Issue: Sep 2009


GM's Sale of Opel: Making the Best of a Bad Situation



Comments on GM

by Moodys Investor Services

On September 10, GM’s board of directors announced its support for the sale of a majority stake in its European Opel/Vauxhall (Opel) operation to a consortium consisting of the Canadian-based auto parts supplier Magna International Inc. (Magna) and the Russian state-owned bank Sberbank (partnered with Russian automaker GAZ). Although the sale will reduce GM’s exposure to near-term losses and restructuring costs at Opel, we believe that as a partial owner of the operation, GM will face greater challenges in attempting to improve the effectiveness and efficiency of its product-development program, and the company will ultimately play a much less significant role in the global auto industry.

A definitive agreement is expected to be signed within a few weeks, with a closing of the transaction by November. As part of the agreement, Opel will receive approximately $6.6 billion in loan guarantees from the German government (in addition to the $2.1 billion in German government loans extended in May) and an equity contribution of approximately $700 million from Magna/Sberbank. The proposed ownership structure of Opel will be:

Magna 27.5%

Sberbank (partnered with Russian automaker GAZ) 27.5%

GM 35%

Opel Employees 10%

The Opel/Vauxhall operations had the potential to play an important role in the long-term rehabilitation of GM by providing product to meet the U.S. market’s growing demand for small cars, spreading development costs over a larger sales base, supporting the development of global vehicle platforms, and maintaining purchasing power with an increasingly global supplier base. Moreover, similar strategies to capitalize on the benefits of a global presence are becoming more critical to the strategies of GM’s U.S., European, and Asian competitors. One important example of the emerging success of GM’s integration of its U.S. and European operations is the Chevrolet Malibu. This vehicle is built on a European-designed platform and is one of the most competitive models in the critical U.S. mid-size car segment. Despite these strategic benefits, however, retaining full control of the Opel operation would have exposed GM to significant losses in a European market that will likely remain depressed through 2010, and would have required capital injections (as much as $6 billion) that it could not afford. Consequently, some form of sale or massive restructuring of Opel was unavoidable.

The sale of a majority interest of Opel to Magna/Sberbank may be the best that GM could salvage out of a bad situation. With the funding provided by the German government, Opel will be able to continue to operate, and GM will attempt to preserve the benefits of its association with Opel. In announcing the transaction, GM stated that, “The agreement will keep Opel/Vauxhall a fully integrated part of GM’s global product-development organization, allowing all parties to benefit from the exchange of technology and engineering resources.” GM accurately identifies the objective it must achieve following the sale of Opel, but achieving this goal will be very difficult. 

The track record of large-scale global alliances within the automotive industry is not good. There are few examples in which the goals of such alliances—joint product development, platform sharing, consolidated purchasing programs, and technology transfers—have resulted in meaningful and measurable benefits to the parties involved, even in circumstances in which their interest are closely aligned. With the reconstituted Opel, there is the potential for considerable divergence of interests among key stakeholders. The array of interests and goals that could come into play include Magna’s position as a parts supplier to many auto OEMs that compete with GM and Opel, GAZ’s critical need to build its expertise and efficiency in producing cars, the German government’s interest in protecting jobs in Germany as Opel cuts capacity in other European countries, and GM’s need for European-based product that will help reestablish its position in North America. We also note that the dismantling of “organizational silos” has been a long and difficult challenge for GM. This legacy, combined with the potentially divergent interests of Opel’s many stakeholders, does not bode well for GM’s ability to harvest the benefits that might otherwise accrue from a large European operation. These potential benefits are being put at risk, just when they are becoming most critical to the company’s revitalization.

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