Commentaries

Germany should call GM’s bluff

Recently bankrupted companies seeking billions in taxpayer handouts do not generally have the strongest hand at the negotiating table. Yet General Motors seems determined to drive a hard bargain over the bailout of Opel, its European car arm.

After months of tortured negotiations with the German authorities, GM is now threatening to reverse away from the deal. However, it appears to have few alternatives.

Opel reckons it needs 3.3 billion euros in loan guarantees and other support to see it through to the end of 2011. Germany is ready to stump up the cash, but would like to see Opel sold to Magna,  the Canadian car parts maker, and its Russian backers.

GM is worried that Magna’s bid is too complex and would hand its precious intellectual property to the Russians. It favours a rival bid by RHJ International, the Belgian investment group, which requires less state support but would cost more jobs. With an election looming, however, the RHJ deal looks a non-starter in Berlin.

Now GM is suggesting it might keep Opel and raise the cash elsewhere. Quite where it hopes to find that kind of money is unclear. GM is barred from using U.S. government funds to support its international operations.

It has a presence in Britain through its Vauxhall division, but the British government is less prone to being blackmailed with the prospect of plant closures. Just ask Tata, the Indian group which spent months seeking government support to prop up Jaguar Land Rover before giving up.

GM could raise some cash by flogging or mortgaging its Chinese operations, the largest outside the United States. Even though credit markets have eased since the spring, however, the political complexities of such a sale would surely rival anything thrown up by the Magna proposal.

Driving an Opel round in circles

True to form, GM’s negotiator on the sale of Opel has poured cold water on expectations of a slam-dunk deal for Canadian car parts group Magna and its Russian backers.

John Smith (no relation, but I’m impressed by his negotiating) maintains in his blog that GM will compare the latest Magna offer with the proposal it has on the table from Belgium-based financial investor RHJ International.

Yesterday was a pretty busy day in the media, with many outlets  reporting that Magna/Sberbank and General Motors had reached an agreement regarding Opel.  At the risk of repeating myself, that’s just not the case. (emphasis added)

Smith is still waiting for more information from Germany’s automotive task force on the T&C of the financing package they are offering to sweeten a deal to buy Opel.

He’s promising to keep us posted. Shame nobody else involved in the negotiations in blogging on them. Or perhaps a chatroom is the way to go.

Driving a hard bargain on GM’s Opel

John Smith, General Motors’ chief negotiator on the sale of Opel, deserves a medal. But he certainly won’t be getting one from German Chancellor Angela Merkel.

Magna says it has reached an agreement in principle to buy a controlling stake in GM’s European unit. However, GM says it is going to think about the revised offer from the Canadian auto parts maker. It wants more details of the government financing package on offer before it can make up its mind.

Even though this contest has been one-sided from the start, GM and Smith have stuck resolutely to their guns in talks with not only the potential bidders but also the German government — resisting its attempts to bully them into accepting the Magna bid to the last.

Berlin has unashamedly skewed the race towards Magna at every step of the way — supporting its Russian-backed consortium in the belief that fewer jobs will be lost than under the rival takeover proposal of Belgian private equity group RHJ International favoured by Smith and GM.

With a general election looming on Sept 27, Merkel is desperate to show voters that her government is protecting local jobs at a time when the economy is fragile.

The “auction” involving Magna, RHJI — and in the early stages Fiat and some Chinese buyers — has driven up the price GM is getting for Opel to a reported 500 million euros. However, a key ingredient of Magna’s offer are the loans being made to Opel — totalling 4.5 billion euros — guaranteed by European governments.

Magna, along with Russian backers Sberbank and carmaker GAZ will get a 55 percent stake in Opel.

Schaeffler/Conti feud puts Schroeder back on stage

Gerhard Schroeder is back at centre-stage, seven weeks before Germany’s general election. A corporate feud between industrial holding group Schaeffler and car parts maker Continental AG has given the former chancellor the chance for a comeback as the workers’ champion, although he no longer holds public office.

When Schaeffler, the biggest family-owned industrial company in Germany, bought control of Conti last August, the two sides appointed Schroeder as guarantor of the interests of Continental and its workforce, shareholders and other stakeholders under an investors’ agreement.

With the new owners now trying to oust Conti CEO Karl-Thomas Neumann, the former chancellor has used his powers to demand information from Schaeffler – and take legal action if necessary — to enforce compliance with the pact. Neumann’s sin is to have proposed a share issue that would dilute Schaeffler’s control.

A published summary of the shareholders’ agreement does not explicitly bar Schaeffler from seeking to remove Conti’s CEO, but it commits the owners “to support the ongoing strategy and business policies of the Executive Board”.

Latest reports on Monday suggested Schaeffler was seeking a compromise in which both Continental chairman Rolf Koerfer, a Schaeffler loyalist, and Neumann would go — as would the disputed share issue — to avert a showdown at a Conti supervisory board meeting on Wednesday.

