GM to make pension payments for years just to get out of Europe

SOUTHFIELD: General Motors Co will practically pay France’s PSA Group to take its long-struggling European unit off its hands as it looks to cauterise a perennial bleeder.

PSA will pay a total of US$2.2bil to buy GM’s German Opel unit, its UK sister brand Vauxhall and its European auto lending business. In return, GM will give the French carmaker US$3.2bil to cover future Europe pension obligations and keep managing US$9.8bil worth of plans for existing retirees.

Europe’s burden on GM’s balance sheet will now be confined to pensions, leaving Peugeot owner PSA with the task of fixing the troubled Opel brand and turning around a business that’s lost about US$9bil since 2009. Once the deal closes, GM will pay about US$400mil annually for 15 years to fund the German and UK plans, spokesman Tom Henderson said.

“Peugeot really held them over the fire on the pensions,” David Whiston, an auto analyst with Morningstar Inc, said by phone. “But the benefits outweigh the risks. GM would have had to manage the pension obligations that they are keeping anyway.”

GM executives dismissed the idea they’re paying PSA to take Opel off their hands. The automaker is cutting losses and cash burn while keeping its obligations to retirees who worked for the company, chief financial officer Chuck Stevens said. The Detroit-based automaker burned through about US$4.4bil in cash during the last three years in Europe.

“It’s a known obligation,” Stevens said on a conference call on Monday. “All we’re doing is recognizing an obligation that we had and the historical drag on the business.”

By dropping its European business, GM will improve profit and cash flow, Stevens said.

Rather than keep about US$20bil in cash on hand to run the business and cushion against recessions, the company can shrink its buffer to about US$18bil, he said.

The newly freed US$2bil will accelerate GM’s share buyback programme once the deal closes later this year, Stevens said.

The move also allows GM to redirect about US$1.1bil in capital expenditures the company typically spends per year in Europe. The automaker can now either plow that into new models for profitable markets like the US or China, develop costly technology or return cash to shareholders.

PSA chief executive officer Carlos Tavares is walking away with some goodies, too. GM is taking on a non-cash charge of as much as US$4.5bil for the deal. The non-pension portion of that is US$2.7bil in deferred tax assets that PSA can use to offset income - assuming Tavares turns the company around and starts earning some.

GM isn’t on the hook for any restructuring costs that could come from PSA laying off workers. — Bloomberg