GM dumps Chinese in Opel race, standoff looms

July 23, 2009

Two things Opel junkies need to know in today’s news.

1) General Motors has dumped Chinese state-owned carmaker BAIC’s long-shot bid to take over GM’s main European arm. That leaves a two-horse race between Canadian-Austrian car parts maker Magna and Belgium-based financial investor RHJ, loosely associated with U.S. private equity firm Ripplewood.

2) The two trustees appointed by the German authorities to a board overseeing Opel in its transition to new ownership are refusing to toe Berlin’s line that Magna’s bid is the only game in town (according to an intriguing Reuters sources story).

This strengthens the prospect of a deadlock between Detroit and Berlin, which in theory would be arbitrated by the five-member Opel Treuhand (trustee) board. The panel comprises two GM appointees, one nominee of the German federal government, one representative of the four German states which have Opel plants on their territory, and a chairman — the president of the American Chambers of Commerce in Germany — who does not have a casting vote.

Chancellor Angela Merkel made crystal clear on Wednesday, before GM and German officials had held their first talks on the final offers, that the German authorities (both her national “grand coalition” and all four regions) are backing the Magna solution, which she called “sustainable in all respects”.  The Opel workforce and the  co-governing Social Democrats strongly back Magna because it proposes fewer job losses and no plant closures, whereas RHJ would mothball the politically symbolic Eisenach factory in eastern Germany. 

Yet according to Reuters sources, both German trustees are defying their masters (and mistress). The Berlin government’s man is said to favour the offer by RHJ, which would downsize Opel and give GM a chance to buy back control in a few years. The regions’ representative is said to be leaning towards a managed insolvency, under which Opel would go into administration and viable bits would be auctioned off.

If positions do not change, the trustees ought logically to back GM and vote for RHJ. That would leave German authorities with a straight choice between agreeing, however reluctantly, to give state credit guarantees to RHJ, or refusing, at the risk of plunging Opel into insolvency. 

So why am I not convinced that will be the outcome? Well, I guess it’s because of the old principle that “he who pays the piper calls the tune”. Whoever buys a controlling stake in Opel will need billions of euros in German state guarantees (roughly half federal and half regional money) — RHJ’s plan calls for 3.8 billion, Magna’s for 4.5 billion.

What German politician, with a general election set for Sept. 27, will have the guts to pony up billions of taxpayers’ euros for a financial investor which plans to turn a quick profit by shrinking Opel and flogging it back to its American owner?

Of course, it is possible to make a plausible business case that while RHJ may not know much about automobiles, it knows how to make companies profitable; that RHJ requires less taxpayer money than Magna; that the Magna bid is predicated on a risky growth strategy in Russia, with a Kremlin-backed bank and an underperforming Russian car company as partners; and that a slimmed down GM, having emerged from U.S. bankruptcy, may be Opel’s best hope down the road. But it would be a hard sell at the hustings.

So what do I think may happen? In politics, as in life, when a decision is too hard, the first instinct is to postpone it. I suspect a way may be found to kick the decision down the road until after the election. This may require another dollop of state bridging finance, on top of the 1.5 billion euros already provided by the Germans. That would need the permission of the European Commission, so it could be tricky.

On the other hand, the EU competition regulator may provide the perfect alibi for delaying a quick decision on who gets Opel. Germany’s economics minister said last week that Brussels would insist that any suitor inject more of its own funds into Opel than is currently on offer, as a condition for authorising the state aid. That could be grounds for sending the bids back to RHJ and Magna for improvement, which might just tide German politicians over until after polling day.

But for Opel, every further week of uncertainty must surely reduce the chance of a viable car company emerging at the end of the process.

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