PSA Group inks deal to acquire Opel and Vauxhall from General Motors

Article by Christian A., on March 7, 2017

Now, it has been signed. Discussions over the possible acquisition of Opel/Vauxhall from General Motors by the PSA Group have finally reached a conclusion. The parties, including international banking group BNP, have finally inked an agreement in which GM is selling both its automotive and financial operations in Europe for a whopping EUR2.2 billion (around $2.33 billion).

According to the terms of the agreement, PSA will be acquiring Opel and Vauxhall – GM’s automotive operations in Europe – for EUR1.3 billion (around $1.38 billion). PSA and BNP Paribas are forming a 50-50 joint venture to acquire the European operations of GM Financial at 0.8 times of its pro forma book value or around EUR900 million (around $953 million). Thus, the transaction – the sale of Opel/Vauxhall automotive operations and GM Financial’s entire European operations – has a total value of EUR2.2 billion.

PSA’s share of the entire transaction -- Opel/Vauxhall and half of GM Financial’s European operations – will cost the French group around EUR1.75 billion (around $1.85 billion). BNP Paribas’ share of the transaction – 50 percent GM Financial’s European operations – will cost the banking group around EUR450 million (around $476 million).

Up for grabs for PSA are Opel/Vauxhall’s entire automotive operations. This includes the Opel and Vauxhall brands, six assembly plants and five parts production sites, as well as GM’s engineering center in Russelsheim, Germany. Opel and Vauxhall’s around 40,000 employees are also included. However, the deal doesn’t include GM’s engineering center in Torino, Italy. Opel and Vauxhall will still benefit from GM’s intellectual property licenses until such time that these brand’s vehicles are converted to PSA platforms.

Once the agreement reaches finality, Opel and Vauxhall will be totally under the PSA Group’s wings. With Opel and Vauxhall generating EUR17.7 billion in 2016, the PSA Group is poised to take a 17-percent market share in Europe. This will effectively allow the PSA Group (plus Opel) to become the second largest carmaker in Europe, next to the Volkswagen Group that boasts of controlling around a quarter of the European market.

The PSA expects the transaction to allow for significant economies of scale as well as synergies in purchasing, manufacturing and R&D. In fact, the French company is expecting annual synergies of EUR1.7 billion 2026. Since a substantial part of these synergies is expected to come by the end of the decade, Opel/Vauxhall would be able to turn around their misfortunes at a faster pace. In terms of figures, PSA is expecting Opel/Vauxhall to achieve an operating margin of two percent and a positive operational free cash flow by 2020. PSA is also expecting its new acquisition to post an operating margin of six percent by 2026.

This acquisition agreement is considered as one of the biggest and is expected to change the automotive landscape in Europe. Nonetheless, it might lead to massive job cuts. Around 19,000 of Opel/Vauxhall employees are in Germany and around 4,500 are located in the UK. Massive job cuts are expected to be a sensitive issue in the upcoming elections in France and Germany, as government officials weigh in on possible political backlash from the transaction.

GM’s decision to sell Opel/Vauxhall should allow it to get rid of its European business, which has been posting losses for nearly two decades since 1999. GM has already lost $20 billion in Europe, which forced it to close its production facilities in Bochum, Germany. Even though Opel/Vauxhall has squeezed out costs and has vastly improved its offerings, it remains unprofitable and has been losing market share in Europe. This is simply because Opel/Vauxhall has low profit margins with production being done in Germany, Spain and the UK, where labor costs are high.

Press Release

Opel/Vauxhall to join PSA Group

General Motors Co. (NYSE:GM) and PSA Group (Paris:UG) today announced an agreement under which GM’s Opel/Vauxhall subsidiary and GM Financial’s European operations will join the PSA Group in a transaction valuing these activities at €1.3 Bn and €0.9 Bn, respectively.

With the addition of Opel/Vauxhall, which generated revenue of €17.7 Bn in 20161, PSA will become the second-largest automotive company in Europe, with a 17% market share2.

Creates sound European foundation for PSA to support its worldwide profitable growth

“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.

Advances GM’s Transformation and Unlocks Value

“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 T. 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.

