Analysts puzzled by PSA’s Opel takeover plan

February 21, 2017

Analysts are struggling to understand the logic behind PSA’s proposed takeover of General Motors’ (GM’s) European division Opel/Vauxhall – although they see ample reasons for GM to sell. 

Despite several attempts to restructure, Opel has lost money every year since 1999 and its market share in Europe has fallen from more than 10% seven years ago to only 7% today. It is also overexposed to the UK and German markets, both of which are expected to slow this year. 

Overall, it is not a strong business, nor is it a strong brand. In J.D. Power's consumer rankings, Opel ranked alongside Peugeot and  Citroën and does not command the brand power usually associated with German automotive marques. 

When PSA confirmed the merger talks last week, it highlighted the savings that the larger group could generate through economies of scale. However, Exane BNP Paribas’ Dominic O’Brien forecasts that a full takeover could only create €1 billion in combined savings. The two companies anticipate €1.1 billion by 2018 through the joint development of four vehicles and a purchasing joint venture. 

However, not all are so negative. In a note to investors, Berenberg Bank analyst Alexander Haisslsaid that substantial gains are achievable, but depend on skilled leadership. It said: ‘While we understand the rationale for such a transaction -- scale, cost savings, platform rationalisation -- the big question mark remains the potential purchase price and how quickly PSA can achieve potential savings and reduce GM Europe's cash burn. 

PSA was at the brink when Tavares took the helm and turned the company around through a restructuring that included axing more than 17,000 jobs; Opel however is on the cusp of returning to profit, which makes job losses harder to justify. Tavares will also face Germany’s powerful unions, which have already strongly opposed the proposed merger. 

German Chancellor Angela Merkel said on Friday that Germany will do all it can to secure Opel plants and jobs in the event of a merger – particularly in an election year. 

Theresa May, Britain's Prime Minister, is also in line to meet with Carlos Tavares at an as-yet unspecified date in order to avert Vauxhall job losses – politically toxic when the UK is looking to appear strong as it approaches triggering the formal Brexit process in March. 

Further to the news that Opel chief executive officer Karl Thomas Neumann has been drawing up a strategy to turn Opel into an electric-only brand, GM has said it will make its electric car technology – which is behind its successful Chevrolet Volt – available to PSA if the deal goes through. Access to GM’s technology would undoubtedly help PSA, with GM’s Ampera-e, based on the Bolt, able to travel 520km on a single charge under European tests and set for release this year. However, questions remain about the viability of a brand being so reliant on licensing-in the technology.

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