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Magna may have dodged business disaster with failure of Opel deal, observers say

TORONTO - Magna International (TSX:MG.A) dodged what some industry observers say could have been a disaster this week when General Motors Co. dashed plans to sell its money-losing Opel division to a Magna-led group that wanted to build cars and sell them in the growing Russian market.

TORONTO - Magna International (TSX:MG.A) dodged what some industry observers say could have been a disaster this week when General Motors Co. dashed plans to sell its money-losing Opel division to a Magna-led group that wanted to build cars and sell them in the growing Russian market.

Stock in the auto parts producer jumped more than 10 per cent on Wednesday as investors appeared to heave a sigh of relief that Magna, already Canada's largest parts company, would not become the next major automaker.

The deal held promise for Magna, but also lots of risk, especially if the European transaction began to undermine Magna's traditional parts sales to Volkswagen and others who would see Opel as a competitor.

"Investors were focused on the negative (aspects) and there were quite a few that were obvious," said David Tyerman, an auto parts analyst at Genuity Capital Markets.

"Those have all gone away."

Magna had been seeking a 55 per cent stake in Opel alongside its lender, Sberbank of Russia, and reached a tentative agreement in September.

The deal wasn't without controversy and complications, ranging from political tension to threats by Magna's parts customers to back out of their agreements if the company became their competitor.

Some analysts also questioned whether Magna had the smarts to plunge head-first into selling cars after specializing for years in building transmissions, drive trains and other components.

"Magna senior management aren't execs with marketing experience in automobiles," Tyerman added.

The darkest cloud hovering over the deal was whether Magna founder and chairman Frank Stronach's dream to buy a car company would conflict with Magna's interests in serving other automakers with parts.

Automakers were concerned with Magna having access to their design secrets and other intellectual property while investing in vehicles that would serve as direct competition to their own products.

Volkswagen threatened to pull out of using Magna's factory in Austria to manufacture a line of its Porsches if the company bought Opel.

"The Magna-Opel deal would've been problematic," said Joseph D'Cruz, professor of management at the University of Toronto.

"Magna was going to have to go to some very extreme lengths to keep Opel separate from the rest of its operations."

Things were going relatively smoothly, it seemed, until GM made the surprise announcement on Tuesday that it was backing out of the tentative agreement.

The news sent shock waves through Opel's operations in Germany where the union cancelled cost concessions and prepared to walk out of factories in protest.

"If they do strike, then Opel's ability to recover will be seriously compromised," said D'Cruz.

"In Germany, the unions are very powerful. You don't upset your union if you want to run a successful business."

GM's decision to keep and restructure Opel suggests the U.S. automaker may be more optimistic about the future of the global auto industry after one of the most difficult periods in its history.

But it's likely thousands of jobs at Opel will be lost as the company is streamlined, echoing what has already happened in the United States and Canada, where GM and Chrysler received tens of billions in U.S., Canadian and Ontario government loans to survive as they cut their workforces

Canadian Auto Workers union president Ken Lewenza drew parallels in the Opel troubles with past uncertainty faced by domestic autoworkers.

"These workers in Europe are going through the same challenges we went through in Canada," he said.

"It's the kind of inconsistencies with GM that are creating some concerns from a worker's perspective."

Despite the disintegration of the deal, Lewenza remained optimistic about GM's prospects in the auto industry.

"I think they've got a great future. But this sends an inconsistent message in terms of where the company wants to go," he said.

Stronach has remained optimistic during interviews after the deal fell through, even though he relentlessly pursued Opel when it was on the table.

"Stronach has been very diplomatic, and the obvious reason is that he doesn't want to upset his biggest customer," said D'Cruz.

Last year, GM made up about 21 per cent of Magna's global automotive sales. Overall, Magna has 72,000 employees at 242 facilities across the world.

Magna's stock closed up $4.34, or 10.1 per cent, to $47.34 on the Toronto Stock Exchange. The company's shares have a 52-week high of $55.25 and a low of $25.44.

 
 
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