General Motors '(NYSE: GM) long-troubled Opel subsidiary could be sold to French automaker PSA Peugeot Citroen (NASDAQOTH: PUGOY) soon. The parties are discussing a valuation around $2 billion, Bloomberg is reporting, and the framework of the deal could be in place within a week.
A $2 billion valuation and a rush to complete the deal
According to the report, which cites multiple unnamed people familiar with the matter, GM and PSA are honing in on a valuation around $2 billion for Opel, the German automaker owned by GM since 1929. Under the deal taking shape, PSA would pay GM about $1 billion in cash and assume another $1 billion or so in liabilities in exchange for Opel.
The report also indicated that the companies are hoping to have the deal's structure hammered out by next Thursday, when PSA is scheduled to report its fourth-quarter and full-year 2016 earnings. But there are still some sticking points that could delay a deal, or scuttle it altogether.
Getting government officials on board with the sale
The challenge is that Opel and PSA have overlapping product lines, and the combined company would have more production capacity than it needed -- but closing factories in Western Europe, where governments tend to aggressively protect jobs, is very hard to do.
Executives from PSA and Opel have spent the last few days reassuring government officials in Germany, France, and the U.K. (where Opel has a couple of key factories) that the deal could be done without massive job cuts. Objections from government ministers, or politically powerful labor unions, could bring negotiations to an abrupt end. But right now, no big roadblocks are visible.
Germany's economy minister, Brigitte Zypries, said on Thursday that she expects the deal to proceed after receiving assurances from GM, while U.K. business minister Greg Clark said he had been reassured that the parties "valued highly" the operations in his country.
But that said, Opel's factories in Ellesmere Port and Luton, England, appear likely to be among those restructured or closed if the deal goes through.
A key issue driving the sale: Production capacity
The challenge facing both PSA and Opel is excess production capacity. Auto factories are hugely expensive to build, tool, and run. A general rule of thumb in the industry is that a factory won't break even until it's running at 80% of "capacity," which is generally defined as two shifts of workers working five days a week.
Europe in general has more automotive production capacity than its current new-car market can support. Opel's underutilization of its factories is a key factor in GM's years-long struggle to break even in Europe.
According to estimates from LMC Automotive, six of seven GM Europe assembly plants and three of eight PSA plants were below 80% utilization in 2016. Clearly, some of those factories will have to close or be restructured to make the combined PSA-Opel solidly profitable.
The upshot: It's looking likely to happen
Although it's still not assured, a deal that was a total surprise to the industry just a few days ago now looks to be on course to come together fairly soon.
It's clear why GM would want to make the deal: Shedding Opel will allow it to reinvest its capital in more profitable opportunities. It's also clear why PSA wants to make the deal: A combined PSA-Opel would be Europe's second-largest automaker after Volkswagen AG and in a much better position to survive in the long haul -- if it can cut costs enough to be sustainably profitable.
Long story short: While the deal could still fail, it's looking likely to happen. Stay tuned.
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