossland X crossover, jointly developed by PSA and GM, as a successor to the Opel Meriva MPV (Geneva Motor Show 2017)

Release of PSA and Opel vehicles jointly developed with GM

B-SUV   The Opel/Vauxhall Crossland X and Citroen C Aircross B segment SUVs jointly developed based on the BVH1 platform will be manufactured at Opel's Zaragoza Plant in Spain and released in 2017. The C Aircross is a successor to the C3 Piccaso, a sub-compact minivan, and the Crossland X is a successor to the Meriva MPV. PSA plans to produce a combined total of 220,000 vehicles in 2018.
C-SUV   The Grandland X was developed based on the Peugeot 3008 compact SUV, which underwent a full facelift in 2016, and production will start in 2017. The vehicle will share the EMP2 platform and be produced at PSA's Sochaux Plant in France. PSA plans to produce a combined total of 300,000 vehicles in 2018.
B-LCV   The sub-compact LCV Peugeot Partner/Citroen Berlingo and the next-generation Opel Combo have been developed based on the EMP 2 platform, and production will begin at PSA's Vigo plant in Spain in 2018. The OEM plans to produce 300,000 vehicles in 2019. Currently, the Combo is produced at the Fiat/Tofas joint venture plant in Turkey, produced along with the Fiat Doblo.
Source: PSA & Opel/Vauxhall Alliance: Towards A Better Future 2017.3.6


GM: Brexit triggers the sale of Opel

  Opel has experienced losses for 16 consecutive years from 2000 to 2015, with losses exceeding USD 20 billion. In spite of this, GM expected to make Opel profitable in 2016 as recently as March of the same year. Additionally, during its 2016 earnings announcement, GM claimed that without the effects of Brexit, its European operations would have balanced out income and expenditures in 2016. The decision by the U.K. to leave the EU, which was decided in a referendum in June 2016, triggered the sale of Opel. Since 2012, the U.K. has been Opel's biggest market, selling roughly 290,000 vehicles in 2016, as well as producing roughly 200,000 vehicles. Brexit has had a significant effect on the OEM (see the tables at the end of the report).

  Given the results of the referendum, the British Pound has greatly depreciated in comparison to the Euro. The U.K.'s Vauxhall produces the Astra at its Ellesmere Port Plant, and the mid-size commercial Vivaro van at its Luton Plant, both of which are mainly exported to Continental Europe. Additionally, other models are imported from Continental Europe. Because the Ellesmere Port Plant procures 76% (average for vehicles produced in the U.K. is 59%) of its parts from Continental Europe, the depreciation of the Pound has lead to an increase in parts purchasing expenses needed for production in the U.K., putting pressure on the OEM's income. Additionally, sales for vehicles imported to the U.K. from Germany and Spain have decreased due to the Euro exchange rate, meaning Opel suffered a loss of USD 257 million (EBIT) in 2016. When the U.K. officially leaves the EU, tariffs will be placed on imports and exports, resulting in complex customs clearance procedures.

Increased efficiency of its production structure and the possibility of closing plants

  PSA and Opel both have excess production facilities, and in order to realize PSA's plan for reducing costs, it may be necessary to reduce the number of employees or close plants.

  GM has promised its employees that it will produce the Astra at the Ellesmere Port Plant until 2021 and the Vivaro van at the Luton plant until 2025. PSA has announced that it will keep that promise.

  However, after 2021 the Ellesmere Port Plant where the Astra is produced may be closed. In 2016 the plant produced 114,000 vehicles and had a utilization rate of 63%. The Astra is expected to undergo a full facelift in 2021, which therefore requires PSA to decide on a production plant by mid-2018, with much interest in what will happen to production at the Ellesmere Port plant after 2021.

  Moreover, because of political conditions such as the French government having a 14% share of PSA, as well as labor regulation related considerations, staff cuts are expected to be difficult in France and other countries in Continental Europe, and it is reported that they will be more easily implemented in the U.K.



GM: Implementing disciplined capital allocation

  According to a report from Automotive News on March 13, 2017, GM will not simply sell Opel, but will also restructure its businesses with unforeseeable prospects due to poor performance and focus on investing in more profitable fields (GM calls this "disciplined capital allocation"). The OEM claims, "All business segments must generate their own costs."

  After withdrawing from its European operations, GM is expected to fall to fourth in global vehicle sales behind the third place Renault-Nissan Alliance, behind VW and Toyota, which regularly jockey for the top spot. The OEM has shown no reluctance to give up its long-held pride in being the "world's largest automaker."

  The OEM will allocate its generated capital to fields that are expected to grow, such as pickup trucks, SUVs, autonomous driving technology, new mobility, the Cadillac brand, sales finance businesses, and its Chinese operations.

  Items targeted for restructuring include the passenger vehicle business in the U.S. and poorly performing overseas markets.

  As GM's U.S. sales are moving toward an increasingly larger percentage of SUVs and crossover vehicles, the ratio of its passenger vehicles has decreased from 38.3% in 2013 to 26.8% in the period from January to April 2017. The OEM will focus particular attention on reviewing its lineup of small and full-sized passenger vehicles.

