By Laurence Frost and Edward Taylor
PARIS/FRANKFURT (Reuters) - France's PSA Group (PEUP.PA) plans to buy Opel from General Motors (GM.N) in a deal valuing the business at 2.2 billion euros ($2.3 billion), creating a new European car company to challenge market leader Volkswagen (VOWG_p.DE).
The maker of Peugeot and Citroen cars vowed to return Opel and its British Vauxhall brand to profit, targeting an operating margin of 2 percent within three years and 6 percent by 2026 underpinned by 1.7 billion euros in cost savings.
The deal seals GM's exit from Europe and ends a relationship dating back to the 1920s.
GM will receive 650 million euros in cash and 670 million euros in PSA share warrants for the Opel manufacturing business. The Paris-based carmaker and BNP Paribas (BNPP.PA) will pay an additional 900 million euros for Opel's financing arm, to be operated jointly and consolidated by the French bank.
GM will take a non-cash charge of $4 billion to $4.5 billion on the deal when it closes in late 2017. The company said the transaction would cut its cash balance requirement by $2 billion, allowing it to accelerate share repurchases.
The company's shares were down 1.4 percent in midday trading in New York.
PSA shares jumped as much as 5.2 percent after Chief Executive Officer Carlos Tavares said GM's European operation could be turned around using lessons from the French group's own recovery. Opel recently recorded its 16th consecutive full-year loss.
"We're confident that the Opel-Vauxhall turnaround will significantly accelerate with our support," Tavares said.
By acquiring Opel, PSA leapfrogs French rival Renault (RENA.PA) to become Europe's second-ranked carmaker by sales, with a 16 percent market share to VW's 24 percent.
Last year, PSA and GM Europe recorded a combined 72 billion euros in revenue and 4.3 million vehicle deliveries.
PROUD, NOT RELIEVED
Eight years after coming close to selling Opel to Canada's Magna (MG.TO), Detroit-based GM has faced renewed investor pressure to offload the business to raise profitability, rather than chase the global sales crown currently held by VW.
After fending off 2015 merger overtures by Fiat Chrysler (FCHA.MI) with support from her board, GM CEO Mary Barra agreed to target a 20 percent return on invested capital and pay out more cash to shareholders.
"The way I look at this is positioning Opel-Vauxhall to be incredibly successful in the future," Barra said on Monday when asked by a reporter whether she was relieved.
"General Motors doesn't have to be relieved," PSA's Tavares interjected. "They can be proud of giving Opel-Vauxhall a better future."
The two carmakers, which already share some production in a European alliance, confirmed last month they were negotiating PSA's outright acquisition of Opel, sparking concern over possible job cuts.
Tavares said on Monday the targeted savings would come from purchasing and research and development, thus avoiding plant closures, as the Opel lineup is redeveloped with PSA technology and vehicle architectures.
An ambitious technical convergence will begin with the Opel Corsa, Tavares indicated, as Reuters reported earlier.
The next version of the popular subcompact will be delayed by a year to 2020 as it goes back to the drawing board, according to presentation slides shown to analysts.
"Our planning teams are already working on that," Tavares said. Another five PSA-based Opel vehicles will follow by 2023.
The Opel deal caps a stellar two-year recovery for PSA, which avoided bankruptcy in 2014 by selling 14 percent stakes to the French state and China's Dongfeng <0489.HK>, matching the Peugeot family's diluted holding.
Tavares has since cut about 3,000 French assembly line jobs each year through voluntary departures to trim the wage bill to 11 percent of revenue from the 15 percent he inherited and which is roughly where Opel's labor costs stand today.
PSA reiterated pledges to run Opel as a distinct German subsidiary and honor existing job guarantees, which tend to cover production plans for existing models.
The longer-term outlook for Opel plants may be less certain.
"Tavares wants to create healthy competition between the plants," said one person involved in the tie-up talks. "They will be competing for workload."
With Europe's auto market near a peak, some analysts expected the new group to close two or three plants within five years. Britain's European Union exit adds to the uncertainty over Vauxhall's UK plants at Ellesmere Port and Luton.
But Tavares said export demand could help fill Opel plants, adding that UK manufacturing brought both opportunities and risks in the event of a "hard Brexit" in which Britain leaves the EU without a free-trade deal.
"This may look to you a little bit romantic," he said.
The transaction also calls for GM to retain most of Opel's pension deficit, which analysts estimated at $10 billion. Earlier in the talks, the U.S. carmaker sought to offload a larger share of the liabilities, sources said.
Some smaller pension funds will be transferred to PSA, along with a 3 billion euro payment to cover their full settlement, the companies said.
Existing Opel models will be barred from entering new overseas markets under non-compete agreements that had also complicated negotiations. GM will be similarly excluded from marketing the same underlying technologies in Europe.
The PSA warrants, exercisable in five years and maturing in nine, provide financial incentive for GM to continue cooperating. The U.S. carmaker has agreed to sell the shares received upon exercise, keeping no stake in PSA.
(Additional reporting by Gilles Guillaume; Editing by Jason Neely and Meredith Mazzilli)