GM (GM) and Peugeot confirmed media reports that they are discussing extending their alliance beyond three European projects to date, including GM possibly selling Opel and Vauxhall to Peugeot. GM stressed that there are no assurances of a deal, and we caution against too much enthusiasm on the news, since a sale is only one of several outcomes. Further capacity sharing may be helpful to a point, but it will not magically turn GM Europe into a 5% EBIT margin division. In 2016, GME generated $18.7 billion in revenue but posted an adjusted EBIT loss of $257 million. GME needs more crossover models, and we think a sale could be difficult to realize cost synergies as work councils and the German and French governments would not be receptive to plant closures. We are maintaining our fair value estimate and will reassess our valuation if a deal is reached. If a full sale agreement for about 3 times EBITDA, or about $600 million, were reached, our fair value estimate would rise to $47 from $44. This scenario assumes that capital expenditures for 2018-20 fall by about $1.3 billion per year for the sale of nearly all of GME. Should management instead keep capital spending constant to reinvest for mobility services or electric or autonomous vehicles, our fair value would increase to $45. These valuation scenarios may change, though, once we roll GM’s model for the recent 10-K filing.
GM and Peugeot have a recent past, with GM announcing a 7% equity stake in the French automaker in February 2012. GM then sold these shares in December 2013 for a $152 million gain as GME brought in new leadership after the investment of Peugeot, current GME President Karl-Thomas Neumann, who came from Volkswagen in March 2013. We suspect Neumann was not as enthusiastic about the Peugeot investment as then-GM vice chairman Steve Girsky was. Girsky has since left GM and its board. Current CEO Mary Barra may also not have liked the deal, as she became CEO the month after GM sold its stock.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
David Whiston, CFA, CPA, CFE does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.