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China, French Bailout Reported For Peugeot-Citroen

Family, GM Would See Interests Diluted.
Conflicting Holdings In China Might Undermine Deal.
Does This Mean Peugeot-Citroen Can’t Meet Financial Targets?

Peugeot-Citroen shareholders ran for the exits after reports the financially sick company will be bailed out by a French-Chinese combination.

The shares dropped about 10 per cent over a couple of days when unconfirmed reports circulated that Chinese carmakers Dongfeng and the French government would subscribe to a €3 billion share issue giving them both 20 per cent stakes in Peugeot-Citroen. This would slash General Motors seven per cent stake to about four per cent, and end Peugeot family control by reducing its interest to 14 per cent. The family currently has 25 per cent of the shares and 38 per cent of the voting rights.

Investors worried that if Peugeot-Citroen felt the need to succumb to this kind of assistance, it might mean it had little faith in meeting its financial targets.

Peugeot-Citroen’s automotive losses shrank to €510 million in the first half, an improvement of €147 million on the same period of 2012. The division had been expected to lose about €740 million in the first half, and about the same again in the second half of 2013. Peugeot-Citroen has pledged break even by the end of 2014, after it burned through €3 billion in cash in 2012, pledged to halve that in 2013 and become cash neutral by the end of 2014.

“Such a large capital rise …….. could even potentially give the signal that Peugeot-Citroen is uncomfortable with its current guidance on cash burn, which is to reduce this at least in half in 2013 with a very significant reduction throughout 2014,” said Citi Research analyst Philip Watkins.

Late last month Fitch Ratings said Peugeot-Citroen will probably fail to reach its targets, which might be delayed until 2015.

Reduce worries about survivability
Watkins said a tie-up with Dongfeng might mean Peugeot-Citroen’s impressive technology would be “more widely dispersed”, and this could weaken the French company’s long-term competitive position. On the other hand, a deal would help reduce worries about its survivability.

Deutsche Bank’s Gaetan Toulemonde worried that a big French government stake would not please shareholders.

Peugeot-Citroen has slashed spending on new car programmes and the Financial Times Lex column worries that this might be a hindrance, although signs the European car market might revive is a plus.

“While new model launches have been sustained, its youthful portfolio will start to age again from 2014. So a longer-term structural solution is needed. And now that European car production seems to have reached a trough, this would be a good time to deliver it,” Lex said.

Lex also pointed to potential problems with the deal because of overlapping alliances in China with GM and Renault-Nissan.

Reuters reported that because of problems at Peugeot-Citroen, GM had scaled back cooperation early into the alliance and turned down a government backed merger.

Bumpy road
The World Street Journal’s Heard on the Street columnist Renee Schultes had a more positive take.

“More capital could allow the auto maker to maintain investment needed to secure its competitive position long term. Peugeot is 50 per cent smaller by volume than its global peers putting it a disadvantage,” Schultes said.

But Schultes did add a note of caution.

“Peugeot has turned down a bumpy road,” Schultes said.

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