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11/6/09 7:10 p.m.

Short answer: GM calls off its' deal to sell Opel to Magna, and instead will attempt its' own turnaround of Opel.

GM Throws Opel Deal Into Reverse

By JOHN D. STOLL, SHARON TERLEP and CHRISTOPH RAUWALD

In a dramatic change of course, General Motors Co. backed out of a deal to sell the company's European operations to car-parts supplier Magna International Inc., and now plans to spend billions to restructure the money-losing business itself.

The decision to keep control of Opel of Germany and its British sister company Vauxhall was made at a board meeting Tuesday in which the company's directors strayed from the plan of Chief Executive Frederick "Fritz" Henderson, who had spent months negotiating the Magna agreement.

GM's change of heart reflects the car maker's increasing confidence about its outlook as well as the direction of its aggressive new chairman, Edward E. Whitacre Jr. The former AT&T Corp. chief, who was picked by the U.S. government for his post, has told GM executives to concentrate on expanding its market, not shrinking it.

The Opel sale plan was concocted in the car maker's darkest hours, as it faced insolvency and the need for a $50 billion U.S. bailout. Since emerging debt-free from bankruptcy reorganization in July and 60% owned by the U.S., it has seen car sales climb, reporting Tuesday that its October U.S. sales rose 4.7%. Email Alerts

Opel also is a key supplier of car designs for GM operations in the U.S., including the underpinings of the strong-selling Chevrolet Malibu sedan and small-car technology that could be important as U.S. fuel-economy standards are tightened.

GM's move carries both risk and potential reward for the company's chief owner, the American taxpayer. Instead of retreating to its main markets of North America and China, as envisioned until recently, GM will attempt to remain a global car maker with a major European presence. Keeping Opel could require a further infusion from GM coffers. But if GM turns around the European operation it could be a potentially more profitable company, one able to make good on its borrowings from the U.S. and Canadian governments.

The GM board was persuaded to keep Opel by the unit's "improving business environment" and its strategic importance to GM, Mr. Henderson said in a statement. "GM will soon present its restructuring plan to Germany and other governments and hopes for its favorable consideration," he added.

The Opel deal is the second major transaction to fall apart for Mr. Henderson in little over a month. GM had anticipated selling its Saturn division to mega auto dealer Roger Penske, but Mr. Penske's plan died after French auto maker Renault SA, which was in talks to supply Saturn with vehicles, changed its mind. Now, GM plans to close Saturn.

This latest Opel development provides a fresh wrinkle in the evolving relationship between Mr. Henderson -- who has been at GM for a quarter century -- and a board made up largely of GM newcomers who have a wealth of experience in private equity, turnarounds and deal making.

Whereas Mr. Henderson's predecessor, Rick Wagoner, had often won in the boardroom by relying on the support of long-serving directors, Mr. Henderson appears to be tiptoeing through land mines of strong opinions by adjusting his game plan.

Mr. Henderson by no means is out of the woods. Now, he must implement a turnaround in Europe that has so far been unattainable despite a decade of restructuring -- much of it orchestrated by him earlier in the decade.

GM is asking European governments that host Opel or Vauxhall plants, including Germany, Poland, the U.K., and Spain, for about €3 billion ($4.43 billion) to help revamp the operations. About €2 billion of that is expected to come from Germany.

One issue that GM faces soon is the Nov. 30 expiration on €1.5 billion in bridge loans from Germany. GM hadn't received word from the German government Tuesday evening on whether it will continue extending the loans or request they be repaid, said a person familiar with the matter.

German Chancellor Angela Merkel was meeting with President Obama and U.S. lawmakers in Washington on Tuesday. She had been a vocal backer of Magna's Opel bid.

Ms. Merkel's conservative ally Roland Koch, state premier of Hesse where Opel is based, condemned GM's decision, saying he was "angry that months of effort to find a good solution for Opel Europe have failed because of GM."

Mr. Koch expressed "grave worries about the future of the company and its jobs" because of Opel's "negative experiences" in recent years under GM's ownership. He called on GM to repay the bridge loan to the German state by Nov. 30, "so that the German taxpayer doesn't suffer."

In effect, GM's board has called the bluff of German officials, who had responded to the European Union's concerns about Germany providing the Magna deal with funding by saying the German support was available to GM no matter which restructuring route it chose, according to a person familiar with the board meeting.

The European Union's question echoed concerns in the boardroom, as directors in August and September had grilled GM managers on why they had allowed the German government to gain so much leverage over the fate of Opel, said people familiar with the discussions. The key question was why Magna, which was offering only $500 million for a 55% stake in Opel, was the only viable option for the German government and labor unions.

The board eventually signed off on the deal, but some members remained concerned about GM's ability to compete globally without Opel.

Mr. Henderson, who had been running GM Europe until he became chief financial officer in 2005, wanted to build the company's Chevrolet brand into a global powerhouse, while treating GM's proposed 35% stake in Opel as an engineering partnership.

In the months following GM's decision to sell a majority stake to Opel, the European car market has shown a mild improvement, thanks to government scrappage programs that mirror the U.S.'s "cash for clunkers" rebates.

By the summer, Mr. Henderson's management team had worked out the deal to sell control of Opel to Canada-based Magna and its Russian partners, car maker OAO GAZ and state-controlled OAO Sberbank. The German government pledged to finance the plan and help fund Opel with €4.5 billion.

The Opel sale topped the agenda as GM's 13-member board met in Detroit on Tuesday. The board decided to review the sale one final time to discuss the European Union's concerns about Germany's backing and in light of indications that Germany may support a future for Opel other than the Magna sale.

Mr. Henderson told the board Tuesday that GM had struck the Magna deal in a very different economic environment, just as the company was filing for Chapter 11, and that the company's results had improved steadily in the months since, according to a person familiar with the matter. Mr. Henderson told the directors GM now could restructure Opel without the help of Magna and its Russian partners.

The board took Mr. Henderson up on that suggestion Tuesday, telling him to find someone capable of running GM Europe more effectively, according to the person familiar with the meeting. In addition, Mr. Henderson has to quickly repair ties with European labor representatives, the German government and Opel's management. All three had pushed for a new owner.

In a statement, Siegfried Wolf, Magna's co-chief executive, said Magna understood the board's decision and vowed to continue supporting Opel and GM.

Earlier Tuesday, Opel workers agreed to concessions that would have saved Magna €265 million ($391 million) annually in exchange for saving jobs and avoiding some plant closings. The deal was valid only if GM and Magna signed a final sale agreement.

GM estimates its restructuring will cost about €3 billion to revamp Opel, which it says is significantly lower than all bids submitted as part of the investor solicitation.

—Marcus Walker contributed to this article.

Write to John D. Stoll at john.stoll@wsj.com, Sharon Terlep at sharon.terlep@dowjones.com and Christoph Rauwald at christoph.rauwald@dowjones.com

Printed in The Wall Street Journal, page A1

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