Can GM Sell Opel and Not Fully Walk Away?

General Motors doesn't look like it has much leverage with the German government over the sale of its Opel unit. German Chancellor Angela Merkel has publicly favored a deal that would give Canadian parts maker Magna International (MGA) and its partner, Russia's OAO Sberbank (SBER.RTS), a 65% stake. The Germans have offered €4.5 billion in financing to Magna, but none for a competing bid from investment firm RHJ Investments (RHJI.BR).

But by playing a waiting game, GM's new board of directors hopes to either alter the terms of the Magna deal or get the government to finance the RHJI offer. GM's advisers think the automaker could do even better by finding new sources of funding that would let the company keep Opel or by letting Opel fall into insolvency. The latter would liquidate the company and force GM to engineer future small and midsize passenger cars in its U.S. or Korean operations. But it would also keep Magna and its Russian partner from emerging as a competitor. Sberbank has ties to Russian automaker GAZ (GAZA.RTS).

GM's board had a few issues with the Magna deal, which is why it refused to make a call either way during its phone meeting on Aug. 21, say sources close to the board. GM's U.S. unit holds the intellectual rights to Opel's engine technology and passenger-car platforms. The board wants to keep control of that, even if Opel and its new owner default on loans from the German government or if the company is sold again later on. GM's board also wants to preserve royalties paid by Opel's owner. Neither was clearly spelled out in the proposal the board reviewed on Friday.

Time Is Short The fear, says one adviser to GM, is that Magna and its Russian partners would use the technology to compete against GM not only in Europe but in other emerging markets.

GM doesn't hold all of the cards. But Merkel is under pressure to show that she has saved Opel and thousands of German jobs by striking a deal by the Sept. 27 election. So time is short.

If GM can't retain control of Opel's intellectual property from Magna, it would prefer to do a deal with RHJI. Sources close to the talks say RHJI would be willing to sell the company back to GM later. Its offer was also more lenient toward GM when it comes to technology ownership.

That's problematic in Germany. Politicians and labor leaders have blamed GM for Opel's woes, so selling to a player like RHJI means GM could be back in the picture. But RHJI's bid also requires public financing of about €900 million less than what Magna requires.

There is one other option. GM could try to get financing from the Spanish and British governments and restructure Opel on its own. But that would cost several billion dollars and it isn't in the works just yet. Opel has plants in both countries. GM also could let Opel go insolvent, allow all the jobs to go away, and use the Chevrolet brand and cars coming from its Korean GM-Daewoo operations for sale in Europe.

Fresh Product in Hand GM already is growing Chevy in Europe; so far this year, Chevy has sold 214,000 cars in Europe, about one-third of Opel's sales. The Opel brand had been growing until recently; sales are off 20% this year in Europe, largely because the Russian market has tanked. If GM can expand the Chevy brand using cars made in cheaper plants in Asia and Eastern Europe, it could succeed in the long run. But GM has to build Chevy up against homegrown names from all over Europe and steal a march on Korean and Japanese interlopers, which already have a head start.

GM's board may feel that it can afford to wait out the Germans, who have already loaned Opel money. Plus, the Chevy Malibu is relatively new, and most of the work on the Chevy Cruze, which hits the market early next year, is done. So GM has fresh product in hand that utilizes Opel's technology.

If it looks like Opel will go insolvent, GM has time to engineer new passenger cars without it. And the Korean GM-Daewoo unit could engineer compacts and subcompacts. "GM could ride for nine years on what they've got," says James N. Hall, principle of Detroit-area consulting firm 2953 Analytics.

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