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Potential outcomes for GM’s Opel unit

  Germany’s state and federal governments will decide by Christmas whether to extend a guarantee of €1 billion to Opel should its Detroit-based parent General Motors file for Chapter 11 bankruptcy protection.

 

GM Europe has ruled out a collapse of the German carmaker, which traces its roots back to 1899 and has been part of GM longer than rival Volkswagen has existed. Nonetheless, GM Europe and Opel executives met on Monday with labor leaders, German Chancellor Angela Merkel and top cabinet officials to discuss the carmaker’s future.

The following are possible scenarios for Opel:

OPEL CONTINUES OPERATIONS UNAFFECTED

Should the worst-case scenario hit, with GM forced to apply for bankruptcy protection, the US carmaker may decide to leave its European operations untouched by the measures. Assuming Opel were unable to fund its own operations, GM might still favour providing enough cash to keep Opel alive, since the Russelsheim-based carmaker enjoys a strong franchise with small, fuel-efficient vehicles like the Corsa and Meriva.

GERMANY BACKSTOPS OPEL DEBT

The pledge should help Opel, a separate legal entity in Germany, to raise cash to fund operations next year. Opel employs 15,000 blue-collar workers in Germany alone, and with suppliers like Leoni dependent on the company’s output more jobs are on the line, just as general elections loom in Germany.An open issue that could remain a potential powder keg for politicians down the line would be what happens if the market fails to appreciably improve in 2010.

STRATEGIC BUYER OFFERS TO BUY GM’S EUROPEAN OPERATIONS

This is an unlikely scenario as investors shy away from the capital-intensive auto industry, preferring to hoard cash and work to repair their balance sheets amid the financial crisis. Private equity firms are likely taking to heart the example of Cerberus’s ill-fated involvement with Chrysler, and even rivals in emerging markets like India and Russia cool their interests. Bernstein Research’s Max Warburton said GM’s assets could be attractive either to Renault and PSA of France, due to a complementary geographical sales footprint, or to German brands BMW and Daimler, looking to gain scale while lowering average fleet emissions.

SOVEREIGN WEALTH FUNDS LOOK TO SCOOP UP CHEAP ASSETS

While this is an option since many are equipped with the cash and possibly even the appetite to buy a carmaker at rock bottom valuations, most have little or no experience in running the day-to-day operations of a major carmaker. Few have acquired more than a minority interest as a result. Abu Dhabi’s Mubadala investment authority bought a 5% stake in Ferrari, Investment Dar owns half of Aston Martin, and Daimler’s largest shareholder is the Emirate of Kuwait with 7.6%.

GM SELLS OPEL TO GERMAN GOVERNMENT

Berlin could look to protect a key employer in Germany, though the company has so far officially rebuffed any speculation that it would seek to carve out and dispose of Opel. The government could nationalize Opel using its state-owned KfW lender to buy a majority stake in the carmaker or finding a group of banks to acquire a holding, with the assurance that the government would recoup any loss. (Reuters)