Peugeot Citroen Group Buys Loss-Making Opel for $2.2b

France’s PSA Group has agreed to buy its major European rival Opel/Vauxhall from General Motors in a deal valuing the German-based business at €2.2 billion ($2.3 billion), both companies confirmed on Monday.

The mega deal is likely to herald a new era for the French firm which has been pushing in several direction in the past few years, including doubling down on its bid to be the biggest auto brand in Iran following the removal of sanctions in January 2016 with its local partners SAIPA and Iran Khodro.

PSA Group’s rationale for seeking to acquire General Motors’ chronic money loser, Opel, has many industry watchers puzzled but it has potential benefits for both firms, Automotive News Europe and Reuters reported.

The move would push PSA into the number two spot in Europe by sales, behind Volkswagen Group and ahead of its French rival, Renault.

For GM, the benefit of a deal seems clear: An opportunity to offload a company that has hemorrhaged hundreds of millions of dollars annually and redirect those resources to markets with more profit potential.

For PSA, however, which struggled during the recent European recession, the likely benefits are much less certain, analysts and experts say.

The deal represents an opportunity for PSA on a number of levels. PSA and Opel already have a “mature” agreement, said Isabelle Chaboud, an associate professor at the Grenoble School of Management in France who focuses on financial analysis of companies.

 Immediate Boost

PSA’s gain from the deal could include an immediate, huge and relatively inexpensive boost in PSA’s share of the fiercely competitive European market, potentially unlocking an array of synergies, profits and cost savings.

A combined PSA-GM Europe entity would have had 16.8% of the European market in 2016, according to Exane BNP, versus 9.7% for PSA and 6.6% for Opel. A restructured Opel could boost earnings per share by up to 30% by 2020, Exane BNP suggests.

In addition, the ability to find savings quickly by building on PSA’s 2012 agreement with Opel on joint platforms, shared manufacturing, purchasing and logistics is another point of potential profitability for the new firm.

The first fruits of that collaboration will be on display at the Geneva auto show this week when the Citroen C-Aircross and Opel Crossland X models make their debuts.

Moreover, moving forward, with the announcement of the deal, Iran’s relationship with the Opel brand can now move with full force when the group separates from its Detroit-based parent company.

Currently, Tavan Khodro Jey, the only company permitted to import the company’s cars into Iran has had limited traction with importing the usually low-cost vehicles due to the hideous 100% import tax levied on them, making an affordable Opel Corsa the same price as a low-end Mercedes-Benz in the international market.

With the deal moving ahead, Peugeot could implement a strategy to add the Opel brand to the range of vehicles it intends to produce in Iran over the next few years, meaning more variety for local car buyers and another market for the Paris-based companies to shift the vehicles in.

On the other hand, European analysts said, the deal poses challenges for PSA, including making the new group even more reliant on Europe than it is now.

Europe accounted for 61% of PSA’s 3.15 global vehicle sales last year. Opel is a largely European-only brand because GM has restricted its Germany-based subsidiary from selling outside of Europe, where it would compete with Chevrolet, pulling the brand out of Russia and China in recent years.