Strengthens Each Company for the Long Term

The transaction will allow substantial economies of scale and synergies in purchasing, manufacturing and R&D. Annual synergies of €1.7 Bn are expected by 2026 – of which a significant part is expected to be delivered by 2020, accelerating Opel/Vauxhall’s turnaround. Leveraging the successful partnership with GM, PSA expects Opel/Vauxhall to reach a recurring operating margin3 of 2% by 2020 and 6% by 2026, and to generate a positive operational free cash flow4 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 transaction is 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. It 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.

By immediately improving EBIT-adjusted, EBIT-adjusted margins and adjusted automotive free cash flow and de-risking the balance sheet, the transaction will enable GM to lower the cash balance requirement under its capital allocation framework by $2 Bn, which it intends to use to accelerate share repurchases, subject to market conditions.

GM will also participate in the future success of the combined entity through its ownership of warrants to purchase shares of PSA. GM and PSA also expect to collaborate in the further deployment of electrification technologies and existing supply agreements for Holden and certain Buick models will continue, and PSA may potentially source long-term supply of fuel cell systems from the GM/Honda joint venture.

Additional Information

Terms of the Agreement

Opel/Vauxhall automotive operations will be acquired by PSA for €1.3 Bn. 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 Bn. 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 share5, the warrants correspond to 39.7 MM shares of PSA, or 4.2% of its fully diluted share capital6. 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 transaction includes all of Opel/Vauxhall’s automotive operations, comprising Opel and Vauxhall brands, six assembly and five component-manufacturing facilities, one engineering center (Rüsselsheim, Deutschland) and approximately 40,000 employees. GM will retain the engineering center in Torino, Italy.

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.

Ongoing Pension Fund Commitments

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 will remain with GM. The obligations with respect to the German Actives Plan and these smaller plans of Opel/Vauxhall will be transferred to PSA. GM will pay PSA €3.0 Bn for full settlement of transferred pension obligations.

Closing Conditions

The transaction is subject to various closing conditions, including regulatory approvals and reorganizations, and is expected to close before the end of 2017.

Warrants

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) representing in aggregate 36.6% of the share capital and 51.5%7 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 Bn in cash over five years.

About PSA Group

With sales and revenue of €54 billion in 2016, PSA Group designs unique automotive experiences and delivers mobility solutions that provide freedom and enjoyment to customers around the world. The Group has three car brands, Peugeot, Citroën and DS, as well as a wide array of mobility and smart services under its Free2Move brand, to meet the evolving needs and expectations of automobile users. The automobile manufacturer PSA is the European leader in terms of CO2 emissions, with average emissions of 102.4 grams per kilometer in 2016, and an early innovator in the field of autonomous and connected cars, with 2.3 million such vehicles worldwide. It is also involved in financing activities through Banque PSA Finance and automotive equipment via Faurecia. Find out more at groupe-psa.com/en

PSA Group Forward-Looking Statements

This press release includes forward-looking statements and information about the objectives of PSA Group, in particular, relating to the acquisition of GM’s Opel/Vauxhall subsidiary and GM Financial’s European operations, and corresponding expected synergies. These statements are sometimes identified by the use of the future tense or conditional mode, as well as terms such as “estimate”, “believe”, “have the objective of”, “intend to”, “expect”, “result in”, “should” and other similar expressions. It should be noted that the realization of these objectives and forward-looking statements is dependent on the circumstances and facts that arise in the future. Forward-looking statements and information about objectives may be affected by known and unknown risks, uncertainties and other factors that may significantly alter the future results, performance and accomplishments planned or expected by PSA Group. These factors may include changes in the economic and geopolitical situation and more generally those detailed in Chapter 1.5 of the reference document filed with the Autorité des marchés financiers (the “AMF”) on 24 March 2016 under no. D.16-0204.

1 Opel/ Vauxhall financials correspond to financials of the contributed entity

2 Excluding Russia and Turkey. Source: IHS (February 2017)

3 IFRS. Subject to full review of US GAAP – IFRS differences

4 Defined as recurring operating income + D&A – restructuring costs – capex – capitalized R&D – change in working capital

5 Reference price is the 20-day volume-weighted average share price of PSA as of February 13th, 2017 (pre-leak of February 14th, 2017)

6 Based on 907 MM fully diluted shares outstanding

7 Based on a fully diluted number of shares outstanding of 907 MM shares, pro forma the exercise of all outstanding 2014 warrants

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Topics: psa, peugeot, citroen, opel

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