General Motors Co. (NYSE:GM) and PSA Peugeot Citroën announced the creation of a strategic alliance that is intended to focus on two primary areas -- platform/component sharing and purchasing.
As part of the deal, GM would buy a 7 percent stake in the Paris-based automaker PSA, making it the second-largest shareholder in Peugeot behind the Peugeot Family Group.
Under the arrangement, PSA will raise 1 billion euros ($1.34 billion) in new capital and the companies will consider developing a new common platform for low emission vehicles. The first vehicle on a common platform is expected to launch by 2016, GM said.
GM and PSA will share select vehicle platforms, components, modules, and create a global purchasing joint venture. Through this alliance, the two companies hope to share capex and R&D for select platforms, but there would be no consolidation of production.
The auto giant estimates the total synergies from the alliance at around $2 billion annually within about five years and would be split evenly between the two companies. The majority of these savings would likely be centered in Europe, given the physical presence of the two companies.
However, some Wall Street analysts are skeptical about the latest deal, especially given GM's poor track record of its previous alliances and the deal would not materially improve GM's position in Europe.
Suzuki was a successful alliance for GM with a $600 million to $700 million profit in 2006. However, GM's bigger foothold in Asia came from buying assets from Daewoo out of bankruptcy at distressed levels.
Meanwhile, the alliance with Fiat did not end well, as GM had to pay $2 billion to buy its way out of the put option. Similarly, Fuji Heavy (Subaru) resulted in a $700 million loss in 2005.
"We think management is sincere that the deal is better structured than past alliances (especially Fiat). As a result, there's probably not a substantial amount of downside to the relationship. However, our sense is that this announcement is no panacea to GM's losses in Europe." Jefferies analyst Peter Nesvold wrote in a note to clients.
Nesvold, who has a "hold" rating on GM shares, remains skeptical over the alliance saying that GM is already the biggest automaker in the world, so scale isn't the company's challenge. Moreover, the deal would not stem GM's losses in Europe as both GM and PSA directly said there would be no plans to share capacity.
Also, the cost savings will take several years and GM is sharing 50 percent of the cost savings, despite the fact that it is more than 2 times the size of PSA. The analyst said, in fact, this was GM's biggest pushback on the Renault-Nissan proposed alliance last cycle.
Meanwhile, GM is buying a 7 percent stake in PSA, while PSA is not buying any stake in GM. This arguably increases the complexity at GM while the stated goal has been to reduce it."We don't see material downside from GM's standpoint, we struggle to understand why it doesn't go against the grain of GM's strategic moves of the last several years," Nesvold said.