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Fitch: Sale of Opel/Vauxhall Improves GM's Profitability but Reduces Diversification
March 6, 2017 / 6:36 PM / 9 months ago

Fitch: Sale of Opel/Vauxhall Improves GM's Profitability but Reduces Diversification

(The following statement was released by the rating agency) CHICAGO/BOGOTA, March 06 (Fitch) Fitch Ratings does not expect any immediate effect on General Motors Company's (GM) IDR of 'BBB-' or its Positive Outlook from the planned sale of its Opel/Vauxhall (Opel) subsidiary to PSA Group (PSA) in a cash and stock transaction. The sale comprises nearly all of GM's General Motors Europe (GME) segment, except for an engineering center in Italy. In conjunction with the sale, General Motors Financial Company, Inc. (GMF), GM's financial services subsidiary, plans to sell its European subsidiaries to a joint venture that will be owned by PSA and BNP Paribas. GM's GME segment generated about 12% of GM's automotive revenue in 2016, and Opel and Vauxhall sales constituted about 12% of GM's global vehicle sales volume in the year. However, despite Opel's size, Fitch estimates that the unit constituted only about 2% of GM's consolidated EBITDA in the year, and cash burn at the subsidiary actually reduced GM's consolidated FCF by about $900 million. Fitch expects the transaction to have a relatively minor impact on GM's credit protection metrics in the near- to intermediate-term. In the near term, debt-funded cash contributions that GM will make to certain European pension plans in conjunction with the sale will likely result in a slight increase in leverage, although leverage will still remain low for the company's current rating category. Excluding the incremental debt increase, the pension contributions and a planned repayment of Opel debt will result in GM experiencing a cash outflow from the transaction over the near term, although cash savings from the sale will improve FCF over the longer term. Also over the longer term, the exercise of warrants in PSA common stock that GM will receive as part of the transaction will likely result in a further cash inflow. The sale will also reduce the target amount of cash that GM's needs to hold on its balance sheet to protect against a downturn. Following the close of the transaction, GM expects to increase the pace of repurchases to reduce its cash level to a new target of $18 billion. About $2 billion of the current $20 billion cash target has been intended to protect against potential cash burn at Opel in a severe downturn, and that amount will no longer need to be included in the target. Over the longer term, divesting Opel will allow the company to focus future investments on products and regions with higher return potential. Cash needed for capital spending and research and development will be lower than it would be without the sale, while required cash contributions to GM's European pension plans are also likely to be lower following the sale. Capital spending at Opel has recently been running at about $1 billion per year. From an operational perspective, Fitch has a mixed view of the transaction. Opel has not generated an annual operating profit in 17 years, with European industry manufacturing overcapacity and Opel's own brand challenges resulting in pricing pressure. Opel also has only a limited presence in the higher margin European commercial vehicle and SUV sectors, which has further exacerbated its profitability challenges. Although the unit appeared to be on-track to break even in 2016, the weakening of the British pound following the U.K.'s Brexit vote resulted in another annual operating loss. By selling Opel to PSA, GM will be able to avoid considerable future investments related to increasingly stringent fuel economy and emissions regulations in Europe. In particular, as European regulators take an increasingly hard line on diesel emissions, automakers in the region will need to invest much more heavily in vehicle electrification and other non-diesel emission-reducing technologies. Shedding Opel will allow GM to focus its research and development and capital investments in global regions and on products with significantly more profit potential. Despite these positives, the sale of Opel will leave GM with a smaller and less diversified business that is more heavily dependent on the performance of its U.S. and China operations. GM will have only a very limited presence in the third-largest global automotive market in the world. If there is a significant downturn at some point in the U.S. or China automotive markets, GM will not be able to rely on Europe as an offset to challenges in those regions, as many of its competitors will. For creditors, a significant component of the overall transaction involves an estimated $2.8 billion contribution that GM expects to make to fully fund the pension plans for active employees that move to PSA. This contribution is in addition to a $400 million risk premium that GM will also pay to PSA at closing. Following the $2.8 billion contribution, PSA will be responsible for the active employees' pensions going forward, while GM will retain the $6.5 billion pension liability for Opel employees who will have already retired at the time of closing. Although Fitch believes GM could fund the $2.8 billion payment with a combination of proceeds received from the Opel sale and existing cash on hand, GM currently expects to issue $2.8 billion in new debt to fund the payment. Although this debt-for-pensions swap will not result in an overall increase in GM's balance sheet liabilities, debt-funding the payment will slightly increase GM's leverage according to Fitch's calculations. Fitch estimates that pro forma for the Opel sale and the pension-related debt increase, GM's automotive debt will rise to about $13 billion from $11 billion today, and automotive leverage (automotive debt/Fitch-calculated EBITDA) will be about 0.8x, up from about 0.7x today. Fitch's leverage figure also incorporates an estimated $400 million decline in GM debt related to current Opel borrowings that the company will repay with proceeds from the sale. Fitch estimates that following the Opel debt repayment, GM's pro forma automotive leverage would decline to about 0.6x if the company did not issue debt to fund the pension payment. Fitch is generally comfortable with GM's plan to reduce its cash target to $18 billion from $20 billion. Although $20 billion would provide an additional cash cushion, Fitch agrees that the sale of Opel reduces the need to hold an extra amount of cash to cover cash burn at the European unit. As a smaller company, Fitch expects the $18 billion target will be sufficient to cover the company's cash needs in a severe stress scenario without the need for any significant incremental borrowing. The financial structure of the transaction calls for PSA to acquire Opel for a combination of cash and warrants. At the close of the transaction, GM will receive about $900 million in cash, as well as warrants in PSA common stock with an estimated value of about $700 million. However, at closing, GM will pay PSA the $400 million noted above to compensate the French automaker for risks associated with the transfer of pension plans covering active Opel employees. Thus Fitch expects GM to receive a net $500 million in cash at closing, plus the value of the warrants. The warrants will be locked up for five years, so their ultimate value will depend on PSA's post-transaction performance. However, around the time of closing, Fitch expects GM to make the debt-funded $2.8 billion pension contribution as well. As mentioned above, GMF will sell its European captive finance subsidiaries to PSA and BNP Paribas for an additional $1 billion. The full amount will not likely be received at the closing of the initial transaction, as regulatory requirements are expected to delay the closing of some of the various finance subsidiaries. Of the $1 billion that GMF expects to receive from the sale, it will keep about $500 million to maintain its target leverage ratio, while it will transfer the other $500 million to GM in the form of a dividend. Contact: Primary Analyst Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Craig D. 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