Detroit Free Press - Morgan Stanley auto analysts today recommended that General Motors jettison its struggling Opel unit, which is piling up losses for the automaker in Europe.
The move adds pressure for GM to consider a sweeping move, instead of incremental steps, to fix its problems in Europe.
The experts, including lead analyst Adam Jonas, recommended a "separation" of GM and Opel, which is bleeding cash as European consumers pull back on spending in the midst of the continent's sovereign debt crisis. The analysts said it was the "best option for both GM and Opel stakeholders."
The recommendation "reflects a significant deterioration in the European car market and widening operating losses," the analysts said in a research report.
Discharging Opel would be something of a do-over for GM, which came close to selling Opel during the auto crisis in 2009. At the time, several executives, including current GM Vice Chairman and European restructuring chief Stephen Girksy, convinced the company to keep the unit.
Morgan Stanley said GM's decision not to sell Opel has turned out to be a $10 billion to $20 billion mistake.
GM views its European unit as an important source of engineering expertise.
"We are committed to Opel and believe we can restore it to long-term profitability," GM spokesman Jim Cain said in an email.
Ridding itself of Opel would be costly for GM. Morgan Stanley suggested it would cost $7 billion to $13 billion to off-load the Germany-based unit, which develops and manufactures cars throughout Europe. GM had about $33 billion in cash or equivalents at the end of the second quarter.
But the analysts predicted it could lead to a 50% appreciation in GM's stock price, which was up more than 4% to $22.67 at 12:21 p.m. after the European Central Bank announced a bond buying initiative. GM is making big profits in North America and China, but its stock price has been weighed down by Europe and other factors.
A big price increase in GM shares could be a boon to the U.S. government, which still owns 32% of GM's common stock.
GM lost $617 million in Europe in the first six months of 2012, compared to a $107-million profit a year earlier. The automaker has lost an average of more than $1 billion a year in Europe for the last 12 years.
"Opel's distraction and financial burden represents a far greater threat to GM than the unfunded pensions," Morgan Stanley said in a research note.
Unions have a tight grip in the region – and particularly in Germany, where labor laws make it expensive and cumbersome to reduce capacity and close plants.
GM recently negotiated a tentative deal with union IG Metall and German works councils to close an Opel plant in Bochum, Germany, after 2016. The labor groups also recently agreed to 20 "short workdays" for about 9,000 workers in Rüsselsheim and Kaiserslautern. That deal is expected to save GM about $50 million.
But Barclays auto analysts have suggested that GM will lose $464 million in Europe in the third quarter and another $442 million in the fourth quarter.
"Without being specific, GM has not ruled out any options with respect to fixing the Opel business," Morgan Stanley analysts said. "In our view, GM has the opportunity to turn an unlimited liability into a limited one, but visibility on timing is harder to pin down. In the interim, we believe GM must bear the cash burn and management distraction for a while longer."
