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Peugeot-Mitsubishi Alliance Proposal Draws Fire

“There Is No Other Alternative” Hardly A Ringing Endorsement
Mitsubishi’s Battery Car Expertise Impresses Though
Could This Help Peugeot’s Long Promised Return To The U.S.?

News that Peugeot of France is negotiating a tie-up with Japan’s Mitsubishi Motors hasn’t thrilled investors who view the Japanese company as weak, although they are impressed by its electric car expertise.

Citigroup Global Markets likes Mitsubishi’s electric car achievements, but says the main reason Peugeot sought an alliance with Mitsubishi was because there simply weren’t any other candidates.

“Political opposition to European plant closures has stymied prospects for a European alliance. Of the global players, Toyota, Honda, Hyundai and Suzuki look too big. Nissan and Mazda already have alliance partners, leaving only Mitsubishi,” said Citigroup analyst Philip Watkins in a report.

Deutsche Bank wasn’t impressed either.

“Overall, we do not expect any positive impact on Peugeot’s bottom line in the foreseeable future from this tie-up,” it said.

The Wall Street Journal’s Heard on the Street column was less circumspect.

“A financial car-wreck for so many years, Mitsubishi Motors seems to have caught another investor’s eye,” said the column’s James Simms, pointing out that the company has yet to pay a dividend on its preferred stock because it has retained losses on its balance sheet of $9.3 billion.

Electric bright spot
The Financial Times’ Lex column wasn’t excited by Mitsubishi’s finances, but also liked the electric car’s promise.

“Mitsubishi Motors has a balance sheet only a mother could love. Net debt to earnings before interest, tax, depreciation and amortisation was over eight times in March. The profit and loss account is not much prettier. One notable bright spot is electric cars – in July it became the world’s first automaker to being mass production,” Lex said.

Mitsubishi is weak in Europe, but has a strong Asian presence and something of a toehold in the U.S. market. Mitsubishi already makes cars for Peugeot – the Peugeot 4007 SUV and the Citroen C-Crosser are Mitsubishi Outlanders in disguise. Mitsubishi is ahead of the battery powered car game, already selling the iMiEV. The upcoming 2010 battery cars the Peugeot iOn and Citroen C-Zero are iMiEVs with different badges.  Peugeot and its Citroen subsidiary specialise in small, fuel-efficient gasoline and diesel cars. The two companies are also collaborating in Russia, where they are building a vehicle plant expected to start producing in 2011.

Peugeot investors have been concerned about the company’s over-concentration on European sales. Peugeot CEO Philippe Varin unveiled a three-year plan last month to boost the heavily loss-making company’s margins by €3.4 billion with more cost cutting, and increasing sales in emerging markets.

First major structural change
The discussions will centre on the possibility of Peugeot buying between 30 and 50 per cent of Mitsubishi, according to press reports in Japan. Combining the two companies would create the world’s 6th biggest in terms of sales, and would be the first, major structural change to emerge from the current auto market slump. Peugeot-Citroen is currently 8th largest in terms of sales,

Citigroup’s Watkins said any deal should be limited to a minority stake by Peugeot in Mitsubishi. Taking a 50 per cent stake would be risky for Peugeot because of Mitsubishi’s weak balance sheet. This would also jeopardise the Peugeot family’s position as a controlling shareholder.

“Mitsubishi still seems likely to be the main beneficiary of any tie-up, in our view, given Peugeot-Citroen’s superior product offering and scale. The main win for Peugeot-Citroen would most likely be Mitsubishi’s more global presence, with developed markets representing only 40 per cent of volumes, and with its much stronger Asian presence. This compares with Peugeot’s still nearly 65 per cent exposure to Western Europe,” Watkins said.

According to Global Insight analyst Ian Fletcher the deal with Mitsubishi could mean a return to the U.S. for Peugeot, which it left almost 20 years ago, and some interesting projects.

Enticing mix
“(a deal) could allow it to secure a stronger foothold in the North American and Asian markets, while for Mitsubishi it would increase its long-term security. There is also the enticing mix of Peugeot’s diesel technology and Mitsubishi’s electric expertise, which would offer each automaker opportunities in these growing fields as well as potential to pool their knowledge to create diesel-electric hybrids,” Fletcher said.

But investors’ joy may be tempered a bit when they remember that a previous Mitsubishi alliance with Mercedes crashed and burned, leaving the Japanese company with a huge debt load. Mercedes bought a 34 per cent stake in 2000 only to cut and run in 2005.

Citigroup’s Watkins sees some niche advantages for Peugeot, but that’s about it.

“Mitsubishi does seem to have made progress in electric vehicles and a deeper strategic alliance is also likely to benefit Peugeot in this area. But synergy potential, in terms of product/platform sharing, distribution and purchasing still seems relatively limited to us, with purchasing savings offering the best prospect. Though even here, the low degree of commonality between products suggest that savings will likely be relatively long term in delivery.” Watkins said.

Beggars can’t be choosers
The bottom line seems to be that the proposed deal reflects the old saying “beggars can’t be choosers”.

“If geographical diversity is all that Mitsubishi really offers the question has to be why it, rather than one of the several other manufacturers with a global presence, is not involved in discussions. The answer seems to be simply that there is no alternative partner that isn’t already in an alliance…..,” Watkins said.

Neil Winton – December 15, 2009

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