GM Parks European Business

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What's going on?

General Motors (GM), the giant American carmaker, has agreed to sell its European division to PSA, the automaker that owns Peugeot and Citroen. The €2.2 billion deal will make PSA Europe’s second largest automaker.

What does this mean?

GM, owner of the Vauxhall brand in the UK and the Opel brand in continental Europe, has lost money on its European business every year since 2000. The American carmaker has been pursuing a strategy in recent years of getting leaner and meaner, and selling off its loss-making European division fits with that strategy. For PSA, by absorbing GM’s operations, it can increase its production while identifying overlapping costs to cut (i.e. this deal is expected to create synergies).

Why should I care?

For the stocks: Shares of both companies rose, signaling that investors like the deal.

This deal was not a surprise as various media reports in previous weeks suggested it was imminent. Nevertheless, shares of PSA and GM initially rose on Monday (on a day of overall market weakness). The reaction from investors suggests that they are happy to see GM ridding itself of its European operations while, simultaneously, being optimistic that PSA will be able to wring more value of it than GM was able to.

The bigger picture: PSA said that Brexit could provide an opportunity for car production in the UK.

PSA’s CEO discussed the possibility of a “hard Brexit” (i.e. Britain leaving the EU free trade area) when speaking to reporters about the deal. He said that if a hard Brexit were to occur then the company would still continue to make cars in the UK, mainly because it sells so many cars there. He also said that PSA would then work with more suppliers in the UK rather than buying so many of its parts from Europe. Such a strategy, especially if replicated by other automakers, could be a positive for British manufacturing.

Originally posted as part of the Finimize daily email.

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