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Peugeot Restructuring Seen As Ineffective, Late

Peugeot Closes Plant, Confirms Big Loss, Cash Flow Problem
Will Government Intervene, Or Unions Act Up?

Estimates Of Loss For 2012 Hit €1 Billion

Peugeot-Citroen finally bit the bullet and closed the Aulnay plant, but investors reckon that the financially-troubled car maker needs to take more drastic action to keep afloat.

The action could fire angry unions into potentially debilitating action, while any degeneration in the company’s condition could lead to another French government bailout.

Peugeot-Citroen announced it would close the Citroen C3 Aulnay plant near Paris in 2014 eliminating 6,500 jobs, would axe another 1,500 jobs across the organisation, and revealed it lost €700 million in the first half and had been burning cash at the rate of €200 million a month since the middle of last year. The cash burn is unlikely to stop until 2015.

The Wall Street Journal and the Financial Times felt this was a slap in the face for new French President Francois Hollande.

“Peugeot has slammed the brakes on French President Francois Hollande’s political honeymoon,” said the Journal.

The FT’s reaction was a little less mature.

“Having fun yet, Francois Hollande?” the FT’s Lex column said.

Some experts wondered whether Peugeot-Citroen’s plight might force the French government to step in with money to bail it out. Some  investors thought that even though the action taken by the company was harsh and difficult, it wasn’t enough to make much difference to its future, not least because most of the actions won’t take effect until 2014.

“The measures announced should allow European operations to reach an operating breakeven in 2014, if market conditions do not deteriorate further. But this is not enough in the current environment to generate a positive net result, in our view,” said Deutsche Bank analyst Gaetan Toulemonde.

Others thought the actions amounted to small progress but were wary of possible union action.

Relatively insignificant
“Though welcome, this is also relatively insignificant in the context of automotive revenues of €40 billion. Aulnay represents only four per cent of worldwide production too. Our cautious response also reflects uncertainties on how labour unions might react and the cash impact of any potential disruption,” said Philip Watkins of Citi Research.

J.P.Morgan recently raised its Peugeot-Citroen loss estimate for all of 2012 to €633 million from a previous expectation of €615 million. Last year the automotive division lost €92 million.

Citi’s Watkins has said Peugeot-Citroen’s Auto loss might hit €920 in 2012, and saw red ink in 2013 too.

Commerzbank analyst Sascha Gommel raised his loss estimate for the Auto division to €1 billion in 2012.

Ratings agency Moody’s Investors Service said it might cut its appraisal of Peugeot-Citroen’s debt.

“Peugeot Citroen faces tremendous operational stress with financial metrics, ………. likely to deteriorate further in the current year and unsustainably high cash burn from its automotive operations,” Moody’s said.

Moody’s didn’t think the deal with General Motors would help much either, although it might in the medium to long term.

“Moody’s also notes that a number of past mergers and alliances in the automotive industry have very rarely achieved the anticipated competitive advantages and improved performance,” it said in a statement.

GM has a seven per cent stake in Peugeot-Citroen in a deal aimed at cutting costs and merging some production.

Peugeot-Citroen previously announced asset sales of €1.5 billion and launched a €1 billion rights issue. Next year it must repay €1.5 billion of its debt while its restructuring plans could cost €1 billion, according to the Journal.

Government intervention?
The French government might feel it must intervene.

“That raises the spectre of the French government having to bail out Peugeot again, as it did with a €3 billion loan in 2009. Both Peugeot and Mr Hollande may have more bitter pills to swallow,” the Journal said.

Neil Winton – July 15, 2012

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