Should GM unload Opel?

Sep 11, 2012

Let's just be friends

Veteran Morgan Stanley auto analyst Adam Jonas caused a recent stir when he suggested that General Motors reverse course and sell its Opel affiliate rather than try to save it. Reason: its potential damage to the rest of GM. Seeing what he described as "a significant deterioration in the European car market and widening operating losses," Jonas called Opel "the single biggest threat to GM's long term financial health and sustainability."

Such an amputation would not come cheaply. Jonas figures that the cash cost of a separation would be $7 billion to $13 billion, but he believes that ultimately it would drive a more than 50% appreciation to GM's stock by driving earnings per share up nearly a dollar (or 20%).

Selling Opel would be harsh medicine, but other automakers have prospered after dumping money-losing operations. Jonas cites two similar transactions in his report, but there have been a half dozen others in the past 30 years. Here's a look at how they turned out:

Renault-AMC

AMC had always led a precarious financial existence, and Renault, its French owner, wasn't much help in changing that. When gas became cheap in the mid-1980s, the market moved away from AMC's small cars. After Renault chairman George Besse, who had championed AMC, was assassinated in 1986, Renault sold it to Chrysler for $1.5 billion.

Bottom Line

The deal produced a windfall for Chrysler, which leveraged AMC's Jeep business into a huge moneymaker. Renault made a longer-lasting acquisition in 1999 when it acquired 36.8% of then-struggling Nissan. The Renault-Nissan alliance has mostly thrived since then under CEO Carlos Ghosn.

BMW-Rover Group

In 1994, British Aerospace sold its 80% majority share in Rover Group for $1.35 billion to BMW, which was looking for a lower-end brand to complement its luxury performance cars. But despite budgeting $2.8 billion to invest in new models, it never fully confronted Rover's inefficient and antiquated practices, and the acquisition turned into a sinkhole. In 2000, BMW broke up the group. It sold Land Rover to Ford and Rover cars to an investor consortium and decided to keep MINI for itself.

Bottom Line

Ford struggled with Land Rover before selling it to Tata Motors of India in 2008. The Rover Car consortium failed and production ceased in 2005. But MINI has been a boon for BMW with its MINI Cooper creating what has become known as the premium small segment. BMW itself went through a management upheaval after the Rover fiasco but emerged stronger than ever. Analyst Jonas notes that while it cost BMW $2.7 billion to exit Rover, its stock "subsequently appreciated handsomely."

Ford-Jaguar Land Rover

Having acquired Jaguar in 1989 for $2.4 billion and Land Rover in 2000 for $3 billion, Ford sold the two U.K. companies to India's Tata Motors for $2.3 billion -- less than half of what it had paid for them. The two companies were performing so poorly that one analyst derided Tata's move as "a vanity purchase." Jaguar never made a nickel in 19 years of Ford's ownership, while Land Rover seemed incapable of building vehicles of a quality commensurate with its upscale prices.

Bottom Line

Thanks to surging sales in China, both Jaguar and Land Rover are thriving. Each posted record results in the last fiscal year, with sales up 29% from the previous year. Bloomberg figures the two brands are now worth $14 billion. Ford has done nearly as well but now faces a slowdown in China, a recession in Europe, and tough competition in North America.

Daimler-Chrysler

In 1998, Daimler-Benz took over Chrysler for $37 billion in the notorious "merger of equals." Chrysler suffered under German direction, and after a series of losses, Daimler sold 80% of the American company to the private equity firm of Cerberus Capital Management for $7.4 billion. Jonas figures it cost Daimler $9.3 billion to exit Chrysler

Bottom Line

Daimler earnings popped after the sale, but its Mercedes-Benz brand seemed to lose momentum to archrival BMW, with whom it now competes for sales leadership. In 2010, Mercedes announced another partnership, this one with Nissan to develop small cars. Chrysler, since filing bankruptcy in 2009, has prospered under the control of Italy's Fiat, which acquired the American automaker for essentially nothing. With Fiat's help, Chrysler has updated its product line successfully and boosted sales.

Ford-Volvo

When Ford saw an opportunity to acquire Volvo Cars -- a profitable though smallish Swedish automaker -- in 1999, it jumped at the opportunity and paid $6.45 billion. A decade later, after supporting Volvo through years of losses and tentative efforts to integrate its operations, it sold the company to China's Zhejiang Geely Holding Group for $1.8 billion.

Bottom Line

Within days of disposing of Volvo, Ford announced it was also terminating Mercury, leaving Lincoln as its sole upscale brand. Lincoln is currently overhauling its product line -- as is Volvo. Under the leadership of CEO Stefan Jacoby, Volvo is focusing its gaze far out in the future and has set a goal of 800,000 unit sales by 2020.

GM-Saab

After buying Saab for $650 million in 2000 and investing countless additional millions to make it profitable, GM wound up unloading it ten years later for $74 million to the Netherlands' Spyker Cars. A boutique manufacturer with no experience managing even a small automaker, Spyker struggled to launch a new 9-3 sedan and the 9-4x crossover vehicle, and Saab collapsed into bankruptcy a year later.

Bottom Line

Spyker shopped Saab widely to Chinese buyers, but GM blocked a sale by announcing it would not continue its licenses to patents and technology. Most of Saab's working parts have now been sold to a Chinese electric car manufacturer.

GM-Hummer

GM bought the rights to the Hummer name in 1998 and marketed three vehicles, the H2 and H3 on GM platforms. After an initial spurt of interest, Hummer's over-the-top styling and voracious appetite for gasoline came to be seen as a liability in a weak economy, and GM put it up for sale in 2009.

Bottom Line

A Chinese maker of heavy industrial equipment wanted Hummer, but the Beijing government blocked the deal. With no other buyers on the horizon, GM began shutting the marque down and built the very last Hummer in May 2010.

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