Tags: gm | auto | opel | europe

Morgan Stanley Analyst: GM Should Dump Opel

Thursday, 06 September 2012 03:18 PM

The time has come for General Motors Co. to cut ties with its money-losing European business, Opel, which has been a drag on the U.S. automaker for years, a Wall Street analyst said on Thursday.

The Detroit company has lost $16 billion in its European operations, which include the Opel and Vauxhall brands, over the last 12 years, Morgan Stanley analyst Adam Jonas said. The eurozone debt crisis led consumers in the region to pull back on spending, causing GM last year to abandon its target for break-even results in Europe for the full year.

GM's losses in Europe do not seem to be nearing an end, so exiting Opel, while costly upfront, would make sense, Jonas said in a research note to clients. Selling Opel could cost GM up to $13 billion, including upfront restructuring, an equity contribution to a buyer and funding Opel's pension obligations, he estimated.

"One of the worst things in the auto industry is owning a cash-burning, resource-consuming business," wrote Jonas, who has an "overweight" rating on GM shares. "We believe the time has come for GM to find a new home for Opel."

GM said it remains committed to Opel, however.

"Despite the tough environment for the automotive business in Europe, we believe we have an opportunity to turn the Opel/Vauxhall business around and bring it back to long-term profitability," said GM spokesman Jim Cain.

GM has reduced the number of temporary and contract employees in Europe, and is working with the German union IG Metall to cut costs further, including cutting the hours of several thousand workers at two of its plants. The company and union also are in talks for a deal that would give GM wage concessions and the ability to close a plant in 2017.

Opel's persistent woes have led the automaker to push for changes including the ouster of the unit's chief executive in July. GM is also introducing new cars and realigning its business in the region, including forming an alliance with French automaker PSA Peugeot Citroen.

Jonas said that divesting Opel could add nearly $1.00 a share to earnings and ultimately drive more than 50 percent appreciation in GM's stock price. GM's shares were up 3.4 percent at $22.49 on the New York Stock Exchange on Thursday afternoon.



In 2009, GM almost sold Opel to Canada's Magna International Inc before pulling out of the deal after deciding Opel was too strategic a part of its global business. At the time, GM CEO Dan Akerson favored the sale, but in recent months he has said he is more concerned with fixing Opel than in dwelling on the past. Jonas said that GM likely "wishes they had a 'do-over'" on the 2009 sale.

Jonas called Opel the "single biggest threat to GM's long-term financial health and sustainability," adding that a separation was in the best interest of not only GM but of Opel as well. He compared it to when Daimler AG sold Chrysler in 2007 to Cerberus to escape what was a financial drag for the German automaker. Chrysler is now managed and majority-owned by Italy's Fiat SpA.

"We'd rather see GM with a 3 percent share in Europe," Jonas said, referring to the company's Chevrolet business in the region, "generating a profit than an 8 percent market share in Europe generating massive losses." He forecast Opel to burn a further $12.3 billion of cash from 2012 to 2021.

GM's Chevrolet business in Europe is not counted in that region, and is instead part of the company's international operations unit that includes Asia.

"Opel isn't merely a drain on precious cash," Jonas said. "It is a drain on engineering resources, management resources - sapping energy and swagger from the culture of the company." He estimated GM Europe will lose $1.5 billion this year and another $1.3 billion if not more in 2013, while revenue will stagnate through 2016 and grow by only 1 to 1.5 percent annually from 2017 through 2021.

Jonas also said closing Opel may not be a viable option for GM, costing as much as $20 billion over several years and hurting the company's reputation.

Morgan Stanley's investment banking arm has advised GM in the past.

Jonas said Opel is worth a negative amount equal to half of GM's market capitalization, which at Wednesday's closing price was about $34 billion.

Exiting Opel would cost GM between $7 billion and $13 billion, including $3 billion to $7 billion in cash GM would likely need to attach to the business to sell it, Jonas estimated, adding that the figure could even be higher.

The overall estimate also includes $1 billion to $2 billion in additional restructuring actions by GM to show it was trying to get the business back to break-even, and $3 billion to $4 billion to fund most if not all of the company's German pension liabilities.

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Thursday, 06 September 2012 03:18 PM
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