March 6, 2017 / 7:18 AM / 6 months ago

UPDATE 3-PSA targets Opel turnaround as GM exits Europe

* Deal values Opel at 2.2 bln euros

* First new PSA-based Opel models due around 2020

* Plans joint cost savings of 1.7 bln euros

* Marks GM's exit from Europe (Adds executive comments, details, background)

By Laurence Frost and Edward Taylor

PARIS/FRANKFURT, March 6 (Reuters) - France's PSA Group has agreed to buy Opel from General Motors in a deal valuing the business at 2.2 billion euros ($2.3 billion), creating a new European car giant to challenge market leader Volkswagen.

The maker of Peugeot and Citroen cars vowed to return Opel and its British Vauxhall brand to profit, targeting an operating margin of 2 percent within three years and 6 percent by 2026 underpinned by 1.7 billion euros in joint cost savings.

PSA shares jumped as much as 5.2 percent after Chief Executive Carlos Tavares said GM's European arm could be turned around using lessons from the French group's own recovery. Opel recently recorded its 16th consecutive full-year loss.

"We're confident that the Opel-Vauxhall turnaround will significantly accelerate with our support," he said.

By acquiring Opel, PSA leapfrogs French rival Renault to become Europe's second-ranked carmaker by sales, with a 16 percent market share to VW's 24 percent.

The disposal seals GM's exit from Europe and ends a relationship dating back to the 1920s.

Eight years after coming close to a sale to Canada's Magna , the Detroit car giant has faced renewed investor pressure to offload the business to raise profitability, rather than chase the global sales crown currently held by VW.

Last year, PSA and GM Europe recorded a combined 72 billion euros in revenue and 4.3 million vehicle deliveries.

GM will receive 1.32 billion euros for the Opel manufacturing business in the form of 650 million euros in cash and 670 million in PSA share warrants.

An additional 900 million euros will be paid by the Paris-based carmaker and BNP Paribas for Opel's financing arm, to be operated jointly and consolidated by the French bank.

'PROUD NOT RELIEVED'

After fending off 2015 merger overtures by Fiat Chrysler with support from her board, GM boss Mary Barra agreed to target a 20 percent return on invested capital and pay out more cash to shareholders.

"The way I look at this is positioning Opel-Vauxhall to be incredibly successful in the future," Barra said on Monday when asked by a reporter whether she was relieved.

"General Motors doesn't have to be relieved," PSA's Tavares interjected. "They can be proud of giving Opel-Vauxhall a better future."

PSA shares were up 2.2 percent at 19.49 euros as of 0939 GMT, after reaching 20.06 euros earlier in the session. GM shares closed 1.2 percent higher on Friday after Reuters reported a deal had been struck.

The two carmakers, which already share some production in an existing European alliance, confirmed last month they were negotiating PSA's outright acquisition of Opel, sparking concern over possible job cuts.

Tavares said on Monday the targeted savings would come from purchasing and research and development - avoiding plant closures - as the Opel lineup is redeveloped with PSA technology and vehicle architectures.

An ambitious technical convergence push will begin with the Opel Corsa, the CEO indicated, as earlier reported by Reuters.

The next version of the popular subcompact will be delayed by a year to 2020 as it goes back to the drawing board, according to presentation slides shown to analysts.

"Our planning teams are already working on that," Tavares said when questioned about the model. Another five PSA-based Opel vehicles will follow by 2023.

LABOUR COSTS

The Opel deal caps a stellar two-year recovery for PSA, which avoided bankruptcy in 2014 by selling 14 percent stakes to the French state and China's Dongfeng, matching the Peugeot family's diluted holding.

Tavares has since cut about 3,000 French assembly line jobs each year through voluntary departures to trim the wage bill to 11 percent of revenue from the 15 percent level he inherited - which is roughly where Opel's labour costs stand today.

PSA reiterated pledges to run Opel as a distinct German subsidiary and honour existing job guarantees, which tend to cover production plans for existing models.

Beyond those horizons, however, the outlook for Opel plants may be less certain.

"Tavares wants to create healthy competition between the plants," said one person involved in the tie-up talks. "They will be competing for workload."

With Europe's auto market near a peak, some analysts expect the new group to close two or three plants within five years. Britain's European Union exit adds to the uncertainty over Vauxhall's UK plants at Ellesmere Port and Luton.

But Tavares said exports could help fill Opel plants, adding that UK manufacturing brought opportunities as well as risks in the event of a "hard Brexit" in which Britain leaves the EU without a free-trade deal.

"This may look to you a little bit romantic," he conceded.

The transaction also sees GM retain most of Opel's pensions deficit, estimated by analysts at $10 billion. Earlier in the talks, the U.S. carmaker had sought to offload a larger share of the liabilities, sources said.

Some smaller pension funds will be transferred to PSA, along with a 3 billion euro payment to cover their full settlement, the companies said on Monday.

Existing Opel models will be barred from entering new overseas markets under "non-compete" agreements that had also complicated negotiations - while GM will be similarly excluded from marketing the same underlying technologies in Europe.

The PSA warrants, exercisable in five years and maturing in nine, provide a financial incentive for GM to continue cooperating. The U.S. carmaker has agreed to sell the shares received upon exercise, keeping no stake in PSA.

The Opel sale cuts GM's cash balance requirement by $2 billion, the company said, allowing it to accelerate share repurchases. GM will also take a charge of $4 billion to $4.5 billion on the deal, expected to close in late 2017. ($1 = 0.9432 euros)

Additional reporting by Gilles Guillaume; editing by Jason Neely and Keith Weir

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