General Motors (NYSE:GM) is selling its European vehicle brand Opel for $ 2.3 billion to Peugeot. According to our valuation of GM, its European business makes up only 3% of its overall valuation despite contributing around 10% to sales and revenue. This translates into a valuation of around $ 1.4 billion, making Peugeot’s offer a good one for the company in our view. We believe the following three reasons justify GM’s decision to sell Opel:
- The European market is highly unprofitable. The auto business has extremely high fixed costs, and margins in the industry depend on companies being able to drive transaction prices to their benefit. This is why companies with successful premium car brands post higher margins. Cadillac has no presence in Europe and GM struggles to increase transaction prices in Europe, which as a market tends to favor mid-size vehicles. As a result, the company has reported operating losses for many years in the region. Over the last six years, GM has lost an average of $1 billion annually in its European operations.
2. GM had already considered selling the brand when it exited bankruptcy in 2009, but instead opted for a plan to restructure its operations in Europe in 2012. That process was effective, as the company closed a factory in Germany and closed operations of the Chevrolet brand in Europe. In fact, the company was on its way to profitability in 2016 but the impact of Brexit has scuttled those plans. From a shareholder’s perspective, the only thing worth looking at is future expectations of growth. Europe is a highly mature, highly penetrated market with fairly set patterns of consumption. It is quite unlikely that a company like GM can suddenly start making much higher profits in a market like Europe. The only two ways for GM to increase profits in the region are changing its sales mix towards higher priced or premium vehicles — a tough task given the strength of the German car brands Volkswagen, BMW, and Daimler here — and to cut costs by innovating in the production process, which is a costly and highly uncertain endeavor. Consequently, despite GM’s best intentions, it makes sense to exit the European market.
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3. GM is not afraid to take tough decisions. In 2015, the company decided that it would return more money to shareholders and targeted an average return on invested capital of 20%. This made the company more focused and allowed it to forego size and market share for profits. After this decision, the company decided to exit the Russian car market and closed a factory in Australia. The decision with Opel is consistent with this trend and makes sense from an investor perspective.
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1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email email@example.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors