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Magna poised to take wheel at Opel

Globe and Mail Update

Rome, Montreal — Canada's Magna International Inc. moved a big step closer to taking control of the company that was essential to Fiat SpA's plans to create a European automotive powerhouse.

Magna on Friday reached a tentative agreement with General Motors Corp. to take a controlling stake in Adam Opel AG, GM's ailing German division. The agreement came only hours after Fiat, which is taking control of Chrysler LLC, boycotted a meeting in Berlin aimed at devising a financial package to keep Opel afloat during GM's expected Chapter 11 bankruptcy filing.

The deal reportedly includes a commitment from Magna to provide about euros €300-million ($423.63-million U.S.) in short-term financing to support Opel, which is burning through large amounts of cash as sales sink. The German government has tentatively agreed to provide Opel with €1.5- billion in bridge financing.

Speaking to reporters in Montreal, Sergio Marchionne's, Fiat's Italian-Canadian chief executive officer, said Fiat would still like to secure a deal for Opel but is more concerned with fixing Chrysler at the moment.

“We need to get [Chrysler] kickstarted with it comes out of Chapter 11,” he said after making a presentation at the annual meeting of Financial Executives International. “That remains our primary objective. If the Opel transaction is not available to Fiat, life will move on, you know.”

Magna has hinted in may be willing to form joint venture with Fiat to help revive Opel. But Mr. Marchionne said he is not interested. “That's not meant to be derogatory,” he said. “We have used Magna as a supplier in the past with varying degrees of success. They are a large supplier to Chrysler. So we're going to continue to rely on them.”

Fiat said it boycotted the Berlin meeting because the German government's financial demands on Fiat were too great. In a statement issue by the company Friday morning, Mr. Marchionne called the German government's search for a new Opel owner “complicated and uneven” and said his company was in no position to improve the Opel takeover offer that it had already made. The offer contemplated no cash investment.

In Montreal, Mr. Marchionne characterized the complex negotiations to rescue Opel as “now taking on the air of a Brazilian soap opera, in the midst of an election year both in Europe and Germany.”

Opel has plants in Germany, Belgium, Britain and other European countries and each of the governments fears Opel job losses during the company's restructuring will create a political backlash.

He criticized what he said is a go-it-alone approach so far taken by individual European countries in the bailout of the auto sector, rather than developing a common strategy to ensure a level playing field for all car makers. The pell-mell approach is in stark contrast to that of the U.S. and Canadian governments, which worked in constructive fashion with the stakeholders and unions to ensure that “everyone shared in the sacrifices being made.”

If thill invest some €700-million in the new Opel, some of which it wants guaranteed by the German government. GM and Sberbank would each own 35 per cent of Opel and Magna would take 20 per cent. Ten per cent would be reserved for Opel employees. Ailing Russian car maker OAO Gaz, controlled by oligarch Oleg Deripaska, has offered to make Opels for the Russian market.

Magna's strategic advantages are not obvious; the Canadian proposal seems to have appealed to the German government because it offered a cash investment and may eliminate fewer German jobs than Fiat's proposal. But Magna has no dealers and no experience in the mass production of cars. Sberbank is a financial player, not a manufacturing expert.

Fiat had argued that its proposal made strategic sense because it and Opel could save billions of euros by launching models from the same platforms and sharing technologies such as engines and other components.

Mr. Marchionne has predicted that only the highest-volume car makers – those capable of pumping out at least 5.5-million vehicles a year – will be able to afford the massive costs of launching new cars. That means the industry will have to see more mergers, he said.

“The industry is in dire need of consolidation. Whether we are the agents or somebody else is the agent, the process is fundamentally inescapable. We need to get there.”

Magna's tentative agreement means Opel has a better chance of avoiding legal insolvency as GM goes through the bankruptcy courts. GM is expected to file for Chapter 11 bankruptcy on Monday.

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