General Motors (GM 38.10, -0.12) made a news splash this morning with its announcement that GM's Opel/Vauxhall subsidiary and GM Financial's European operations will be joining PSA Group, the French manufacturer of Peugeot and Citroen vehicles.
The combined value of the transactions, which are expected to close before the end of 2017, is 2.2 billion euros or approximately $2.3 billion.
This deal will establish PSA Group as the second-largest auto manufacturer in Europe, with a 17% market share, trailing behind only Volkswagen (VLKAY). GM for its part sees the separation as an opportunity to strengthen its core business and to boost its profit prospects and shareholder returns.
Specifically, GM said the closing of the aforementioned transactions will immediately improve its EBIT-adjusted and EBIT-adjusted margins, as well as its adjusted automotive free cash flow. In turn, GM will be able to lower the cash balance requirement under its capital allocation framework by $2 billion, which the company said it will use to accelerate share repurchases.
GM isn't saying au revoir altogether to the Opel/Vauxhall business. It will retain a small position through warrants that correspond to 39.77 million share of PSA, or 4.2% of its fully diluted share capital. The warrants have a nine-year maturity and are exercisable at any time in whole or in part starting five years after the issue date.
PSA Group, as part of the deal, will also take over six assembly and five component-manufacturing facilities, one engineering center in Russelsheim, and approximately 40,000 employees. It was further stipulated that all of Opel/Vauxhall's European and U.K. pension plans, funded and unfunded, with the exception of the German Actives Plan and selected smaller plans, will remain with GM.
GM expects to take a primarily non-cash special charge of $4.0-4.5 billion in connection with these transactions.