GM to Make Pension Payments for Years Just to Get Out of Europe

  • U.S. carmaker to pay about $400 million annually for 15 years
  • Opel sale improves GM’s future profit and cash flow, CFO says

How Does GM Benefit From Selling Off Opel Unit?

General Motors Co. will practically pay France’s PSA Group to take its long-struggling European unit off its hands as it looks to cauterize a perennial bleeder.

PSA will pay a total of $2.2 billion to buy GM’s German Opel unit, its U.K. sister brand Vauxhall and its European auto lending business. In return, GM will give the French carmaker $3.2 billion to cover future Europe pension obligations and keep managing $9.8 billion worth of plans for existing retirees.

Europe’s burden on GM’s balance sheet will now be confined to pensions, leaving Peugeot owner PSA with the task of fixing the troubled Opel brand and turning around a business that’s lost about $9 billion since 2009. Once the deal closes, GM will pay about $400 million annually for 15 years to fund the German and U.K. plans, spokesman Tom Henderson said.

“Peugeot really held them over the fire on the pensions,” David Whiston, an auto analyst with Morningstar Inc., said by phone. “But the benefits outweigh the risks. GM would have had to manage the pension obligations that they are keeping anyway.”
GM executives dismissed the idea they’re paying PSA to take Opel off their hands. The automaker is cutting losses and cash burn while keeping its obligations to retirees who worked for the company, Chief Financial Officer Chuck Stevens said. The Detroit-based automaker burned through about $4.4 billion in cash during the last three years in Europe.

“It’s a known obligation,” Stevens said on a conference call Monday. “All we’re doing is recognizing an obligation that we had and the historical drag on the business.”

Read more: Why GM wants out of Europe, a QuickTake Q&A

GM’s Upside

By dropping its European business, GM will improve profit and cash flow, Stevens said. Rather than keep about $20 billion in cash on hand to run the business and cushion against recessions, the company can shrink its buffer to about $18 billion, he said.

The newly freed $2 billion will accelerate GM’s share buyback program once the deal closes later this year, Stevens said.

The move also allows GM to redirect about $1.1 billion in capital expenditures the company typically spends per year in Europe. The automaker can now either plow that into new models for profitable markets like the U.S. or China, develop costly technology or return cash to shareholders.

“We laud GM management for taking an aggressive action,” Matthew Stover, an analyst with Susquehanna Financial Group in Boston, wrote in a report Tuesday. It sends a strong message to the organization about a change in behavior.”

Peugeot’s Opportunity

PSA Chief Executive Officer Carlos Tavares is walking away with some goodies, too. GM is taking on a non-cash charge of as much as $4.5 billion for the deal. The non-pension portion of that is $2.7 billion in deferred tax assets that PSA can use to offset income -- assuming Tavares turns the company around and starts earning some.

Carlos Tavares, CEO of PSA Peugeot Citroen, discusses the purchase of Opel and Vauxhall.

GM isn’t on the hook for any restructuring costs that could come from PSA laying off workers.

“If you can’t fix something, then why hang on?” said Maryann Keller, an industry consultant in Stamford, Connecticut. “This was a bold move and a smart move by GM.”

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