Here’s How General Motors’ Exit From Europe Can Benefit Its Shareholders
Recently General Motors (NYSE:GM) announced that its Opel/Vauxhall subsidiary and GM Financial’s European operations will be sold to the PSA group for a total transaction value of around $ 2.3 billion. This sale will make the company’s presence in Europe insignificant where it will now only sell its high priced and low volume models – Chevrolet and Cadillac. By our estimates, before this sale, Europe accounted for an insignificant 3% of General Motors’ valuation, although the company generated around 10% of its revenues from the region.
We did not expect any significant increase in General Motors’ market share in Europe over our forecast period.
According to our estimates, North America and China are the two key geographies driving value for General Motors and by selling off its European business the company can focus on its significant geographies. This transaction will reduce the company’s capital requirements and it plans to use the excess cash flow generated from this transaction to accelerate its share repurchase program. The company estimates that a $2 billion share purchase can increase its earnings per share by 5%, impacting the shareholders positively.
Until recently, the company was selling around 20 million cars in Europe and although we estimated a steady rise in this number over our forecast period, lack of a significant overlap between the company’s European portfolio and its rest of the world portfolio was a primary reason for not achieving economies of scale in the region. While larger gasoline engines dominate the U.S. market, Europe’s diesel and tiny engines need a different technology to move towards cleaner vehicles. Instead of investing into this technology which will not be useful in other regions, GM will be better off focusing on China where it holds strong growth potential. Despite contributing nearly 10% to its revenues, we estimated that Europe will contribute less than 5% to the company’s EBITDA (earnings before interest tax depreciation and amortization) over our forecast period after breaking even in 2017. Removing this region can impact the company’s margins positively.
We believe a concentrated focus on profitable regions where technology advancements can be applied uniformly should benefit GM in the long term. Europe is a tough market and the impact of Brexit is likely to make it harder for the company to achieve significant gains in the region in the near future. Deploying capital in other regions with strong growth prospects can improve the company’s overall profitability in the long term. Using the excess cash flow towards accelerating the share repurchase program will make the company leaner and lead to an immediate improvement in shareholder value.
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