Euro Leaders Outraged As General Motors Backs Out Of Opel Deal

General Motors Co. stunned European government and labor leaders yesterday (Wednesday) when it backed out of a deal to sell a majority stake in its Opel and Vauxhall brands to car-parts supplier Magna International Inc. (MGA).

GM may now be forced to spend billions to restructure the money-losing business itself as German and Russian leaders threatened to withdraw their governments’ support in protest.

The u-turn will leave GM with control of Opel’s small car designs, including its proprietary electric vehicle technology, which is an important part of its plan to deal with more stringent U.S. fuel-economy standards.

GM’s decision to keep Opel makes sense in view of the U.S. carmaker’s significant progress since it filed Chapter 11 bankruptcy last June, analysts said.

After the U.S. government took a 60% stake in GM in July, it emerged debt-free from bankruptcy and its domestic car sales have risen, climbing 4.7% in October.

“Strategically, it makes sense to keep a maker of small vehicles that can quickly be sold in the U.S.,” Xerfi analyst Guillaume Mouren told Reuters.

But the about face is also extremely risky, because it’s angered many overseas government and labor union leaders. GM is counting on European loan guarantees for the majority of the financing it needs to overhaul Opel. But those guarantees were based on GM maintaining European car factories.

Labor leader Klaus Franz took hundreds of millions in labor concessions off the table yesterday - concessions that were agreed to on condition that Opel was bought by Magna, the Canadian company long favored by Berlin and Moscow as buyer-of-choice.

“General Motors’ behavior toward workers is completely unacceptable,” German Economy Minister Rainer Bruederle told reporters after hearing GM’s news.

Germany is home to half of Opel’s 50,000 workers.

Labor leaders were planning protests across Europe on Thursday as Franz said workers would no longer tolerate GM’s “blackmail” of European governments and staff.

The question for GM now is how it will finance its plan to restructure Opel. Germany, Britain, Spain and Belgium were originally expected to provide about $6.6 billion (4.5 billion euros) in aid to rescue Opel and Vauxhall.  GM said it expected restructuring on its own would cost about $4.4 billion (3 billion euros).

Amid the political rancor, GM may be forced to return by the end of November the balance it owes on a $2.2 billion (1.5 billion euro) bridge loan it took from Berlin to keep Opel out of GM’s bankruptcy filing earlier this year.

The repayment looms over GM even though German officials had said they would provide support for restructuring Opel no matter what route GM chose for the restructuring.

The decision to keep control of Opel and Vauxhall was made at a board meeting Tuesday after the company’s directors rejected a plan submitted by Chief Executive Officer Fritz Henderson, who had spent months negotiating the Magna agreement, according to The Wall Street Journal.

GM’s change of direction reflects the newly appointed board of directors’ increasing confidence about its business outlook as well as the direction of its aggressive new chairman, Edward E. Whitacre Jr., the former CEO at AT&T Corp. (T).

Whitacre, the U.S. government’s hand-picked man for the job, has told GM executives to concentrate on expanding its market, not shrinking it, The Journal reported.

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