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Peugeot-Citroen Talks With Opel-Vauxhall Fail To Excite

Peugeot Link With Mazda, Maruti or Suzuki favoured
At Least Talks Show Peugeot-Citroen Knows It Has A Problem

GM Might Take Small Stake In Peugeot

Almost as soon as news hit that Peugeot-Citroen and Opel Vauxhall might form some kind of an alliance, the nay-sayers broke cover saying it wasn’t a smart to link two huge loss makers which had overlapping businesses rather than complimentary ones, and were based mainly in recession- threatened Europe.

A couple of weeks later, it was still hard to find any supporters of the idea, aside from the agreement that yes, collaboration on a few projects would save money over time, but not much.

It would make more sense for Peugeot-Citroen to make overtures to a company like Mazda, or set up an alliance with Maruti of India and Suzuki. Tata Motors was another possibility, according to Morningstar Equity Research of Chicago.

“Peugeot’s talks with GM: going the wrong way on a one-way street,” said Morningstar analyst Richard Hilgert in a report.

“Peugeot and Opel/Vauxhall both need to reduce head count and rationalize capacity. GM wants to grow its Chevy brand in Europe as a low-priced entry while pushing Opel and Vauxhall more upscale. From our perspective, an alliance between Peugeot and GM would not enable either company to benefit from the real cost savings each needs to achieve in Europe, nor would it significantly improve GM’s ability to grow the Chevrolet brand in the region,” Hilgert said.

Any attempt to rationalise capacity between the two companies was doomed to failure because it was politically impossible. GM doesn’t need Peugeot technology and vice-versa, but both need volume to fill their  plants, Hilgert said. GM should stick with its plan to take Opel-Vauxhall upscale and grow Chevy.

More suitable Mazda
“Peugeot needs more comprehensive cost synergies than an alliance with GM would provide. In our opinion, Mazda would make a more suitable partner. We also like the idea of a Peugeot-Maruti-Suzuki alliance. Tata Motors could be another possibility,” Hilgert said.

Deutsche Bank analyst Gaetan Toulemonde wasn’t overly enthused about a possible deal either, saying synergies would take years to achieve and might be lost as Peugeot-Citroen and Opel-Vauxhall chased sales in the same markets.

“GM’s current problems will most likely remain the responsibility of GM, PSA’s problems will remain the responsibility of PSA,” he said.

According to Emmanuel Bulle, analyst with Fitch Ratings, the difference in size between the companies prevented anything like a full merger, but a cross-shareholding similar to that between Renault and Daimler might make sense. Press reports suggested that GM might take a stake in Peugeot from between under five per cent or up to seven per cent.

Short-term
Bernstein Research of London analyst Max Warburton said the kind of deal apparently talked about between GM Europe and Peugeot would only be short-term.

“It might work in the end but a loose alliance could only be a temporary solution,” Warburton said.

“Something needs to happen in European autos given chronic overcapacity, terrible pricing and near-zero gross margins in small cars. But putting European auto companies together, while logical on paper or power-point, is incredibly hard to execute and to make functional,” Warburton said.

Together the companies would have close to 20 per cent European market share, putting them very close to the leader Volkswagen of Germany. But the barriers to these companies making money for years, including political influence stopping rationalisation, poor brands and pricing, would not be addressed.

IHS Automotive analyst Ian Fletcher also thought a possible loose alliance wouldn’t achieve much.

“While an alliance may go some way towards reducing the investment required by each company in its core products, they will still need to look at ways of making their production bases more efficient, something which each are likely to have to deal with alone,” Fletcher said.

Losses
Peugeot already makes diesel engines for Ford and Jaguar Land Rover, and gasoline engines for BMW and Toyota. In the last half of 2011 Peugeot-Citroen’s car operation lost about $650 million. GM Europe lost $700 million in all of 2011.

Citigroup Global Markets probably had the most enthusiasm for the news, but that was really limited to the fact that Peugeot-Citroen was actively seeking to address problems.

“Investors, we believe, are not happy with the status quo at PSA. Alliances provide the potential for this to change and though there are uncertainties on how current talks might progress and reasons to doubt whether overcapacity issues could be addressed by any potential GM tie-up, we still expect the market’s near-consensual gloominess on PSA’s prospects to improve,” said Citigroup analyst Philip Watkins.


Neil Winton – March 1, 2012

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