Monday General Motors and PSA Group announced plans for the French automaker to acquire Opel/Vauxhall from GM in a $2.3 billion deal. While the initial thought of GM selling money-losing Opel seemed to delight investors and analysts, GM’s stock traded downward yesterday and today as details of the deal took hold.
One such detail is fairly big one: GM basically paid PSA Group to take Opel off their hands. PSA Group is paying $2.3 billion for Opel/Vauxhall and the European arm of GM Financial, but there’s a small caveat in the deal. GM will pay PSA Group $3.2 billion to fund Opel’s pension plans for its roughly 30,000 employees. Subsequently, GM will continue to have to add about $400 million to meet Opel’s pension obligations associated with employees drawing on it before the time of the acquisition.
Opel’s total pension obligation is around $9.8 billion.
GM subtlety left the pension details out of their press release announcing the deal. The company did announce that it will have to take on a $4-4.5 billion mostly non-cash charge on its own financial statement associated with the transaction. Well, $3.2 billion of that will be for pension obligations while the rest is likely a paper write-down. For those who aren’t business finance wizards: that means GM sold Opel for less than it was valued at on their own balance sheet.
Despite the fuzzy numbers, the transaction is still likely in GM’s financial benefit. The rest of Opel’s liabilities will be promptly removed from the GM balance sheet. GM’s operating statement will also be freed of the perpetual stream of operating losses Opel has incurred over the last 17 years. Just since GM has emerged from bankruptcy in 2009 Opel has incurred over $9 billion in loss.
Perhaps as a consolation prize to GM for their generosity, PSA Group has agreed to provide GM stock warrants that total a 4.2 percent equity stake in the new PSA Group. GM can begin converting the warrants to cash in 2022.