  As for overseas markets, GM has already either reduced or terminated investments in Russia, Thailand, India, Indonesia, and Australia. In case of the Russian market, the automaker determined it is no longer capable of securing a market size that can justify local production. As for South America, while GM continues to struggle there (deficit of 374 million in EBIT in 2016), it sees future potential in the region and plans to increase investments (see the table section at the end of this report).

GM: Reducing investments in poorly performing regions

Russia   GM will review its business model in Russia. 1) Production at the St. Petersburg Plant ended midway through 2015. 2) Consigned production of Chevrolet vehicles to GAZ ended in 2015. 3) Production of the Chevrolet NIVA at GM-AVTOVAZ continues.
  GM also withdrew from its import business for Chevrolet mass production models and Opel vehicles at the end of 2015. For its Russian operations, the OEM will limit its lineup to Cadillac brand vehicles and high-end Chevrolet brand vehicles produced in the U.S. such as the Corvette, Camaro, and Tahoe, and will strengthen its lineup by increasing the availability of models like this while continuing to maintain a presence in the market.
Thailand   GM will consolidate its lineup to the Colorado pickup truck, TrailBlazer and Captiva SUVs, and the Cruze passenger vehicle (announced in February 2017) in Thailand due to poor demand. These models will amount to 75% of GM's sales in Thailand. Production of the Sonic passenger vehicle and Spin MPV will conclude at the end of their product life cycles.
India   In July 2015 the OEM announced it would invest USD 1 billion in its Indian operations by 2020 to drastically reform its production system and product lineup. GM will close its aging Halol Plant in Gujarat (production ended in April 2017) and enhance its Talegaon plant in Maharashtra, with plans to produce ten new models.
  However, since 2017, as a result of changes to the Indian market including the implementation of stricter regulations on the automotive industry, GM has decided to review its entire product plan, and will suspend its investment of USD 1 billion until they are completed.
  From 2010 to 2011, GM sold 110,000 vehicles in India, but these figures have decreased annually every year since, and in 2016 the OEM's sales failed to break 30,000 vehicles. In order for the automaker to make a large investment in its Indian operations, it requires an expectation of profitability.
Indonesia   GM withdrew from production in Indonesia in 2005. The OEM reentered the region in 2013, and began production of the Spin MPV, but on February 26, 2015, it announced it would be closing its plant, and production concluded in June of the same year. Japanese vehicles make up of 90% of the local market and GM failed to establish a competitive sales and parts procurement network.
  Conversely, on February 2, 2015 (24 days prior to the above announcement), a joint venture between GM and the Chinese automakers SAIC and Wuling, SAIC-GM-Wuling, announced it would construct a new plant in Indonesia with an annual production capacity of 150,000 vehicles, and construction began in August. Initially, the plant produced Wuling brand minivans, but it will sequentially increase its models and export to neighboring countries. GM plans to cooperate with Chinese companies to increase price competitiveness and try to enter the market again.
Australia   In December 2013 GM announced it would end production at the Elizabeth plant in Australia, but did not reveal a detailed schedule. In February 2017 the OEM announced it would end production in October. GM has produced vehicles in Australia for over 60 years.
(Note) Toyota will also stop production in Australia in October 2017, thereby ending the production of vehicles in Australia altogether.
Source: GM's announcements and media reports


Document section: Opel's vehicle sales in major countries, vehicle production figures, and GM's vehicle sales in countries where production will reduce in size or conclude

Opel's vehicle sales in major countries

2009 2010 2011 2012 2013 2014 2015 2016
UK 260,680 274,701 268,271 258,847 289,281 301,915 310,726 288,865
Germany 345,366 242,412 267,977 223,893 217,401 230,324 241,793 258,015
France 94,389 100,153 99,974 77,356 63,773 65,686 70,054 74,963
Italy 133,615 133,132 121,244 82,703 74,589 80,483 94,245 101,867
Spain 69,633 74,249 59,875 50,602 55,646 70,487 81,976 96,525
Source: MarkLines Data Center

Opel's production in major countries

2009 2010 2011 2012 2013 2014 2015 2016
UK 79,544 145,154 161,483 132,239 120,205 123,509 153,077 195,716
Germany 374,195 411,874 431,967 411,937 425,748 401,309 258,936 303,534
Spain 339,670 372,414 396,559 267,270 209,369 276,042 359,454 422,589
Poland 125,587 158,732 182,933 134,105 108,072 88,961 169,330 203,118
Source: MarkLines Data Center

GM's vehicle sales in countries where production will reduce in size or conclude

2010 2011 2012 2013 2014 2015 2016
Russia 233,598 336,043 376,540 318,412 227,179 88,040 40,311
Thailand 20,026 31,569 77,842 61,049 24,644 16,777 13,766
India 110,361 111,056 92,059 86,825 57,565 36,518 28,949
Indonesia 4,508 4,658 5,398 29,701 28,111 4,363 1,633
Australia 127,582 122,940 112,182 109,382 103,394 101,294 95,950
Source: MarkLines Data Center


Key words
PSA, GM, Opel, Vauxhall

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