February 14, 2017 / 9:59 PM / 5 months ago

Peugeot-Opel merger faces winding road to riches

3 Min Read

The logos of German General Motors daughter Opel and French car maker Peugeot are seen at a Opel and Peugeot dealership in Leverkusen near Cologne October 22, 2012. Picture taken October 22.Wolfgang Rattay

LONDON (Reuters Breakingviews) - Carlos Tavares has shown he can quickly turn around troubled European carmakers. Within three years of him taking charge at PSA Group, the French company’s profit margin has tripled. Now Tavares may be preparing to take on a new challenge by acquiring General Motors’ troubled European unit.

Combining Europe’s third- and sixth-largest makers of passenger cars would be a big step towards ending the gridlock in the continent’s auto industry. Despite years of downsizing and a rebound in demand for new vehicles, the industry suffers from overcapacity. Peugeot plants operate at around 74 percent of their potential, according to Evercore ISI analysts.

Uniting the Opel and Vauxhall brands with Peugeot and Citroen would lift PSA’s European market share to 16 percent, second only to Volkswagen’s 24 percent. Bigger companies have better bargaining power with suppliers and are better able to fund rising research and development costs.

Renault and Nissan provide a possible road map. The French and Japanese groups, which are both run by Chief Executive Carlos Ghosn and have significant cross-shareholdings, reckon their alliance lowered costs by 4.3 billion euros in 2015 – equivalent to about 3.5 percent of combined sales.

If PSA and GM Europe achieved similar savings, costs would fall by 1.9 billion euros, based on joint revenues of around 55 billion euros last year, excluding Peugeot’s car-parts maker Faurecia. Taxed at 25 percent and capitalised, those savings would be worth close to 15 billion euros – similar to Peugeot’s market value.

Placing a value on GM’s European business, which has lost money for more than a decade, is tricky. The U.S. group could inject its business into PSA in return for a shareholding, though it sold its stake in the French group a few years ago. Alternatively, PSA could pay cash. Evercore ISI reckons GM’s European pension liabilities are so large that the U.S. group might need to pay PSA to take over the business.

Even if Tavares can overcome these obstacles, investors recognise that most auto mergers fail to live up to their promise. The French government, which owns 13.7 percent of PSA, may want to protect employment at home. More than half of GM’s European workers are in Germany, where wages are high, unions powerful and layoffs costly. As attractive as it seems on paper, a Peugeot-Opel merger faces a winding road to riches.

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