Peugeot - GM Europe - will you be my valentine?
Automotive News this am has reports of Peugeot talks with GM to "deepen existing relationship". Very tough to make
informed analysis given we don't know what "deepening relationship" means - but historical brand and earnings performance suggests a tough combination. Remain UW.
Peugeot needs to get bigger - Automotive News this am has reports of talks with
GM to "deepen existing relationship". Shares up 5%. Very tough to make informed
analysis given we don't know what "deepening relationship" means. Previous
attempts at European combination with GM have failed - FCA first then Peugeot
previously. Peugeot still has purchasing and joint platform development with
GM - and this makes sense and reduces costs for both. Both companies now face
huge investments in future mobility / EV - both from a very low volume base. In
our view, Peugeot needs to get bigger to compete with Renault/Nissan and VW -
and maybe this is the first attempt. PSA group announced today that: 'it is
exploring numerous strategic initiatives aiming at improving its profitability and
operational efficiency, including a potential acquisition of Opel / Vauxhall'. GM
has not commented.
We highlight the following considerations should a potential deal materialise:
We do not think any full merger would be easy. Obstacles to any potential
merger might be - 1 - GM Europe has lost money for many years despite huge
restructuring attempts for German workforce; 2) Opel brand is almost as lowly
ranked as Peugeot and Citroen brands, which normally populate the lower ranks
of JD Power consumer rankings - Opel has gone from 10%+ European market
share to 7% in last 6-7 years; 3) Opel is heavily overexposed to UK and German
markets - the two markets in Europe that are most extended relative to trend -
and most likely to start rolling over in FY17 in cyclical terms (PLUS more GBP
exposure); and 4) building large scale production volumes in Europe to amortise
rising investment costs is like fighting the last war - VW and Renault /Nissan
alliance did this 10 years ago. The real war will come when the winners start
launching successful next generation cars and we believe PSA has considerable
ground to make to close the gap with peers. Who knows what the deal could be
- but a full European merger does not look to be an obvious winner in terms of
market share or historical profitability. general motors
Conclusion: there may be logic to a deal, but would it improve earnings from
current levels?: A potential Peugeot combination with Opel in Europe, if confirmed, could be advantageous in terms of long-term competitiveness and
economies of scale. However, we see little or no potential for earnings upside -
again depending on the terms of any potential deal . In fact, we believe any deal
highlights the need for Peugeot to invest for the future, and to amortise that
over a larger base. Even with a deal, we continue to believe that Peugeot's
earnings expectations have already peaked. Auto OEM share prices simply do not
re-rate in a period of flat earnings, when margins may have peaked. Once again -
investors should buy OEMs on bad news, not good news. The re-rating since
December seems to only reflect a new optimistic global growth outlook. We do
not think this will last. We stay Underweight, PT €12.