GM gives PSA backing for Dongfeng deal

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PARIS -- PSA/Peugeot-Citroen has won General Motors' backing for a tie-up with China's Dongfeng Motor Group, the French automaker said today, adding that GM and PSA have lowered the savings goals for their scaled-down European alliance.

As part of changes to the partnership, GM, which owns 7 percent of PSA, agreed to vote in favor of an agreement between PSA and a new partner as long as GM's alliance with the French carmaker would still be supported. PSA and GM also agreed not to end their partnership if fewer projects than initially planned were completed.

PSA is pursuing a deal with Dongfeng and the French state that would be underpinned by a capital increase, a source told Reuters, adding that PSA's board had approved a draft deal including a 3.5 billion euro ($4.8 billion) capital increase at a 40 percent discount on the company's current share price.

The hefty discount reflects worsening conditions and currency headwinds for the carmaker, the source said.

PSA's shares fell as much as 8 percent to 10.59 euros and was down 4.7 percent as of 9:04 a.m. in Paris trading. The stock has doubled this year, valuing the company at 3.9 billion euros.

Philippe Varin, PSA's departing CEO, said the French carmaker is exploring a deeper relationship with Dongfeng, its existing partner in a Chinese joint venture. Discussions with Dongfeng are at "preliminary stage," with no guarantee that they will conclude successfully, PSA said in a statement on today. "There is no agreement on the terms of a potential operation."

Separately, a PSA spokesman contact by Automotive News Europe would neither confirm nor deny that the automaker is planning to offer a stake to the French government.

20% stakes for Dongfeng, France

The source, however, told Reuters that the parties will enter final negotiations on the outline deal, which would see the French state and Dongfeng take matching 20 percent PSA stakes, in a capital hike priced below 7 euros a share. Dongfeng and the French state would get their stakes via a reserved share sale, the source said.

Dongfeng declined to comment on the tie-up talks but acknowledged that "feasibility studies" were underway with PSA. "Any fresh signs of a worsening financial situation at PSA would add to our prudence," Dongfeng investor relations official Song Hefeng said.

PSA and Dongfeng have been in talks for months to extend cooperation to other Asian countries, backed by a multibillion-euro share issue.

GM is backing a PSA stake purchase by a third party even though such a deal would seriously dilute its 7 percent stake in the French automaker.

In addition, the founding Peugeot family would lose control as its stake would be diluted from 25 percent to 15 percent even after acquiring some new stock in the rights issue, the source told Reuters.

The effect would be even more dilutive for any other existing investors that turn down the chance to buy new shares.

PSA hopes to conclude the deal in January or February, the source said.

Changing alliance

Also today, PSA and GM trimmed their 2018 savings goal for their 22-month-old European alliance. Both companies said they now expected an evenly split $1.2 billion in annual cost savings by 2018, a 40 percent reduction from the $2 billion initially promised.

That reflects the decision announced in October to cancel production plans for a common small car family, PSA Chief Financial Officer Jean-Baptiste de Chatillon told reporters.

But joint development and production of compact and small minivans will continue, the companies said.

Writedown

PSA, one of the carmakers worst hit by the Europe's economic slump, also said today it would need a 1.1 billion euro ($1.52 billion) writedown at its ailing overseas operations. The 200-year-old company is cutting jobs and plant capacity to try to halt massive losses within two years.

The impairment, following a similar 4.7 billion euro hit on 2012 earnings, reflects weaker currencies and poor sales outlooks in Russia and Latin America, CFO Chatillon said.

PSA's plant in Kaluga, Russia, is among production investments "whose book value is no longer covered by future cash flows," Chatillon said on a conference call. "This will impact group operating income."

PSA's automotive division recorded a 510 million euro operating loss in the first half, before one-off adjustments. The company nonetheless reiterated its 2013 goal of halving last year's negative 3 billion euro operating cash flow.

Reuters, Bloomberg and Bruce Gain contributed to this report

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