Clearing Pension Hurdle Helped GM Sell its European Operation for $2.3 billion

GM will assume much of Opel’s pension obligations and will pay PSA about $2.93 billion to settle pension underfunding.

Resolving the unfunded pension liabilities for auto workers at General Motors Company’s European operations proved to be the key to success in the $2.3 billion sale of GM’s European operation to Peugeot owner, PSA Group. The sale would make PSA the European Union’s second-largest car manufacturer, second to Volkswagen.

The $2.3 billion sale was delayed as negotiations continued to resolve the $10 billion in pension liabilities to about 15,000 Vauxhall and Opal auto workers, as well as other considerations. In the earlier stages of the negotiations in March, PSA’s position was to have GM =assume responsibility for the unfunded liability.

As a result of the sale, GM will assume much of Opel’s pension obligations and will pay PSA about $2.93 billion to settle pension underfunding. The sale will give GM about $2 billion in cash, which it plans to use in a buyback plan, according to news reports. 

The pension issue became so important that David Whiston, an auto analyst with Morningstar Inc., said “pensions are one of the reasons that, if you’re PSA, you don’t want to do the deal. There may be a way to get it done if GM keeps the obligation, but PSA gives them cash.”

In its 10k filed on Dec. 31, 2016, GM said its non-US pension obligations stood at $24 billion, with unfunded liabilities of $11 billion. About $10 billion or 91%, of those unfunded liabilities were to workers in Canada, Germany and the UK.

Unlike the US, which has mandatory pension funding requirements, funding a pension in Europe does not require regular cash infusions. As a result, injecting more cash into the pension plan is not something PSA wanted to do.

Auto analysts said the deal would be good for GM if it  could extract itself from the pension funding problem, while also unloading an operation that was losing money. A proposal reported by Bloomberg earlier this month said PSA was willing to pay about $2 billion for Opel and Vauxhall. This amounted to $1 billion for the purchase and $1 billion being directed toward pension liabilities, but the bulk of the unfunded liabilities would be borne by GM. 

GM’s 10k also said the company had injected $3 billion more into its non-US pension plans over the past three years, with a large portion going into its European pension liabilities. GM plans to put another $970 million into non-US pension plans in 2017, according to the 10k filing.

GM is largely exiting the European market, but will continue to produce Chevrolets. GM has owned Opel for almost 90 years, but decided to sell after the company failed to break even in 2016.  It also has lost about $9 billion from its European operation since 2009. Other factors prompting GM to exit Europe were uncertainty about Brexit, the possibility of new trade tariffs and the very thin profit margins that exist on the production of autos in Europe.

By Chuck Epstein 

| Christine.Giordano@strategic-i.com | 212-217-6929