PSA board backs cash injection by Dongfeng, France gov't
PARIS -- PSA/Peugeot-Citroen's board approved an outline deal to raise 3 billion euros ($4.1 billion) by selling stakes in the automaker to China's Dongfeng Motor and the French government.
The deal, if completed, would represent a defining moment in the history of the automaker, which has been controlled by the Peugeot family since it was founded in 1896. It would result in Dongfeng, the French government and the Peugeot family each holding 14 percent stakes in PSA, according to reports.
After a five-hour meeting on Sunday, PSA's supervisory board agreed to a two-stage recapitalization that would be evenly split between a rights issue to existing shareholders and a subsequent issue of additional shares on the market, Les Echos newspaper said on Monday in a report.
Later on Monday, PSA issued a statement confirming that the automaker is considering a 3 billion euros capital increase. It said under its preferred scenario, PSA would implement a capital increase reserved to Dongfeng followed by a rights offering in which Dongfeng would participate. The French government may also participate in these two capital increases on the same terms and conditions as Dongfeng, the statement said.
Les Echos said Dongfeng and the French government each would inject about 750 million euros to acquire 14 percent stakes at a price between 7.50 euros and 8 euros a share, diluting the Peugeot family's holding to 14 percent from the current 25 percent.
PSA would then hold a rights issue of about 1.4 billion euros for the rest of the funding. In addition, the Peugeot family would invest about 100 million euros to maintain its stake at 14 percent.
PSA CEO Phillipe Varin is seeking to finalize the deal by Feb. 19, which is when the automaker is due to announce its 2013 annual results.
According to French press reports, the Peugeot family was divided over the extent of its participation in the capital increase and the size of the stake sale to Dongfeng.
PSA Chairman Thierry Peugeot resisted a capital increase involving Dongfeng and the French state. He argued that the appointment of Carlos Tavares as PSA's next CEO and the improvement in Europe's car market would help the company to raise 3 billion euros entirely through a public rights issue. Tavares, formerly Carlos Ghosn's No. 2 at Renault, joined PSA on Jan. 1. He will succeed Varin, 61, later in this year.
Thierry Peugeot and his supporters also said the Dongfeng involvement will not solve the issue of PSA's small size and it could also make it more difficult for PSA to cooperate with other European automakers on joint projects. But his cousin, Robert Peugeot, who heads the family holding company, backed Varin's plan for Dongfeng to take a stake in PSA. Robert Peugeot's supporters were concerned that investors may not support a large rights issue while PSA continues to bleed cash.
Les Echos said Thierry Peugeot may be replaced as PSA chairman by Louis Gallois, former head of aerospace firm Airbus's owner, EADS. Gallois joined the PSA board last April as the French government's representative.
Analysts reacted skeptically to the proposed recapitalization.
Macquarie Group said today in a research report that the potential entry of Dongfeng and the French government as investors is likely to make other alliances for PSA "extremely difficult to achieve."
Florent Couvreur, an analyst with CM-CIC Securities in Paris, said: "Some investors are starting to wonder whether the deal with Dongfeng is going to happen at all. In any case, the new shares will be sold at a discount, which will dilute the capital and push the price of the shares down."
PSA has said it needs a cash infusion to raise funds for new models and expand in growth markets such as China. The automaker is expected to confirm next month that it burned through about 1.5 billion euros in cash last year in addition to restructuring costs.
PSA's deepening partnership with Dongfeng marks a shift in strategic emphasis after an alliance with General Motors Co., which included a 7 percent stake by GM in PSA, didn't produce expected cost reductions. GM disposed of its PSA holding in December.
"If we invest in Peugeot, it will bring benefits such as technology and other resources that will help us develop our own cars," Dongfeng General Manager Zhu Fushou said today in an interview in Beijing, declining to comment on any specifics. "Peugeot's main problem is its heavy reliance on Europe, which it should address by shifting focus to emerging markets."
Dongfeng is PSA's partner in an existing Chinese joint venture. The automakers opened their third joint assembly plant in China in July. PSA plans to have production capacity for 950,000 vehicles in China by 2015.
Dongfeng also builds passenger cars and commercial vehicles under its own brands as well as with Nissan, Kia and Honda. In December, Dongfeng signed an agreement to make vehicles in China with Renault.
Incoming CEO Tavares told unions last week that PSA needs to focus on returning to a positive free cash flow, better managing vehicle stocks and increasing its market share in Europe, according to sources familiar with the matter. Tavares plans to give his diagnosis on the state of PSA in about 100 days and is likely to take over as CEO before then, the sources said. French media said Tavares might take on the CEO role as early as Feb. 19.
PSA shares closed at 11.48 euros on Friday, valuing the company at 4.1 billion euros. The company's shares fell to 10.21 euros at the close of trading today in Paris, the steepest decline since Dec. 13.
Bruce Gain, Reuters and Bloomberg contributed to this report