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Peugeot Family Said Ready To Cash In – Or Is This A Ruse?

Some Say Family Wants GM Help, Others See Attempt To Justify Cuts.

“(GM) buying more deeply into the Peugeot morass would represent the triumph of hope over intelligence and experience”.

Peugeot-Citroen was basking in some rare good news about the viability of its recovery from crippling losses when news broke that the family owners might be seeking to give up control by combining with General Motors’ Opel-Vauxhall, or if that failed, seek a deal with Dongfeng Motor Group of China.

This speculative story from Reuters, based on unnamed sources, spurred other theories that the news was in fact a political move to soften up the French government into accepting the need for more production and job cuts at Peugeot. If these unpalatable cuts weren’t made, the theory went, control might be ceded to the Americans or Chinese and the long-term destiny of one of France’s highest profile companies might slip into foreign hands.

Dongfeng is Peugeot’s production partner in China.

Deutsche Bank reckoned this was an attempt by the family – which owns 25 per cent of the equity and 38 per cent of the votes – to persuade GM to raise its seven per cent stake.

“We see it as a message from the family to force GM to take a more radical decision on the future of Opel/PSA (Peugeot-Citroen) with the hope that GM can offer a decent exit route for the family,” Deutsche Bank analyst Gaetan Toulemonde said.

A couple of weeks ago GM CEO Dan Akerson said the company had no plans to raise its stake in Peugeot, although it left itself some wiggle room.

“We don’t have any intention of investing additional funds into PSA at this time. If we see something changes, we’ll evaluate that,” Akerson said.

Cost cutting too
When GM announced it had bought a seven per cent stake in Peugeot in February 2012, the companies unveiled plans to produce a small petrol engine, and develop three new vehicles together. There was a cost-cutting plan too, which would yield $2 billion annually in purchasing savings by 2016.

Morgan Stanley, long-term advocate that GM dump its loss-making Opel-Vauxhall subsidiary, wondered if the French and American companies could take their alliance to the next level. Morgan Stanley’s Adam Jonas said Opel can achieve break-even in a good year, loses around $2 billion in a bad year and loses $1 billion in an average year. GM’s target of breakeven by mid-decade looks realistic.

“However, we do not believe breakeven would be sustainable without further costs reduction or collaboration with a partner,” Jonas said.

Better off out
Jonas reckoned that key changes at Opel in the last nine months may make a deeper collaboration with Peugeot more realistic, but still maintained GM would be better off without Opel.

“Even our worst case “sell” outcome is better than any “keep” outcome. At this point we struggle to envision a scenario where GM achieves a positive value for Opel. Investors should expect GM to have to pay to make it go away,” he said.

Opel-Vauxhall has lost $18 billion since 1999.

Peugeot-Citroen’s automotive division is no slouch in the loss-making arena either and is expected to report operating losses of €740 million in the first half of 2013. Peugeot-Citroen reported a net loss of €5.01 billion for 2012 after write-downs, compared with a net profit of €588 million in 2011. The automotive division reported an operating loss of €1.5 billion for 2012. Moody’s Investors Service said it expects the operating loss to reach €1.5 billion again in 2013, and this could worsen if European sales weaken further or pricing pressure intensifies.

Peugeot-Citroen has pledged the automotive division will break even by the end of 2014. The company has announced factory closures and last year sold assets worth €2 billion and a €1 billion rights issue. The French government has already intervened to back a loan of €7 billion to Peugeot-Citroen’s bank.

Even if Peugeot meets its recovery targets it is likely to need another capital injection, and for this to succeed, potential investors will want to see a more convincing long-term strategy. An uprated combination with GM would be a persuasive factor.

Good news
And the month started so well for Peugeot.  Peugeot CEO Maxime Picat told the Automotive News Europe Congress that it was doubling production of the new 2008 small SUV to 10,000 a month.

Then Deutsche Bank’s Toulemonde said he believed that the worst may now be over for Peugeot despite a current worsening financial situation. He was more confident in a sharp rebound next year. And recommended investors hang on to their Peugeot shares.

Morgan Stanley also was looking more favourably on Peugeot, saying it was a key beneficiary of its improved outlook for Western Europe where it now sees sales falling four per cent in 2013.

Meanwhile in Detroit, the feeling was that GM should avoid getting more deeply involved with Peugeot.

In a column headed “Peugeot rescue too risky for GM”, Detroit News columnist Daniel Howes warned against a deal.

Peugeot morass
GM shouldn’t, (get more involved with Peugeot) unless the new top brass is eager to repeat the mistakes of its predecessors,” Howes said, pointing to failed foreign forays with Isuzu, Suzuki, Subaru and Fiat.

“……can GM profit by doubling down on Europe’s sickest volume automaker? Not easily. Buying more deeply into the Peugeot morass would represent the triumph of hope over intelligence and experience. Even worse, GM would be acquiring politically charged complications in France and Germany, just as the turnaround of its chronic European money loser – Adam Opel AG – begins to show the benefits of new management and a solid workout with improving financial results and growing market share in an otherwise dismal market,” Howes said.

 Neil Winton – July 1, 2013


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