GM Will Face Questions About Opel in IPO Promotion

As General Motors Co. gears up to pitch its initial public offering to investors this fall, one of the tougher tasks it faces is making the case that its Opel operations in Europe can be fixed, The Wall Street Journal reported.

While the U.S. auto maker has reported two consecutive quarters of profit since emerging from bankruptcy last year, its Opel/Vauxhall unit—the backbone of GM's European operations—continues to lose money and remains caught between high production costs and a brand image badly bruised by nearly two years of financial uncertainty.

Opel's market share keeps sliding in an already declining European car market, adding to pressure on GM and Opel's management to show would-be investors that it has an effective turnaround strategy for Europe in place.

Opel's chief executive, Nick Reilly, said the carmaker is sticking to its plan to break even by 2011 and to return to profitability by 2012, and may even do so ahead of schedule should European car sales rebound more quickly than expected.

"Of course I am ambitious and want to do better than what is planned," he said, adding that "GM's new management is supporting us."

In the second quarter, GM Europe, which also includes the European business of Chevrolet and other GM brands, narrowed its loss to $200 million after posting a $500 million deficit in the year's first quarter. Still, that equaled a loss of $483 on each vehicle the European arm sold. GM itself posted a second-quarter profit of $1.3 billion, its best quarterly result in six years.

The biggest trouble spot is Germany, Opel's home base and largest market. Car registration figures released last week show new registrations for Opels in Germany have fallen 39% through August of this year.

While total German car sales are down by more than a quarter this year—the hangover effect of the country's hefty 2009 scrappage subsidies—Opel's drop is the steepest of any domestic manufacturer. It comes despite the recent launch of a new version of one of Opel's best sellers, the five-door Astra hatchback.

As a result, its German market share has slipped to 7.7 percent from 9 percent in 2009. Across Western Europe, Opel's share fell to 7 percent through the year's first half, down from 7.4 percent last year, according to the ACEA European Automobile Manufacturers' Association.

"They're going to have a hard time in [stock promotion] road shows in discussing why, when they were divesting as much as they could, they didn't sell Opel," said Scott Sweet, senior managing partner of IPO Boutique, a Tampa, Fla., IPO advisory firm.

GM last November decided at the 11th hour to pull out of a deal, crafted under pressure from the German government, to sell Opel to a Canadian-Russian consortium. Daniel Akerson, GM's new chief executive, had a central role in the move to abandon the sale as he and other board members concluded Opel played too critical a role as GM's beachhead in Europe and a key center of its engineering know-how, particularly in small and compact and cars, to let it go.

Most analysts agree with that assessment but say Opel faces a daunting battle in returning to sustainable profitability.

Even in the midst of a broad restructuring that involves shedding 8,000 jobs, all but one of Opel's 13 plants will stay open and most of its production will remain concentrated in relatively high-cost Western Europe.

Despite plans to move into new markets such as China and Israel, the auto maker said it would take considerable time to build a substantial presence outside Europe.

And Opel lacks the image or products to command higher prices charged by rivals such as BMW AG to help boost its profit margins, said Jürgen Pieper, an auto analyst at Bankhaus Metzler in Frankfurt.

"There are only so many ways for a company like Opel [to improve profitability] and none are readily available," the analyst said. "In a European market on the upswing they can probably make a small profit, but every four or five years they will be facing the same tough questions again."

Analysts and dealers say Opel's most pressing problem is restoring its image, particularly in Germany, where it has been battered by months of questions over its survival, ownership and financing for its turnaround.

In June, GM announced it would fund Opel's €3.3 billion ($4.3 billion) restructuring on its own, but not before months of delays and, ultimately, rejection by the German government of the car maker's appeal for more than €1 billion in state aid.

"After so much uncertainty for so long, naturally a lot of customers stayed away," said Thomas Bieling, who co-heads the German association of Opel dealers.

To lure back customers and motivate dealers, Opel is investing in new models, including a smaller city car expected to be launched in 2013. And it's banking on its Ampera extended-range electric car, a European cousin to the Chevrolet Volt, which is due out in late 2011.

Opel also recently unveiled a "lifetime" car warranty, which effectively is limited to 160,000 kilometers (99,424 miles), though with no time restrictions. That attracted the ire of a nongovernmental competition watchdog, which last week sued Opel for what it called misleading advertising. Bieling, though, said the guarantee has been popular with dealers and buyers.

Reilly said the company has no plans to change the guarantee campaign. "But of course the competition doesn't like the campaign at all," he said.