PSA Group officially buys General Motor’s Opel unit

General Motor’s has agreed to sell its European unit, Opel, and PSA Group is betting that size is the answer to Europe’s saturated car market as they buy the ailing unit, despite its years of losses.

The French car-maker, PSA Group, will pay 1.8 billion euros ($1.9 billion) for Opel, its U.K. sister brand Vauxhall and a stake in the local financing business.

Opel’s financing arm with PSA will be operated by payments by French bank BNP Paribas, bringing the total value of the deal to $2.3 billion. CEO Carlos Tavares is bolstering his defenses in a peaking market being transformed by new competitors, Brexit and technology.

“It gives us the opportunity to become a real European champion,” Tavares said after announcing the deal, which reinstates PSA as the region’s second-biggest auto manufacturer. “Our plan is to build a common future for Opel and Vauxhall and fix the existing issues.”

The deal allows PSA to solidify its turnaround by spreading the costs for developing new vehicles across a larger network, including GM’s 1.2 million annual deliveries. Meanwhile, the company will also be achieving the savings necessary to compete in the market where high wages and wafer-thing profit margins are included. As the carmaker tries to stay ahead of self-driving and electric car innovations, gaining scale is vital for their success.

The joining of the two companies will yield a projected annual savings of 1.7 billion euros by 2026 by combining development costs, factory investments and purchasing. The deal will also help Opel generate an operating margin of 2 percent by 2020, and 6 percent by 2026. However, the deal will initially be a drag, with PSA’s profit margin most likely dropping to 3.8 percent from 6 percent, according to an estimate from UBS AG.

Job and production cuts are also likely as the two companies come together. They both offer a similar slate of mass-marketing cars from high-cost locations in Germany, France and the U.K. and it will take years for savings to filter through. It will cost about 1.6 billion euros just to implement the savings measures.

“This move, on the paper, is a good deal for PSA,” in part because it gives the French carmaker access to GM’s expertise on electrification and fuel cell technologies, Bryan Garnier & Co. analyst Xavier Caroen wrote in a note to clients. However, “implementing synergies will take time, diluting group’s PSA margin on the short term, while risk of further cannibalization between brands could occur.”

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