GM in Opel dilemma if German aid denied

June 8, 2010

GM in Opel dilemma if German aid denied

The Detroit News

This time last year, General Motors Co. had sunk into bankruptcy and Germany was ready to provide $6.6 billion to back a takeover bid for the U.S. automaker’s Adam Opel subsidiary.

But the situation is altogether different now. GM is making money for the first time since 2007, Europe is struggling with a debt crisis, and Germany is balking at extending any aid to Opel.

The German government is expected to announce this week, as early as Wednesday, whether it will provide more than $1.2 billion in loan guarantees that GM has requested.

The U.S. automaker already has agreed to cover roughly half of Opel’s $4.6 billion restructuring by providing loans and collateral. It is close to lining up $720 million in loan guarantees from Britain and Spain, which have big GM-Opel assembly operations.

But Germany’s contribution is essential to prevent the cost of keeping Opel from ballooning.

"This is something GM will have to find a solution to, if Germany is unavailable with loan guarantees," said Gregg Lemos-Stein, an analyst at Standard & Poor’s Ratings Services.

GM officials declined to discuss their back-up options if Germany turns down its request.

But that’s looking increasingly probable. Last week, German newspapers reported that members of a government-appointed panel of academics and other outside experts said aid wasn’t justified on economic grounds.

Economy Minister Rainer Brüderle has responded coolly to GM’s request and on Sunday ruled out any "special treatment."

A committee of federal and state officials will meet Wednesday to discuss Opel in a darkening economic context. Chancellor Angela Merkel’s government announced plans Monday to cut nearly $100 billion out of the federal budget through 2014 after helping to bail out Greece.

Auto analyst Jürgen Pieper at Bankhaus Metzler in Frankfurt said he believed the odds were "60-40" that the federal government would not provide GM with loan guarantees. GM has a better chance, he said, of obtaining aid from states with Opel plants.

Last year, Germany was ready to back a bid for Opel led by Canada’s Magna International Inc. But after GM Chairman Ed Whitacre reversed the plan to sell Opel, Germans increasingly took the view that the U.S. automaker should cover its expenses. "GM is the mother company and is responsible for the daughter company," said Helmut Becker, head of the Institute for Economic Analysis and Communication in Munich. "In the meantime, GM has made a profit again."

GM may have made an error in repaying $6.7 billion in loans to the U.S. and Canadian governments five years early, said Joseph Phillippi, president of AutoTrends Consulting Inc. in Short Hills, N.J.

The move may have signaled to Germany that GM, which posted an $865 million first-quarter profit, could afford to fund Opel’s restructuring. "That may have been a tactical mistake," he said.

GM touted its repayment of federal loans — but downplayed the fact that U.S. taxpayers are still on the hook for $43 billion in aid that was swapped for a 61 percent stake in GM.

Of the $50 billion GM received in bailout funds, $17.4 billion went into an escrow account that GM tapped to repay the loans.

Rival automakers, including Ford Motor Co., are critical of GM’s request in an industry struggling with excess capacity. "We don’t think from a European perspective that government loans should be given to companies for overdue restructurings," said Ford of Europe spokesman John Gardiner.

Opel has been struggling in the cutthroat European market, which is expected to shrink 10 percent this year. But even as a small, regional player, Opel could be successful as a wholly owned unit of GM if the terms of the relationship were adjusted, said auto analyst Christoph Stürmer at IHS Global Insight in Frankfurt.

He pointed to Volkswagen AG’s relationship with its Czech subsidiary Skoda. It is a separate brand, but it doesn’t pay royalties on VW Group-wide technology, whereas Opel does.

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