PSA Group is betting that size matters in Europe’s saturated car market as closes its deal with GM to buy Opel and its UK sister brand Vauxhall. Despite years of losses for the two under GM, PSA will pay 1.8 billion euros ($1.9 billion US) as the French manufacturer bolsters its defenses in a peaking market that’s being transformed by technology, new competitors and Brexit. GM, which is taking a charge of between $4 billion and $4.5 billion, will retain a toehold in the area by continuing to sell Chevrolets in small volumes.
The deal, formally announced in Paris this morning “Gives us the opportunity to become a real European champion,” said PSA CEO Carlos Tavares after the announcement. “Our plan is to build a common future for Opel and Vauxhall and fix the existing issues.” PSA, which also owns Citroën and Peugeot will become the second biggest car maker in Europe, with about 16% of the market. It will now be bigger than Renault and second only to Volkswagen.
As with any merger, there are opportunities to streamline operations and save money. Carlos Tavares has a reputation as a cost-cutter. PSA estimates synergies should reach €1.7bn on an annual basis (or 2.2% of combined sales). Mr Tavares end on the say that every worker would be given a “chance” to prove their efficiency. “Everybody will have a chance to reach the benchmark in terms of efficiency and as we are progressing towards the benchmark and efficiency we do not need to shut down plants,” he said today.
While PSA may now be able to spread the costs for developing new vehicles across a larger network to achieve the savings necessary to compete amid Europe’s high wages and wafer-thin profit margins emphasis not the deal has been about protecting jobs both in Germany and the UK. Professor Christian Stadler of Warwick Business School warned that workers should brace for redundancies. “I would expect job cuts. PSA has done it before and there is no other way to realistically achieve the cost savings they have in mind, which might possibly mean plant closures as well.”
GM, which has owned Opel for almost 90 years, is cutting ties after the division missed a target to break even in 2016, contributing to losses that have totaled about $9 billion since 2009. In addition to the charge, GM is on the hook for much of Opel’s pension obligations and will pay PSA 3 billion euros to settle some retirement plans. Still, the deal will free up about $2 billion in cash, which GM plans to use for share buybacks.
General Motors executives said they decided to sell Opel because Europe’s changing geo-political and regulatory climate demands more investment at a time when they see a greater need to focus on North America, China and emerging technologies such as autonomous vehicles. One has to wonder if PSA will be able to do the same as they try to integrate Opel and Vauxhall. PSA did announce their intent last year to return to North America, but this takeover will no doubt take quite a concentration of resources in Europe.
Though some are skeptical of the deal, PSA shares rose by 5.25 percent to 20.06 euros, the highest level since July 2011.
How this added diversity in PSA will play out for Citroën in the new mix of Opel and Vauxhall being added to the existing brands of Peugeot and DS remains to be seen. In the end it will be up to the public’s receptiveness to what PSA will offer customers in each market. In recent years Citroën has been positioned toward the new youthful buyer by offering vehicles with innovative style and technology. That distinction could hold some hope of survival in PSA’s increased homogeneous family.