GM Will Sell Opel to Magna After All

The long saga surrounding the fate of General Motors' European strategy appears to be drawing to a close. After all the wrangling and hardball played by GM's board, the company still ended up accepting a deal that, if finalized, will sell a controlling stake in Opel to Canadian parts maker Magna International (MGA), GM said on Sept. 10.

GM's board initially passed on CEO Frederick A. "Fritz" Henderson's recommendation in late August to sell a controlling stake to Magna because directors didn't like some provisions they saw. The board said the proposal had some loose ends concerning the financing and the rights to the passenger car platforms and engine technology developed under GM. The fear was that Magna and Russian partner OAO Sberbank (SBER.RTS), which has ties to Russia-based automaker GAZ, would use the technology to compete against GM in China and other markets around the globe.

Under terms of the deal, GM will maintain strong ties to Opel's engineering operations in the region that will help it develop passenger cars for global markets. And while GM will surrender control of a business commanding about three-fourths of its European car sales (Chevrolet sold 215,000 of GM's 879,000 cars sold in Europe in the year's first half), Magna's Opel and GM will still be joined at the hip in Europe.

Just Bluffing The deal with Magna appeared to have stalled out a month ago, but it's now clear that the board was playing a game of poker. Or perhaps it was good cop/bad cop, with Henderson recommending the Magna proposal but his board refusing to accept it until better terms were ironed out. In a prepared statement, Henderson said that GM, Magna, and the German government cleared up some outstanding issues in recent weeks, which spurred the board to approve the deal.

If the deal is concluded, Magna will own 55% of Opel, with GM keeping 35% and Opel employees taking 10%. The two sides have a 500-page document spelling out who gets what technology and pays what royalties. It also dictates who can compete where, says a source close to the deal. GM will collect royalties if Opel uses its technology. But in the future, Opel can charge GM if its engineers create something GM uses.

GM answered one big question with Thursday's announcement: Opel's engineering works in Russelsheim (Germany) will remain a key part of GM's product development organization. That means GM will have access to the car platforms used to develop Opel models as well as the Chevrolet Malibu, Buick Lacrosse and Insignia, and Chevy Cruze compact. Opel will also maintain the strength of GM's global purchasing power.

"I expect a healthy ongoing relationship," says IHS Global Insight analyst Neil King. "From both sides, they have to work together."

What's less clear is how the two companies will handle competitive issues. Opel, whose 657,000 sales globally in the first half of this year represented 34% of GM's global sales, is the automaker's big player in Western Europe. But it also sells cars in Russia and Eastern Europe, and has a small presence in Latin America and Asia. The new Opel is restricted from selling cars in the U.S. and South Korea. It cannot sell cars in Canada until the fourth quarter of 2012 and Opel cannot sell models similar to GM's Buick cars in China until 2015, says John Smith, GM's group vice-president for business development. But Magna and Sberbank partner GAZ will get control of Opel plants in Russia.

More Chevys Meanwhile, GM has been expanding its Chevrolet brand in Europe, chiefly in Russia and the Eastern markets, by selling cars engineered and assembled with lower costs in Asia. Both companies will covet growth in Russia and the East. "Over time they could be competitors," says King.

Magna will have some big issues to face as well. Opel has lost money for most of the past decade, with only brief respites. Last year, GM's European operations lost $2.8 billion, and they bled a further $2 billion in the first quarter of this year. Saab, another loser that GM is trying to sell, accounted for some of that, but Opel has not been successful since the 1990s. Smith says GM and Magna think Opel can become profitable in 2011.

The new company will get a total of €4.5 billion in financing from the German government, which will syndicate some of that debt to governments in Spain and Britain. Magna will put another €500 million into Opel. GM gets no cash in the deal but does get to unburden itself from a money loser at a time when management has its hands full turning the North American business around.

Now, Magna must start fixing Opel. The problem is that Opel has high-cost manufacturing in Germany, Britain, Belgium, and Spain, while some rivals have moved production to lower-cost countries in Eastern Europe. Opel does have a plant in Poland. But its cars don't command the high prices of, say, the BMW, Mercedes, or Audi brands. So profits are a challenge.

Managing the competitive positioning of both Opel and Chevrolet could be the answer to Opel's cost problems, says James N. Hall, principal of 2953 Analytics. If Magna lets Chevy sell smaller, cheaper cars and stay downmarket as GM had been doing, the two companies can keep moving Opel upscale and get the level of pricing that justifies the costs. Says Hall: "It's in Opel's best interest to leave the lower-market business to Chevy."

GM thinks that Opel's market position may be the best way to keep the company from competing with Chevy. Smith said that moving Opel downward in pricing and prestige to compete with Chevy would be risky for Opel and could turn away core buyers.

Saving Jobs The new Opel Insignia midsize car is commanding better pricing, says Hall. That has led some executives inside GM to believe that Opel can recapture its premium-price position that made the company a winner before GM started cutting corners on its models in the '90s.

But with losses piling up, GM couldn't wait for an Opel turnaround. The German government sees GM management as a big part of the problem, so Chancellor Angela Merkel didn't want to finance a restructuring led out of Detroit. Opel has cash to last only into December or January. So GM had few options but to sell a stake.

Henderson was never keen on the Magna deal, say sources inside GM. But with Opel burning cash and the U.S. Treasury Dept. and German government unwilling to fund a GM-led restructuring, selling the company became the only clear option. GM talked to governments in Britain, Spain, and Poland (homes to other Opel plants) about financing, but no deal was reached that would get the necessary funding. The German government favored Magna as a buyer, believing that it would save more of Opel's 25,000 jobs than RHJ International (RHJI.BR), a Belgian private equity firm that placed a rival bid. GM favored RHJI, but the German government would not provide the needed $4.5 billion in financing to get the deal done.

Now the restructuring gets under way. GM said the two companies need to work with the German unions; with GM out of the driver's seat, German union IG Metall may have the cover it needs to grant more concessions and bring Opel back to profitability. If Magna can pull that off, it will have scored a major victory. And given Opel's history, an unlikely one.

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