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After making billions of dollars in losses since the start of the century, General Motors may be ready to off load Opel to French automaker PSA Group for about $1 billion, according to analysts at Evercore ISI.
Despite European car sales at a nine-year high, auto makers have struggled to make a profit. Detroit-based GM has accumulated more than $15 billion of losses at its Opel arm since 2000 but has held onto its European operations to allow it to develop compact cars and diesel engines. However, global demand for diesel is in decline and therefore GM should be set to benefit from a potential split with Europe, Evercore ISI analysts said in a note.
"General Motors have not made money in Europe for many years, it's a drain on free cash flow and with the European (car) sales above 15 million (units) now you'd argue we're at least three-quarters of the way through the cycle… if you're not making money (now) then will you ever?" George Galliers, autos analyst at Evercore ISI, told CNBC on Wednesday. "We like the deal, particularly from General Motors' perspective."
"Valuing GME is extremely difficult, given the entity's struggle to make money over the years. It does not seem unreasonable to assume that GM might actually contribute money (pay) to dispose of the asset," Evercore said in a note. Excluding pensions and other liabilities estimated to be in the region of $10 billion "and if we equated a sale price of PSA paying up to $1 billion to GM, it would be the equivalent of 6-8 times the potential earnings of a restructured GME."
Any deal may have to overcome political obstacles in the U.K. and Germany, as any merger could lead to job losses. Opel employs 28,000 people in Germany and 4,500 in Britain.
Germany's labor minister Andrea Nahles said Wednesday that there were talks "at all levels" with Opel, GM and PSA to make sure plants remained open in Germany.
"The German government intensively discussed at a cabinet meeting today the issue of Opel" Nahles was quoted as saying by Reuters.
Britain's Department for Business has contacted the President of GM to express their concern after the U.S. firm opened talks to sell its European operations, Reuters reported. GM also has car plants in Spain, Poland, Hungary and Austria.
GM described Brexit as a "speed bump" that was continuing to negatively impact the carmakers attempt to address its European loss-making unit. It had expected to break even in Europe in 2016, however the weakness in the pound against the euro after the referendum combined with reduced vehicle demand resulted in losses of over $300 million.
The U.S. based carmaker said it expects to suffer similar levels of losses from European operations again in 2017 though hopes it would be able to breakeven by 2018.
Should a deal be finalized, the world's third-biggest carmaker and largest in the U.S would withdraw from its vast but beleaguered European market and attempt to fulfil a promise from its chief executive to enhance overall profit margins.
A potential deal would also see France's PSA Group overtake Renault and become Europe's second largest carmaker. The merger could even result in PSA Group becoming rivals to the continent's market leader Volkswagen, as the autos manufacturer continues to contend with an emissions scandal.