GM Alliance Scaled Back, But The Deal Continues.
“We remain positive on (Peugeot) as we believe in a turnaround of the core business”
Investors might have to wait until the end of March to find out if Peugeot-Citroen can agree a deal with China’s Dongfeng Motor Group which would provide crucial financial help, but meanwhile General Motors decided to cash in its seven per cent stake in a scaled back alliance.
Financially troubled Peugeot confirmed rumours that it was in talks with various potential partners including Dongfeng, although details of any possible arrangement still remain to be decided. This is expected to include a €3 billion capital increase which would be subscribed to by Dongfeng and the French government equally, giving both about 20 per cent of Peugeot. Negotiations could continue until the end of the first quarter, Peugeot said.
Peugeot-Citroen also announced it would take a €1.1 billion non-cash charge because of problems in Russia and Latin America. The company said it still expected negative free-cash flow of €1.5 billion for 2013 and break even at the end of 2014. After news broke about the Dongfeng talks, GM announced that it would sell its seven per cent stake in Peugeot-Citroen, and that the alliance would be scaled back.
Peugeot-Citroen said the benefits of the alliance wouldn’t reach the original target of $2 billion each. This would now reach only $1.2 billion for both sides, and two years later in 2018.
According to International Strategy and Investment analyst Erich Hauser the alliance will now focus on a Peugeot 3008/Opel Zafira using a Peugeot platform to be built by 2016 in Sochaux, France, a C3 Picasso/Opel Meriva built on a GM platform in Zaragoza, Spain, and a small van.
No great benefits
“Given that almost all of these vehicles will enter production in 2016 or later, we think it is sensible not to assume great benefits from the alliance on variable costs before this point in time,” Hauser said.
Hauser pointed out that Peugeot already produced cars with Toyota, engines with BMW, diesel engines for Ford, all without equity tie-ups, and therefore the lack of one with GM shouldn’t inhibit the alliance.
Fitch Ratings, which has doubted Peugeot’s ability to reach its financial targets, said although raising fresh capital would reduce net debt, it did not address key challenges of weak profits and negative free cash flow.
“It will do little to solve fundamental challenges on revenue growth and cost structure, including capacity utilisation, raw materials and currency movements,” said Fitch Ratings senior director Emmanuel Bulle.
“The capital increase of more than €1 billion undertaken in 2012 has been absorbed rapidly and did little to curb cash burn and the deterioration in key credit metrics,” Bulle said.
News of the possible deal with Dongfeng and GM’s share sale saw Peugeot’s tumble more than 10 per cent, but some investors were still quietly confident that the French company could turn itself around.
“We remain positive on the stock as we believe in a turnaround of the core business,” said Commerzbank analyst Sascha Gommel.
Peugeot-Citroen’s automotive division lost €510 million in the first half, and is expected to loser close to €750 in the second half of 2013. The company burned through €3 billion in cash in 2012.