March 6, 2017 / 3:38 PM / 9 months ago

Fitch: Opel Acquisition Moderately Positive for PSA

(The following statement was released by the rating agency) BARCELONA/LONDON, March 06 (Fitch) Fitch says that there is no immediate rating impact on Peugeot SA (PSA, 'BB+'/Stable) from the acquisition of General Motors Company's (GM, 'BBB-'/Positive) Opel subsidiary and GM Financial's European operations for EUR1.3bn and EUR0.9bn, respectively. The financial services business will be acquired jointly by PSA and BNP Paribas. We believe that this transaction will be moderately positive for PSA in the medium term but will not fundamentally change the group's business profile in the near term. Upward pressure on the rating could come from the creation of a positive track record in restructuring Opel and boosting the group's profitability and cash generation, which could offset PSA's remaining relative weaknesses from an operating perspective. We believe that the transaction is structured in such a way that it will not have a major negative impact on PSA's financial profile, notably its leverage. PSA will finance the EUR1.8bn deal through its existing cash balance and EUR0.65bn in warrants with a nine-year maturity and exercisable after five years. These warrants have neither governance rights nor voting rights and GM has committed to sell the shares within 35 days of exercising the warrants. In addition, Opel's European and UK large pension plans will remain with GM with the exception of plans covering active employees in Germany that will be transferred to PSA, albeit funded by GM. PSA's financial structure has strengthened substantially over the past couple of years, with funds from operations (FFO) adjusted net leverage improving to negative 0.2x at end-2016 from 0.2x at end-2015 and 1.6x at end-2014, This provides headroom within the rating and we believe the group can shoulder this transaction without putting any significant strain on credit metrics. PSA reported EUR11.4bn in gross cash and liquidity from its industrial operations at end-2016, after Fitch's adjustments for operational cash. On a pro-forma basis, Fitch estimates the net impact from the Opel transaction on PSA's FFO adjusted net leverage to be about 0.2x. The acquisition of Opel will further reinforce PSA's strong positions in Europe. The group will recover its position as the second-largest manufacturer in Europe behind Volkswagen and will bring PSA market leadership of the lucrative light commercial vehicles segment. The European sales of Opel and PSA are complementary and this transaction will reduce the group's exposure to France and south European markets, while gaining exposure to Germany and the UK where Opel has solid market shares. In addition, PSA acquires a production base in the UK and improves its natural hedge in case of a hard Brexit scenario. However, it will also increase PSA's geographical concentration in Europe. We estimate that the group will derive more than 70% of its unit sales from Europe, compared with about 60% currently. A cyclical downturn in the region could have a larger impact on the combined group's sales in spite of the different dynamics of the various European markets. The combined group will also remain focused on the small to medium mass-market segments where competition and pricing pressure are the fiercest. Despite its gradual improvement in recent years, and similar to PSA, Opel has had limited success in the D-segment and above. On the positive side, we expect PSA to gain access to Opel's electric vehicle technology in which the latter is already well advanced. From an operating standpoint, we expect this acquisition to further boost the synergies already created between both entities. PSA has identified annual synergies of EUR1.7bn in the areas of purchasing, administrative costs, R&D, investment and manufacturing as well as EUR1.2bn in working-capital optimisation. We believe that PSA's experience in working with Opel lends credibility to its assumptions on integrating the different entities and increasing profitability. In particular, Opel and PSA have a solid track record in working together as the two companies are cooperating to launch three models together as well as a joint purchasing organisation. PSA's excellent record in rejuvenating its product offering and streamlining its cost structure to boost earnings and cash generation is another strongly positive factor. Nonetheless, the timeframe to successfully execute this transaction remains an area of uncertainty as restructuring Opel and extracting the expected synergies could take time and effort, notwithstanding regulatory approvals to complete the acquisition. We also expect some of the most significant cost savings to be gradual and accrue when Opel's existing models reach the end of their useful lives and are integrated into PSA's common platforms. In addition, we expect some restructuring costs to burden earnings in the short term. Contact: Emmanuel Bulle Senior Director +34 93 323 8411 Fitch Ratings Espana S.A.U. Av. Diagonal 601 08028 Barcelona Thomas Corcoran Associate Director +44 20 3530 1231 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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