GM's Opel Sale Would Cut Off Source of Cheap Finance -- WSJ
March 06 2017 - 3:02AM
Dow Jones News
By Mike Colias and John D. Stoll
General Motors Co.'s sale of Adam Opel AG likely eliminates a
source of low-cost funding for the Detroit auto giant's car-lending
business, potentially pressuring profit in lending operations the
company has been trying to rebuild since bankruptcy.
GM, which on Monday announced it has agreed to sell its Opel and
Vauxhall brands to France's Peugeot SA, and its financial
operations to Peugeot and BNP Paribas SA, has collected nearly $2
billion from retail customer deposits since late 2015 for use in
global lending. The catch: those funds were deposited in the
so-called Opel Bank, an online bank that operates only for
residents of Germany.
The auto maker is relying on GM Financial, which has access to
Opel Bank funds, as a growing source of profit in coming years. A
relative newcomer to auto finance after being created in the years
after GM's 2009 bankruptcy, access to lower-cost funding is
important to helping GM Financial catch up to Ford Motor Co.'s Ford
Credit, which makes far more money than GM's lending unit.
The retail banking operation has given GM access to
less-expensive financing than traditional methods. Opel Bank
advertises rates that are relatively attractive for prospective
customers, but the interest it pays on retail deposits can be less
than what it can borrow on an unsecured basis in the wider
market.
"It's an attractive source of funding partly because it's sticky
-- once a retail customer deposits in a bank account, they're
usually not in a hurry to pull that money out," Amiyatosh
Purnanandam, a finance professor at the University of Michigan,
said.
Peugeot, officially known as Group PSA SA and holding about 10%
of the European market, operates a finance arm as well. PSA Finance
also runs a bank in Germany.
Selling Opel represents a surrender flag for GM after nearly
two-decades of trying to turn a profit in European operations.
Analysts say GM's ridding itself of a division that hasn't
posted a profit since before 2000 -- and lost nearly $20 billion
since then -- will improve free cash flow and allow GM to focus
more on the U.S. and China, where it generates all of its profit.
It also could funnel the more than $1 billion in capital spent in
Europe on self-driving vehicles and other innovation.
Still, the divestiture carries risk.
GM would be the only one of the top five global auto makers
without a presence in Western Europe, the world's third-largest
automobile market. GM risks missing out on steadily improving
conditions in Europe at a time when the U.S. and Chinese markets
are thought to be at or near their peaks, RBC Capital analyst
Joseph Spak wrote in an investor note Friday.
The $1.9 billion in Opel Bank only represents less than 10% of
the debt GM Financial secures annually. GM Financial lends money to
car buyers and dealers. But retail bank assets generally are prized
as a low-cost and relatively stable funding source, Mr. Purnanandam
said.
Opel Bank has grown rapidly since GM began taking deposits in
the third quarter of 2015, with the bank's assets tripling its size
over the course of about 18 months. "We actively monitor the
capital markets and seek to optimize our mix of funding sources to
minimize our cost of funds," GM Financial said in a regulatory
filing last month.
GM exited the auto and home-lending business ahead of its
bankruptcy restructuring by unloading the former GMAC, which was
renamed Ally Financial Inc. In 2010, GM spent $3.5 billion to
acquire subprime lender AmeriCredit Corp., and has gradually cut
ties with Ally.
Dealers have said GM has been at a disadvantage in recent years
without a powerful in-house lender that can meet most customers'
finance needs. But executives believe GM Financial's expanded
offerings are helping the auto maker retain more customers.
For example, in 2015 GM Financial took over as the GM's
exclusive lender for leases. It often offers special deals to
owners whose leases are expiring.
The auto maker has said GM Financial is poised to become a
bigger contributor to the bottom line in coming years. It generated
$913 million in pretax profit in 2016, or 7% of GM's total global
profits. Ford Motor's credit arm had pretax profit of $1.9 billion,
a much bigger contributor to Ford's bottom line.
Write to Mike Colias at Mike.Colias@wsj.com and John D. Stoll at
john.stoll@wsj.com
(END) Dow Jones Newswires
March 06, 2017 02:47 ET (07:47 GMT)
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