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Peugeot-Citroën edges closer to buying Opel

Motoring

Frankfurt, Germany - France's PSA Group, maker of Peugeot and Citroën cars, says it's exploring a possible takeover of Opel, General Motors' money-losing European business.

Cutting Opel loose could mean a solution to GM's long-running drama over losses in Europe – but the Detroit-based automaker cautioned that a deal wasn't a sure thing.

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PSA Group said in a statement on Tuesday that it was considering "numerous strategic initiatives" that would expand the existing cooperation between the two companies, and that a takeover of Opel was one of them. PSA Group and GM are already involved in several joint projects in Europe. GM acknowledged the talks and cautioned that "there can be no assurance that an agreement will be reached."

Combing PSA Group with Opel and its British brand Vauxhall would create the second-largest carmaker by market share in Europe, with 16.6 percent of sales according to 2016 figures. The combination would be second only to Volkswagen, with 23.9 percent, and would vault ahead of the Renault-Nissan alliance, which haS 13.9 percent.

Analysts Philippe Houchois and Ashik Kurian at research firm Jefferies International say in a report that "ongoing market concerns for PSA and GM have been lack of scale, which this combination would help to address." Being bigger can in theory bring per-vehicle cost advantages by spreading fixed costs such as investment in plants and equipment over a larger number of vehicles.

GM last made a full-year pretax profit in Europe in 1999. Since leaving bankruptcy protection in 2009, GM has lost $5.88-billion before taxes on European operations, according to government regulatory filings.

Opel had hoped to reach break-even by now, but last year posted a loss of $257-million for the year even as GM as a whole turned in a robust profit of $9.4 billion. The company noted that the European operation would have broken even if it had not suffered a $300-million hit from the British vote to leave the European Union. The resulting plunge in the British pound shrinks the dollar value of earnings from its Vauxhall models in that market.

GM CEO Mary Barra had underlined the company's commitment to Opel several times in recent years. But the unexpected loss last year has increased pressure to find a solution.

"We aren't satisfied with these results and the team is focused on mitigating the effect through further cost efficiencies" and new models, Barra said after the most recent earnings update.

GM Chief Financial Officer Chuck Stevens said the company expected only a "relatively flat performance" in Europe this year.

Opel has struggled to control costs due to stronger worker protections in Europe that make it harder to adjust production capacity to demand than in the US or other locations. Opel and Vauxhall also face tough competition for sales of less profitable mass-market vehicles.

Opel has had success with models such as the Mokka small SUV, and sales rose 4 percent last year. Its mainstay Astra hatchback, which competes with the Volkswagen Golf and the Ford Focus, won the European Car of the Year award.

But it lacks larger SUV models that would bring fatter profits.

In 2009, GM agreed on a sale of a majority stake in Opel to Canadian car parts firm Magna International and Russian lender Sberbank but called the deal off as the GM's fortunes improved following its bankruptcy restructuring.

GM and PSA Group formed an alliance in 2012 in an attempt to make production more efficient by combining purchasing power and larger scale. But in late 2013 GM announced it was selling its stake, although the two companies continued working on joint vehicle projects. For instance, General Motors will make Citroën's forthcoming subcompact crossover vehicle beginning later this year at a plant in Zaragoza, Spain.

Metalworker Adam Opel started making sewing machines in 1862 in his hometown of Ruesselsheim, Germany, where the company headquarters is still located. Opel added bicycles and then autos in 1899. General Motors bought Adam Opel AG in 1929.

AP

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