Saturday, August 22, 2009

Magna wants Chevrolet Russia as part of Opel deal

Magna International Inc.'s offer for German automaker Opel is sputtering over its request that rights to General Motor Co. Chevrolet vehicles in Russia be included in the deal.

The Canadian auto supplier is locked in a bidding duel for Opel with Belgian investment firm RHJ International SA. Magna, bidding together with Russian state lender Sberbank, wants GM's Chevrolet Russia business to be part of the Opel transaction, sources indicated Tuesday. GM is balking because Chevrolet is its high-volume seller in the region and it's highly profitable.

Magna's bid is clearly preferred by several German politicians and labour leaders, but its final offer as presented to GM varied from what the parties had discussed in previous weeks and contained elements around intellectual property and GM's Russian operations that could not be implemented, John Smith, GM's chief negotiator for the Opel sale, wrote on the company's Europe blog Tuesday.

"GM has partners in other parts of the world who have joint ownership of these assets," Mr. Smith said.""We simply could not execute the deal as submitted."

Those partners include Avtotor, which builds GM vehicles in the city of Kaliningrad, and Avtovaz, which operates a joint venture with GM in Togliatti that builds the Chevrolet Niva sports utility vehicle. Avtovaz is 25% owned by French carmaker Renault. GM's Chevrolet vehicles in Russia are based on products from its Korean Daewoo unit. Korea's government-run Development Bank is a major shareholder in GM Daewoo and is keen on seeing it grow.

Talks on reformulating a bid with Magna continue, Mr. Smith said. He said the rival bid from RHJ is completed and "would represent a much simpler structure and be easier to implement."

A deal with Magna could still get done. But GM would have to get something significant in return, people familiar with the matter said.

Magna's offer for Opel centers on a business strategy that would see sales of Opel vehicles expand dramatically in Russia and the post-Soviet states. Russia is backing the bid because it wants to use Opel technology to revive its own auto manufacturing capability, centered on Russian billionaire Oleg Deripaska's automaker GAZ.

As part of that commercial strategy, sources said Magna and its partner are also seeking control over all or part of GM's Chevrolet business in Russia. The Russian Chevrolet unit is said to be a cash machine for GM because it sources vehicles free of the country's import duty on foreign vehicles, making it a crucial unit as the automaker seeks to reverse nearly US$88-billion in losses accumulated since 2004.

"Not only is Magna having difficulty with this intellectual property issue, they're having difficult understanding that they're not going to get Chevrolet," said Warren Browne, GM's former top executive in Russia. "You're not buying a country. You're buying a brand -- Opel."

Mr. Deripaska has toured the GM-Avtovaz assembly factory and "understands" its value, one source said. Russia's political leaders and Magna executives are also familiar with the operation.

They'd be getting one of the leanest manufacturing facilities in Russia, with an experienced workforce, said the source. "Magna gets to jump in and doesn't have to clean up anybody's mess. They could walk into that plant and get 85,000 to 100,000 units worth of capacity without untangling anything."

Mr. Deripaska's GAZ is still struggling to modernize its car lines and assembly operations. According to Russian media reports, its passenger vehicle business is close to collapse and last week received another state bailout of 5.6 billion roubles ($195-million).

Aurora, Ont.-based Magna and Sberbank are together offering 500 million euros ($766-million) for Opel and its U.K. unit Vauxhall. The partners have offered to pay more cash right away than initially planned. They will each take a 27.5% stake in Opel. GM would retain 35% while Opel workers would be offered 10%.

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