Magna still in driver’s seat for Opel
Written on August 3, 2009
On Tuesday, GM appeared to reject a bidding consortium led by Frank Stronach in its effort to acquire Adam Opel GmbH, GM’s main European subsidiary.
GM’s board meets tomorrow to decide on its preferred buyer, Magna or RHJ International SA, a Brussels-based private-equity firm. GM’s point man on the deal, John Smith, wrote on a GM blog last week that RHJ is the better choice for GM. Magna is demanding too much, Smith complained, including more patents and other intellectual property than GM is willing to give up, and the rights to the Chevrolet brand in Russia.
Yet the smart money remains on Magna, long the front-runner to gain control of Opel and its sister British brand Vauxhall. Opel is not GM’s to sell, having been placed by Germany in a special trust to protect it ahead of GM’s looming bankruptcy. Any buyer of the money-losing Opel will need as much as $7 billion (U.S.) in loan guarantees from Germany and the four German states in which Opel has assembly plants.
That means the "decider" about who takes managerial control of the $23.8 billion Opel is German Chancellor Angela Merkel. And Merkel hasn’t wavered in her support of the Magna-led consortium since May, when she chose it over Fiat as Berlin’s favoured bidder.
"We have made clear that we view the Magna plan as sustainable in all respects," Merkel said last week.
Indeed, apart from GM, it’s difficult to find any constituency not favouring the Magna consortium, which is backed by Russian state lender Sberbank and allied with Russian automaker OAO Gaz. Magna has the support of Berlin, the four German states, Britain, Opel’s unions and the brand’s 4,000 dealers. Magna and Sberbank are offering to put up a total of $766 million for control of Opel.
The RHJ plan is to cut Opel production to restore profitability. By contrast, Magna’s plan is to grow Opel to renewed vigour. That sits well with Germans who regard the venerable Opel as a national icon. Magna seeks to expand Opel into Russia, expected to overtake Germany as Europe’s largest auto market post-recession. And Stronach wants to put some of Opel’s 54,000 employees to work building vehicles under contract for other automakers.
Magna’s more ambitious goals for Opel have won over Roland Koch, governor of Hesse state, home of an Opel plant. The Magna proposal to enlarge Opel is "more promising for the future, because they are saying, `We want to enter new markets,’" Koch said.
After a Magna summit with Opel dealers on July 22, Albert Still, vice-chairman of the Euroda dealership group, said, "They managed to win us over as ambassadors for Magna."
Politics also weigh in Magna’s favour. The "new GM" emerged from bankruptcy last month with Washington as its majority shareholder. The Obama administration would rather not risk alienating Germany or Russia in obstructing a deal that both countries want. Obama is pressing for more German troops in Afghanistan, and Russia is critical to his non-nuclear proliferation aims. Washington, Ottawa and Queen’s Park bailed out GM and Chrysler to protect the jobs of North American workers, not to let GM cling to its offshore operations. Then there’s the still-powerful Vladimir Putin, the Russian premier. Putin is like a father to Russian oligarch Oleg Derapaska. And Derapaska is counting on Opel technology and its product lineup to revive his struggling automaker, OAO Gaz cash advance online. Chevrolet’s Russian operation is a profitable gem for GM, to be sure. But that’s in large part due to exemptions from certain taxes, trade restrictions and other state encumbrances. That could swiftly change at Putin’s whim.
As for RHJ, there is sharp antipathy to private-equity firms in Germany, dating from just before the recession. These buyout shops, with their highly leveraged takeovers of German companies that usually resulted in layoffs, were decried by German legislators as "locusts."
The fiasco of private-equity firm Cerberus Capital Management’s brief ownership of bankruptcy victim Chrysler seems proof enough to many Germans that Opel should not be run by a buyout firm.
There are detractors to Stronach’s gambit, to be sure, mostly among investment analysts. For many of them, Magna is taking on more than it can handle in running a firm that turns out 1.7 million vehicles at plants in five European countries. Magna has only limited experience in full-vehicle assembly. Its modest Magna-Steyr facility in Austria has long made vehicles under contract for Ford, Chrysler and BMW.
"Despite its apparent merits, we believe the Opel acquisition remains a high-risk strategy for Magna with a high price for failure," Fadi Chamoun of UBS Investment Research said in a June investors note.
That, of course, already is Magna’s plight, with about 30 per cent of its revenues derived from two other turnaround candidates, GM and Chrysler. But for Magna, Opel is a bet on an automaker whose woes aren’t as deep as Detroit’s. And Opel is ideally suited to exploit the burgeoning Russian market. Russia’s own domestic automakers are decades behind Opel and other Western auto firms in design and manufacturing.
The current impasse between GM and the Magna-led consortium might be overcome if Stronach were to drop his demand for GM’s Chevrolet business. That business is conducted through two joint ventures in which other parties have ownership stakes. Untangling that business would indeed be onerous. With Opel’s attractive, high-quality models and the factories of Opel and OAO Gaz, Stronach would have sufficient heft to make gratifying inroads into the huge Russian market.
The deal’s complexity can’t be denied. Germany and four of its state governments, Britain, and Opel’s workers – in the form of deferred benefits – are each kicking in a share of the cost of restructuring Opel-Vauxhall. But that might be Stronach’s high card.
At its current size, Opel already is regarded as "too big to fail." The fate of its 25,000 German workers is a prominent issue in September’s German elections. The Kremlin, meanwhile, is looking to Opel to modernize Russia’s entire auto sector, which has fallen into decay since the end of the Cold War.
Even Washington has a stake in Opel’s success, since in the Magna plan, GM is to retain a 35 per cent stake in Opel. It’s in the interests of all these governments that Opel become a robust enterprise whose employment rolls swell as the firm’s output grows.
Long-time Magna watchers who remember how Stronach almost lost his firm in the late 1980s due to rapid overexpansion needn’t worry that the septuagenarian is betting his company yet again.
This time, Stronach has too many partners with a stake in Opel’s success to make a bet against him a wise wager.
Filed in: money.