Morningstar

GM's Europe Exit Makes Sense to Us

The sale of Opel/Vauxhall is prompting us to boost our fair value estimate of the automaker to $51 from $50.

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General Motors Co
(GM)

We are increasing our

We think it would have taken GM well into next decade to possibly bring GM Europe to meaningful profitability, so we do not mind that GM becomes less of a global automaker by selling a business that made up about 12% of its 2016 unit volume. GME has never been profitable on an annual basis in this century and has lost over $22 billion. Exchange headwinds from Brexit were going to make GME’s turnaround effort more difficult, and we can’t blame management for saying the risks of keeping Opel/Vauxhall outweigh the benefits. Once Cadillac has a more complete lineup and more cachet, GM could still re-enter Europe. To give GM some way to benefit should PSA succeed in turning around Opel/Vauxhall, GM receives nine-year warrants in PSA exercisable starting five years after the deal closes (by the end of 2017) with a strike price of EUR 1. The warrants equate to 4.2% of PSA shares (39.7 million shares) and are valued for deal purposes at about $700 million. GM must sell shares received via exercising the warrants within 35 days of exercise.

GM receives about $1.9 billion in cash with $900 million of that for the auto business and about $1 billion for the captive finance arm valued at 0.8 times book value. Add about $700 million for the PSA warrants and deduct $400 million for the pension and total consideration is about $2.2 billion.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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