GM Board Plays Waiting Game with Opel

General Motors' board of directors passed on making a decision to sell a controlling stake in its struggling Opel unit to Canadian parts supplier Magna (MGA) and its Russian partner, OAO Sberbank (SBER.RTS). Sources who were in the meeting or briefed on the conversations say the board wanted to modify terms of the deal before voting on it, but also considers a bid from Belgian investment firm RHJ International (RHJI.BR)—which the German government so far has not supported—to still be on the table.

GM CEO Frederick A. "Fritz" Henderson was expected to recommend accepting the bid from Magna in a meeting with the board on Friday, Aug. 21, according to three sources close to GM's plans. The other option offered was letting Opel fall into insolvency. GM has another bid from RHJI, but the German government so far will not provide more than €3 billion needed for the investment firm to finance the acquisition and restructuring of Opel.

GM's board ended the conference call without making a decision, asking that the German government consider funding the RHJI bid or change some of the terms of the Magna financing package. Sources say GM's board would like to see if it can get the German government to entertain a more competitive bidding process. German Chancellor Angela Merkel wants a deal done before the Sept. 27 election, so GM may think time is on its side. But sources for RHJI are still doubtful GM can get the German government to back that bid, leaving Magna with the bet shot of the two.

"I'm sure they will want to be careful about how they dissolve their ownership in Opel," says Michael Robinet, vice-president of CSM Worldwide, a Detroit-area research and consulting firm. "I would still think Magna is the leading candidate."

German Government's Preference Magna and RHJI had been competing bidders in recent months. The German government favored the bid from Magna and Sberbank for several reasons. First, Magna Chairman Frank Stronach is an Austrian with close industrial ties in Germany. Second, GM is not popular with labor leaders and politicians in Germany, who blame American management for Opel's demise. Since RHJI, a private equity firm, would eventually consider selling control of Opel back to GM one day, the Germans saw the company as a pawn for GM, according to a source close to negotiations. That's because if Magna wins, the company will keep Opel and in the long run could end up competing with GM in emerging markets.

In some ways, the RHJI bid was better for the German government. Both companies sought to cut 10,000 jobs from Opel. Magna offered to pay €400 million for Opel, compared with RHJI's €275 million bid. But Magna also wants €4.5 billion in financing from the German government, about €900 million more than what RHJI requested.

But the German government only agreed to offer Magna financing to cut a deal and restructure Opel. The government never shot down RHJI's request for financing, but nothing was ever approved either. At this point, RHJI could only acquire a controlling stake in Opel if GM's board wanted to get into a standoff with the German government.

GM at first didn't want to give up control of Opel. Doing so will concede control over its biggest European business and 1.2 million cars' worth of sales. But the German government wouldn't give GM any money to restructure Opel, and the losses were too big. Similarly, the U.S. Treasury Dept. mandated that no American taxpayer dollars should be used for overseas operations.

Without any outside help, GM needed to find a buyer. GM Europe lost $2.8 billion last year and an additional $2 billion in the first quarter, and the subsidiary was burning through cash. Opel sales in Europe fell 24% in the first half of the year. "It had to happen," says James N. Hall, principal of 2953 Analytics, a Detroit-area consulting firm. "Opel was nonsustainable for GM."

Passenger Car Expertise The question going forward is: What will GM do in Europe? A lot depends on how the final deal looks. Magna has wanted to take Opel vehicle platforms and technology to Russia, where Sberbank is tied to Russian automaker GAZ (GAZA.RTS). Then they could eventually use the Opel brand and technology and make the cars in Russian plants to push ahead in that growing market.

But GM didn't want to give up its intellectual-property rights to the vehicle technology or give Russian automakers a means to compete against GM with its own technology. How those terms end up in a sale would be vital to GM's strategy.

It's possible GM will end up keeping a 35% stake in Opel for several years and using the jointly owned European plants and Opel technology to provide small and midsize cars around the globe. The current Chevrolet Malibu and new Buick LaCrosse midsize sedans and Chevy Cruze compact are built using Opel-engineered platforms, but they're assembled in the U.S.

Over the long term, however, GM will walk away from Opel if Magna is the controlling partner, sources say. GM would surrender heavy sales in Europe and would have to rebuild expertise in making some passenger cars. That's a risk GM executives are leery of taking. Opel's Russelsheim (Germany) headquarters leads development for the basic engineering of compacts such as the Cruze and Opel Astra and does a lot of work for the platforms on which the Malibu and Opel Insignia are built. "There's a reason that North America was not the home base for GM's passenger cars," says Robinet of CSM Worldwide. "The expertise is in Europe. They will have to train a new group of employees to engineer vehicles they haven't made before."

GM's Low-Cost Option GM does have a low-cost option, though. American engineers could take over GM's midsize sedans while lower-paid engineers at its Korean GM Daewoo unit could develop compacts and subcompacts.

Since GM will be giving up most of its European manufacturing to Magna, the company could start by importing cars from Korea and selling them under the Chevy name. Eventually, GM could open plants in lower-cost Eastern European countries and escape the wages and intransigent negotiators of German union IG Metall.

GM sees the Chevy brand as a global growth story. So far this year, Chevy has sold 214,000 cars in Europe, about one-third of Opel's sales. It has been growing in recent years, but sales are off 20% this year in Europe, largely because the Russian market has tanked. If GM can grow the Chevy brand using cars made in cheaper plants in Asia and Eastern Europe, they could be successful in the long run. But they have to build the brand against homegrown names all over Europe and steal a march on Korean and Japanese interlopers who already have a head start.

That's why a deal with Magna would be a mixed blessing. On one hand, GM could eventually lose Opel's size and expertise. On the other, it also loses Opel's costs and losses. Says Hall: "It's not good because they lose volume, but they could end up making more money, or at least losing less."

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