DBRS Comments on Magna’s Bid for Opel

DBRS notes that Magna International Inc. (Magna) announced on September 10, 2009, that its joint bid with Savings Bank of the Russian Federation (Sberbank) to acquire a 55% interest in Adam Opel GmbH (Opel) has received the support of the board of directors of General Motors Corporation (GM) and the Opel Trust. However, the announcement does not warrant any rating actions at this time because it is not a binding agreement and there is still uncertainty regarding the closing conditions and financial terms. There are still several key issues that need to be finalized over the next few weeks, including a definitive finance package from the German government and the written support of the labour unions on necessary cost restructurings. The definitive agreements are expected to be ready in the next few weeks, with the closing to follow within the next few months.

Under the purchase agreement, Magna and Sberbank will acquire a 55% stake in Opel, with GM retaining a 35% interest in Opel and Opel employees obtaining the residual 10% position. Magna is expected to be well able to absorb the financial impact of the transaction (estimated at roughly EUR 250 million for its share of the cost).

DBRS placed the Company Under Review with Negative Implications on May 1, 2009, following the initial bankruptcy announcement of Chrysler LLC as the bankruptcy of Chrysler LLC and subsequent bankruptcy of GM, and their associated extended production shutdowns in particular, threatened to pressure Magna’s earnings and cash flow given that the Detroit Three collectively represented close to 40% of the Company’s 2008 revenues. These risks have subsided with the emergence of Chrysler Group LLC (Chrysler) and GM from bankruptcy protection, with both companies looking to boost their production through the second half of the year. Additionally, while Magna’s 2009 second-quarter results were weak as a consequence of the extended production shutdowns, DBRS notes that the financial profile of the Company was not materially adversely affected. However, Magna’s ratings remained Under Review given the uncertainty and overhang associated with its Opel bid.

The Company’s investment in Opel would improve its product and geographic diversification. DBRS notes that an increased offensive into the Russian automotive market is deemed to be one of the objectives of Magna’s involvement with Opel. However, DBRS observes that a stronger foray into the Russian market is not without risk. While the Russian market has experienced rapid growth in the past several years and was on track to become Europe’s largest automotive market, 2009 sales have fallen dramatically in response to a lack of credit and low consumer confidence.

DBRS also notes that there are two other significant potential risks for Magna. First, original equipment manufacturers (OEMs) that are existing customers of the Company may potentially become hesitant to award future business to Magna as it may now be perceived as a direct competitor through its involvement with Opel. To mitigate such concerns, the Company indicated that it would establish a firewall to help ensure that there would be no risk of technology transferring from its customers to Opel and Opel to its customers. This notwithstanding, there remains some customer flight risk that, however, is difficult to quantify at this point in time. Furthermore, in addition to Magna’s initial investment in Opel, there is the potential that the Company will have to make additional investments in the future, potentially of a substantial amount, such that its financial profile would be adversely affected.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.