Schroeder’s cameo role has political overtones. It looks like part of a strategy by the Social Democrats (SPD), junior partners in an uneasy coalition with the conservative Christian Democrats (CDU/CSU), to paint themselves as the true defenders of German jobs and companies against predatory Big Finance.

The SPD is trailing far behind the CDU/CSU in opinion polls, with about 23 percent compared to 36 percent for Chancellor Angela Merkel’s conservatives.

GM negotiator slams Opel bidder’s Russian connection

The GM blogger is at it again. John Smith, General Motors’ group vice-president and chief negotiator for the sale of its stake in Opel/Vauxhall, lays into the bid by Canadian-Austrian car parts maker Magna – especially the Russian Connection – in his latest update on the state of the talks.

He also pours cold water on happy talk from German politicians of an early decision in favour of Magna, backed by the German authorities, rather than rival Belgium-based financial investor RHJ International, which clearly still has GM’s preference.

What is most striking about Smith’s blog post is the withering tone of his comments on Magna’s partnership with Russia’s Sberbank in a joint bid, and of the opacity surrounding the Russian leg of the proposed deal. Here are some choice morsels:

As noted in my prior blog post, the Magna proposal is more complex, owing to the inclusion of Russia and a third, Russian-based investor.  We started the week with about 30 issues to resolve, including NewOpel involvement with Chevrolet in Russia, intellectual property transfer rights in Russia, advanced technology access, product development responsibilities, minority shareholder rights and other items.

I can report some progress, resolving perhaps one-third of the issues during a first day of talks.  However, the difficulties of getting to ‘yes’ with three parties in the room were very much in evidence yesterday. Little progress was made in whittling down the outstanding issues, in part reflecting the return of some issues that we previously considered to be resolved.

That suggests that Kremlin-backed Sberbank has resurrected previous demands for de facto control of NewOpel’s Russian operations.  Smith then goes further and expounds his suspicion that the Russian Connection is a way of sucking Opel’s high technology in engines and transmissions away to Russia.

One key point for GM is intellectual property, and this transaction should not become a pipeline, shipping valuable intellectual property to destinations unknown.

GM blog lifts hood on power struggle over Opel

It’s not often you get to lift the hood and watch a power struggle going on in the engine room of General Motors. But the vice-president of GM Europe, John Smith, has just provided tantilising details of the arguments over the rival bids for Opel/Vauxhall, the main European arm of the fallen U.S. auto giant. Smith is the chief negotiator on the sale of Opel.

In a blog apparently intended to reassure Opel staff, but accessible to the public, he insisted GM had not specified a preferred bidder. But he made clear his own preference for the bid from Belgian financial investor RHJ International, which is loosely related to U.S. private equity fund Ripplewood, over the offer by Canadian-Austrian car parts maker Magna and its Kremlin-backed Russian partner Sberbank.

Smith’s post is entitled “Clearing the Air” and was ostensibly written to clarify GM’s intentions and dispel erroneous reports ascribed to interested parties. But his account shows just how poisonous the atmosphere appears to be between GM and Magna, and GM and the German government, which backs Magna’s bid. It also suggests that the air is not too clear within GM’s top management either.

Specific to the Magna bid, which is clearly preferred by several politicians and the Labor Bench, the bid presented to GM varied from the negotiations we had in the previous weeks and contained elements around intellectual property and our Russian operations that simply could not be implemented…

The bid from RHJI is completed and would represent a much simpler structure and would be easier to implement. It would require less monetary participation by the government and would keep our global alignments solid, while still creating an independent Opel/Vauxhall organization in Germany. This remains a reasonable and viable option to be considered as the very difficult issues around the Magna negotiations continue to be worked.

The following day, (July 29) Smith felt the need to add an update denying that GM was seeking to buy back control of Opel at a later date, or that it had asked the U.S. Treasury for financial assistance to restructure Opel. The former is strange since several sources have said a buy-back option is a key feature of RHJ’s offer and not of Magna’s.

So what is going on here and why did the chief negotiator feel the need to explain himself in semi-public in this way? One can only speculate, but one plausible theory is that GM’s top management is split. This would not be surprising since the U.S. government now holds a controlling stake in the shrunken GM that emerged from bankruptcy, and Washington is probably being lobbied heavily by Berlin to support the Magna bid. A senior aide to Chancellor Angela Merkel discussed Opel with the U.S. Treasury on Wednesday.

If GM were to choose RHJ in defiance of Berlin’s clearly stated wishes, it would spark a crisis with political ramifications just as Germany is entering the final phase of campaigning for a Sept. 27 general election. Might the Obama administration not lean on GM’s top management in Detroit to avoid being branded as a potential job-killer in Germany? If so, Smith’s blog may be a doomed effort to make business arguments prevail over politics.

