GM CEO Dan Akerson (left) and PSA Peugeot Citroën Chairman Philippe Varin announced a joint-development alliance last year. Peugeot’s controlling family is now hoping GM will take control. Photo credit: General Motors Company (NYSE:GM).
What is this madness? Reuters reported on Thursday that France’s Peugeot family is ready to give up its controlling stake in PSA Peugeot Citroën , the deeply troubled French automaker – but only if General Motors Company (NYSE:GM) is willing to take over.
Peugeot (the company) is in dire straits, battered by declining car sales in its recession-ravaged home market and without significant overseas operations to help it bootstrap a turnaround.
It’s clear why the founding family is desperate to find a well-heeled suitor, and last year’s joint-development tie-up between General Motors Company (NYSE:GM) and Peugeot makes the General a natural choice.
But this has “huge steaming bucket of Not Good” written all over it for General Motors Company (NYSE:GM). Here’s why.
Signs that GM has finally begun to turn around Europe
General Motors Company (NYSE:GM)’s troubles here in the U.S. in the last decade are well known, but GM has also been dealing with a mess in Europe, where it has lost over $17 billion since 1999, $1.8 billion in 2012 alone. Its German subsidiary, Opel, has long been plagued by exactly the kinds of problems GM had here: Too many factories, too-rich union deals, and products that just weren’t finding enough buyers.
Those problems have been made a lot worse in the last couple of years by the stiff recessions facing much of Europe, recessions that have driven new-car sales in the region to a 20-year low. But as it has been in other parts of the world, GM’s new management team has been making progress in Europe.
About a year and a half ago, GM CEO Dan Akerson began a major overhaul of GM’s European operations, putting his right-hand man, GM vice chairman Steve Girsky, in charge of an ambitious turnaround effort. That effort has included major cuts, new management for Opel, and several new products – as well as a deal with Peugeot to share parts and costs on a few upcoming new models. As part of that deal, GM took a small stake in Peugeot.
GM is still losing money in Europe, but already those losses have narrowed: GM lost just $175 million in the first quarter, much less than expected. As of now, GM expects to be breaking even in Europe, or close, by the end of 2015.
And now, just as Opel is starting to show signs of recovery, along comes Peugeot – with its own money-torching mess.
What would GM get out of this deal?
Like I said, it’s clear what Peugeot would get out of a deal in which GM essentially bought control from the Peugeot family: survival. The company lost 5 billion euros last year and is in increasingly desperate need of cash. Sales have fallen off a cliff and it’s likely to be several years (at least) before the European new-car market recovers.
Large European competitors like Volkswagen and Ford Motor Company (NYSE:F) – and yes, GM – have the global scale to weather the European storm, as does Peugeot archrival Renault, which has a global tie-up with Japanese giant Nissan (OTCBB:NSANY) . All can share development costs and tap profits elsewhere to offset European losses. That’s what the Peugeot family would dearly like to get from GM.
But what would such a deal give GM? Well, it would give GM more scale to work with in Europe – more sales and more production, but also more brands to support, and more union contracts to wrangle. It only makes sense if the French government will let GM consolidate production by closing some or all of Peugeot’s factories.
That’s not a given: Peugeot has five factories in France, and the French government really, really doesn’t want to see those jobs lost. IHS Automotive estimates that those factories ran at 71% of capacity last year; a rule of thumb is that auto factories break even at about 80% of capacity.
And the last thing GM needs in Europe is more underutilized, money-losing factories.
Will GM really consider this?
Reuters, citing inside sources, reported that GM has been willing to discuss the idea – but only if it receives assurances that it will be able to make the necessary drastic cuts without huge costs, like the $750 million in lavish separation payments that Ford Motor Company (NYSE:F) will make to workers to close a factory in Belgium.
That’s probably the smart answer, but it seems unlikely to work out that way. Reuters says that while French officials understand that Peugeot needs a deal with a global automaker, they “remain determined to preserve Peugeot’s French sites and jobs”.
Meanwhile, GM, which has already moved to close one of Opel’s four German factories, is under pressure to preserve that company’s remaining jobs as well. In both cases, the government pressure is probably unrealistic given the harsh market realities – but that doesn’t make it easier for GM to find a cost-effective way forward.
Long story short, it seems unlikely that GM will take over Peugeot as of this moment – but it’s not impossible that something could come of this. Stay tuned.
The article Will GM Buy This French Automaker? originally appeared on Fool.com and is written by John Rosevear.
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