Penske Walks Away from Saturn

| About: Penske Automotive (PAG)

Penske Automotive Group (NYSE:PAG) has declined to buy the Saturn brand from General Motors, despite nearing the end of the deal. The spokesperson of the Michigan-based second leading automotive retailer in the U.S. has explained that Penske was unable to find a manufacturer to make the Saturn models when GM stops producing them after 2011.

In June, Penske had reached a tentative agreement with GM to purchase the brand. Under the deal, GM had agreed to manufacture three Saturn models beyond 2011, but afterwards Penske was supposed to manufacture the products made by a third-party manufacturer.

Speculation was rife that Penske was discussing the production of Saturn with French automaker Renault or a Chinese automaker to produce Saturn but the company spokesperson has not confirmed either. As Penske failed to reach an agreement with third party manufacturers for Saturn, it had no option but to call off the deal.

It takes several years to design new vehicles or engineer foreign vehicles to meet U.S. standards. Thus Penske would risk having run out of stock once GM stops making the vehicles. Penske spokesperson has revealed that there is a little chance that the talks could be reopened. This has triggered fear among the 350 remaining Saturn dealers around the U.S. that they may go bust.

GM now plans to stop manufacturing Saturn as soon as possible. However, this would involve no layoffs as the company manufactures the brand at facilities that produce other brands as well. Saturns are made at plants in Kansas City, KS, Delta Township, MI and Ramos Arizpe, Mexico. GM has assured that the Saturn owners can go to their dealers for service.

Saturn was officially launched in 1990. After a good year in 2007, the brand’s sales dropped last year as the auto market dried up. Through August, Saturn sales were down 60% compared to first eight months of last year.

We recommend the shares of Penske Automotive as Neutral.