Magna sweetens Opel bid, but not on GM concerns

Canadian-Austrian car parts maker Magna has sweetened its offer for General Motors’ main European arm, Opel, by pledging more of its own capital up-front as it tries to burn off Belgium-based financial investor RHJ International, which has GM’s favour so far. But the improved bid doesn’t appear to address the U.S. auto maker’s main concerns about future control. 

According to a German government source, Magna is now offering to inject 350 million euros immediately, with another 150 million to be raised through a convertible bond. Magna had originally offered just 100 million of its own capital up-front with 400 million to be raised in bonds. That compares with RHJ’s offer of an initial 175 million euros, plus another 100 million at the end of 2012.

Magna already has the preference of the German federal and state governments, which together have to provide 4.5 billion euros in loan guarantees, and of Opel’s 25,000-strong German workforce. But GM is reported by sources close to the talks to prefer RHJ’s bid because it includes a buy-back clause that could enable Detroit to regain control after Opel has been restructured and slimmed down.

Magna’s move appears designed to meet demands by Berlin that all suitors increase the share of their own capital invested in Opel to satisfy European Commission conditions for approving German state aid in the form of bridging finance and the loan guarantees. Whether it is enough to assuage Brussels is unknown, but the German government has presumably done its homework and sounded out the EU competition regulator. It may also be intended to win over the two German members of the five-man Opel Trust, which is responsible for the company in transition and would have the final say in a standoff between Berlin and GM. Reuters sources have said both German trustees are leaning against Magna’s plan. 

Whether the improved offer is enough to sway GM is doubtful, since the U.S. auto maker, having recently exited bankruptcy, appears concerned above all to preserve its own access to Opel’s technology,  retain an important say in decision-making at the German firm, and keep open the option of buying back a controlling stake.

Magna’s plan is less attractive on all these counts. Its strategy is based on expanding in the Russian market. Russia’s biggest bank, Sberbank, close to the Kremlin, would have a 27.5 percent stake equal to Magna’s in Opel. Furthermore, according to the Economist, a separate Opel Russia subsidiary would be created to assemble cars at plants of Russian automaker GAZ. The parent company would have only 70 percent of Opel Russia, with the rest held by Sberbank at a knock-down price.

GM is worried about intellectual property issues that could arise if Sberbank were to sell out to GAZ or if Magna were to enter into manufacturing agreements with other carmakers, the Economist says. It also fears it could lose control or even access to some technology Opel developed at great expense, such as clean diesel engines.

Politics, economics collide over Opel

Political and economic logic are set to collide in the byzantine decision-making over the future of German carmaker Opel, the main European arm of fallen U.S. auto giant General Motors. If politics prevail, as seems likely, the cost to German taxpayers will be higher and the chances of commercial success lower.

The aim of the Berlin government and four federal states, which are sustaining Opel with bridging finance, is to save as many German jobs and production sites as possible. That makes political sense ahead of September’s general election. But the business logic is that only a greatly slimmed-down Opel can survive in an industry with chronic overcapacity. In theory, it is up to GM’s board to choose among the three offers it expected to receive on Monday from Canadian-Austrian car parts maker Magna <MGa.TO>, Belgian financial investor RHJ <RJHI.BR>, and, less plausibly, Chinese state-owned auto maker BAIC. But there are several other powerful players with a say. They include the trustees responsible for the company since GM entered U.S. bankruptcy in June, the German federal and state governments, Opel’s works council and, last but not least, the European Commission, which must approve the restructuring plan as a condition for authorising the state aid.

The German authorities and Opel’s workforce prefer Magna’s bid, which is backed by Russia’s Sberbank <SBER03.MM> and automaker GAZ. The strategy is to seek growth in the dynamic but volatile Russian market. Magna requires the most state aid — 4.5 billion euros — but has pledged to keep all German production sites and cut 10,000 of the 50,000 workforce across Europe, of which just 2,500 would go in Germany. GM Europe also assembles Opels in Belgium, Spain and Poland, and in Britain under the Vauxhall marque.

GM management is thought to prefer RHJ because its offer includes a buy-back clause that could put Detroit back in the driver’s seat after three years in which Opel would be shrunk. RHJ wants less state aid — 3.8 billion euros — and plans a similar number of job cuts. However, the make-up of those cuts would be unpalatable to the Germans: it plans to shrink the plant at Bochum and idle that in Eisenach until 2012.

However smart business this may be, it is lousy politics. Bochum, in the Ruhr industrial rust belt, is still smarting from the offshoring of a Nokia plant to Romania. And Eisenach was the first new car factory to open in ex-communist eastern Germany. Indeed if GM defies Berlin’s wishes, the government has said it would reconsider the offer of state aid to any other bidder.

The key may ultimately lie in Brussels. Germany’s economics minister says the EU competition watchdog will require any buyer to inject more of its own funds as a condition for allowing state aid. That could lead to a more rational business solution, but it could also drive Opel into a dead end by making the deal unattractive to investors seeking a cheap ride.