PSA to decide on funds from Dongfeng, report says

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PARIS (Bloomberg) -- PSA Peugeot Citroen's board will meet on Sunday to decide on an investment of about 1 billion euros ($1.4 billion) from Dongfeng Motor Corp. and the French state, people familiar with the matter said.

Dongfeng, PSA's partner in China, and the French government would each contribute at least 500 million euros in the scenario under discussion, said the people, who asked not to be identified because the negotiations aren't yet complete. Dongfeng has agreed in principle to the structure of the deal and is unlikely to face regulatory hurdles at home, they said.

Dongfeng and the French state would each receive about 10 percent of the stock for their cash injection, one of the people said. PSA would later sell shares to bring the overall fundraising to 3 billion euros, the people said. A decision on the size of the rights issue is still under review, and the meeting this weekend may not lead to a definitive agreement, the people said.

A deal with Wuhan, China-based Dongfeng would represent a defining moment in the history of Europe's second-largest carmaker, whose fate has been intertwined with the Peugeot family since its founding in 1896 by Armand Peugeot. It also marks a shift in strategic emphasis after an alliance with General Motors Co. that included a 7 percent stake by the Detroit-based company didn't produce expected cost reductions.

The controlling Peugeot family, which has run the automaker for 118 years, is divided over whether to accept the agreement, the people said. The family owns about 25.5 percent of the Paris-based carmaker's stock and would probably end up with about 15 percent of the company after its holding is diluted through a capital increase, one of the people said.

Pierre-Olivier Salmon, a PSA spokesman, and Zhou Mi, a Dongfeng spokesman, declined to comment.

Investment for new models

The added funding would help PSA pay for new models and expand in growth markets outside its European home region, where auto demand has shrunk for the last six years. Dongfeng and PSA already operate three factories together in China, the world's largest auto market, with annual capacity set to rise by two-thirds to 750,000 vehicles by the end of 2015.

Dongfeng, established in 1969, is one of China's top four automakers. It builds passenger cars and commercial vehicles under its own brands as well PSA, Nissan, Kia and Honda models as part of joint ventures. In December, Dongfeng signed an agreement to make vehicles in China with Renault.

The talks with PSA are not the first time Dongfeng has weighed an overseas investment. Last March, the company withdrew from discussions to buy a stake in electric-car maker Fisker Automotive.

PSA said in December that the automaker will take a 1.1 billion-euro non-cash charge for 2013 due to worsening markets and unfavorable exchange rates in Russia and Latin America. The carmaker reported a first-half operating loss of 510 million euros in its automotive unit.

Europe drop

PSA's European deliveries fell 8.5 percent to 1.34 million vehicles last year, narrowing the group's market share to 10.9 percent from 11.7 percent in 2012, according to Brussels-based industry lobby group ACEA. That compares with a European sales decline of 0.8 percent at Volkswagen, the region's biggest carmaker, and a jump of 4 percent at Renault, which ranks third in the region's auto market.

GM disposed of its PSA holding in December, about 21 months after acquiring the stock for 320 million euros as the partnership formed. GM Vice Chairman Steve Girsky said when the stake was sold that the U.S. company's financial backing "is no longer needed," while the alliance "remains strong." Even so, the companies forecast that savings from the cooperation will amount to $1.2 billion by 2018, 40 percent less than the $2 billion originally predicted.

French funding

President Francois Hollande said this week that the French state hadn't been asked yet to buy a holding. "If we are asked to take a stake, it will be done with funds not from the budget, funds from disposals," he said. "That would allow us to do it without widening the deficit. We have reserves."

France this week sold a 451 million-euro stake in Airbus Group. That sale would let the government invest in PSA without impacting the overall budget, the people said.

PSA is also in the process of changing leadership, announcing in November that former Renault operations chief Carlos Tavares would take over as chief executive officer. Tavares joined PSA's management board on Jan. 1 and will replace CEO Philippe Varin, 61, later in this year.

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