GM decides to keep Opel, citing improved financial health

ERJ staff report (AN)

Detroit, Michigan (Reuters) -- General Motors Co. has decided to keep Opel, undoing months of painstaking negotiations to sell the European unit to a Russian-backed group led by Canada's Magna International Inc.

GM, which on Tuesday posted its first US sales gain in 21 months, cited an improving business environment and the importance of Opel and its British unit Vauxhall to its global strategy as reasons for the switch.

“GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration,” CEO Fritz Henderson said in a statement. “This was deemed to be the most stable and least costly approach for securing Opel/Vauxhall's long-term future.”

GM confirmed the decision made by its 13-member board after a meeting of directors on Tuesday in Detroit. The automaker said it expected that restructuring Opel on its own would cost about 3 billion euros, or about $4.43 billion.

Under pressure to focus on shoring up sales in its home market after emerging from bankruptcy in July, GM directors had earlier opted to sell a 55 percent stake in the money-losing Opel unit to Magna and its Russian partner Sberbank.

GM's move is a setback for Magna founder and Chairman Frank Stronach, who left his native Austria at age 21 as an impoverished toolmaker and went on to build North America's largest auto-parts supplier.

Magna: Thanks, everyone

"We understand that the board concluded that it was in GM's best interests to retain Opel, which plays an important role within GM's global organization," Magna co-CEO Siegfried Wolf said in a statement. "We will continue to support Opel and GM in the challenges ahead and wish to thank everyone who supported the Opel restructuring process for their tireless efforts and dedication over the past several months."

Opel's work force -- which was to be cut by a fifth under the new owners from 50,000 -- was supposed to receive a 10 percent stake in the new company in return for 265 million euros in annual cost concessions. GM would have kept a 35 percent stake in the unit under the now-scrapped deal.

The decision represented a setback for German Chancellor Angela Merkel, raised the risk of conflict with Opel's European unions and left open the question of how GM would finance its plan to go it alone by restructuring Opel.

The move also marked a startling shift in direction from the course for Opel endorsed by Henderson, who two weeks ago had said a sale of the European unit was the most likely outcome.

German's government had lobbied hard for the Magna deal and on Tuesday night said it wanted GM to repay 1.5 billion ($2.2 billion) in bridge financing extended by German state banks.

"The government regrets the decision of the General Motors board to restructure Opel itself and to keep it in the group," government spokesman Ulrich Wilhelm said in a statement.

Executives caught off guard

Senior GM executives were caught unaware by the move by the automaker's board, led by plainspoken former telecommunications executive Ed Whitacre, an outsider who became the face of the new GM in a recent TV ad blitz in the United States.

Whitacre, whose appointment was vetted by the Obama administration, has shown a hard-charging streak, showing up at GM factories unannounced and putting tough questions to management, people familiar with his tenure have said.

Henderson, a career insider who has vowed to shake up the slow-moving culture of the 101-year-old automaker, had argued that the Magna deal was the best remaining choice for GM, after seven months of painstaking talks with bidders.

The GM board decision to keep Opel came after European Union officials challenged the terms of the funding Germany had pledged to support the sale of Opel to Magna.

Germany had promised 4.5 billion euros ($6.58 billion) in aid to help close the Magna deal, which was widely seen as the option for Opel most likely to preserve jobs.

But EU officials said GM needed to confirm that it would have agreed to sell Opel if Germany had made clear that the same funding would have been available to any buyer.

GM's board had opted to sell a 55 percent stake in the loss-making Opel unit to Canadian group Magna and its partner Sberbank after the seven months of talks, which had included a competing bid from Brussels-listed RHJ International.

Long-running talks

The Opel saga has been running for a year. GM first asked Germany for loan guarantees in November 2008. The automaker had been seeking a buyer for the unit, which includes the Opel and Vauxhall brands, since March.

GM's reversal of course on Opel was met with anger and bitterness in Germany, where support had run deep for the Magna transaction and plans were already under way to distance the Opel brand from GM. Opel workers even claimed GM was playing local politics in its on-again, off-again positions.

"Unfortunately my suspicion seems to been confirmed that the decision to sell Opel to Magna was connected with the elections later that month in Germany," Opel's senior labor leader in Bochum, Rainer Einenkel, told Reuters.

The German state of Hesse's premier, Roland Koch, said he was angered by GM's decision not to sell Opel to Magna, and that he wanted GM to pay back its bridge loan by November 30.

But by taking control of Opel, Magna would have been competing with the automakers who buy its parts and some investors had viewed the deal as risky for that reason.

Shares of Magna have gained 18 percent over the past year, lagging some rivals, including Johnson Controls, up 39 percent, and BorgWarner, up 30 percent.

No other choice?

Auto analysts said keeping Opel would allow GM to maintain control of vehicle development and share parts across a few global platforms, much as Ford Motor Co. has done.

Opel's Russelsheim operations in Germany have been the center for developing vehicles that are crucial to GM's vehicle line-up and its effort to deliver better sales of more fuel-efficient cars.

The Chevrolet Malibu and the Buick LaCrosse mid-size sedans are both built on Opel platforms. That is also the plan for the upcoming Chevy Cruze compact sedan, which represents GM's big bet it can make a small car profitably in the United States.

"If they are going to be competitive on a global scale, they really don't have much choice but to keep Opel," said Autoconomy analyst Erich Merkle.

GM had $13.6 billion remaining in an escrow account from the US Treasury as of October, but the terms of its bailout by the Obama administration prohibit it from using those funds for its overseas operations.

Brad Coulter, a restructuring specialist at O'Keefe & Associates in Detroit, said GM's move to keep Opel suggested "they are not under as much pressure to sell assets to raise cash."

Earlier on Tuesday, GM reported its first increase in US sales in nearly two years.

Jamie LaReau contributed to this report.

From Automotive News (A Crain publication)