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Talk Of Alliances Focuses On Troubled PSA Peugeot-Citroen

Finances Look Rocky, As Bottom Line Points To Losses Again In 2012
But Some Investors Think Things Can’t Get Worse And Say Buy Shares

PSA Talks The Alliance Talk, But Eschews The Walk

When Fiat CEO Sergio Marchionne’s made his plea for more mergers in Europe to combat Volkswagen’s hegemony, all eyes turned to financially troubled PSA Peugeot-Citroen as a prime candidate.

PSA is having a hard time, with investment bankers expecting a loss of €500 million in 2011 and the same again in 2012. That’s not as bad as GM Europe, which Morgan Stanley expects to lose €760 million in 2012. But PSA saw its Western European market share dive to 11.7 per cent in 2011 from 12.6 per cent in 2010 as sales fell 8.8 per cent to 1.6 million, according to AID figures.

After Marchionne’s call for consolidation in Europe at the Detroit Auto Show, PSA said it was interested in a deeper alliance, then promptly laid down conditions that would make it impossible.

According to Deutsche Bank analyst Gaetan Toulemonde, PSA insists that any alliance must not impinge on its independence, and the underlying rationale must be to correct its crippling reliance on Europe.

“Since the group is too dependent on Europe and most of the future world market growth will come from emerging markets, a partner can only be non-European. And to allow the group to remain independent – the Peugeot family controls 30 per cent of the number of shares and 45 per cent of the voting rights – with a low €3 billion market capitalisation, the potential partner can only be a tier 2 player,” Toulemonde said.

That rules out the initial favourite, a deal with Fiat, and suggests the possibility of an alliance with the likes of Chinese owned Volvo, which is unlikely to strike fear into the heart of VW.

Loss-making prospect
Meanwhile, investment bankers agree that PSA’s financial condition is perilous.

”With volume momentum slowing in key markets, we struggle to see what will drive earnings improvement in 2012. We expect the Auto division to remain loss-making for the full year,” said Berenberg Bank auto analyst David Cramer.

“Operating losses in the second half combined with more difficult working capital condition, such as failure to clear inventory, should see PSA burn in excess of €1.3 billion in free cash flow in the second half. While gross liquidity should remain comfortable, we expect PSA to end the year with net industrial debt in excess of €3 billion, higher than the level reached in 2008, likely prompting debate as to whether PSA requires any measures to strengthen its balance sheet,” Cramer said.

Worst performer, so buy
Ironically, all this bad news persuades Cramer to advise his clients to buy PSA shares, on the grounds that things can’t get any worse.

“As the worst performing European manufacturer over the past 12 months, valuation (of the shares) looks compelling,” Cramer said.

UBS Investment Research retains a “neutral” stance on PSA’s shares, worrying that Peugeot would find it difficult to cope with a sudden deterioration of European car demand, and anticipating a €500 million loss in 2012. UBS points out that overdue rationalisation and factory closures have been delayed because of the upcoming Presidential election.

If the Socialist party’s Francois Hollande wins in April, that’s unlikely to spur remedial action.

“PSA shares appear to be pricing a dire outlook, but the company still qualifies in our view as ‘too liquid to fail’,” said UBS in a report.

Investors will remember that Fiat and PSA held talks on an alliance in 2009, while the tie-up with Mitsubishi of Japan collapsed in 2010.

Meanwhile PSA head of brands Frederic Saint-Geours said the overall European car market will fall three per cent in 2012, with more of this coming in the first half. PSA retains its goal of achieving 50 per cent of its sales outside Europe by 2015, and two-thirds by 2020.

Neil Winton – January 25, 2012 

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