Dongfeng confirms talks with PSA but says no deal reached

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SHANGHAI -- China's Dongfeng Motor Group confirmed that it had held talks with PSA/Peugeot-Citroen about a potential investment in the French carmaker, but said no agreement had yet been reached between the two groups.

Earlier today, Dongfeng had asked for a halt on trading in its shares pending an announcement concerning unspecified "inside information," but gave no further detail. Dongfeng spokesman Zhou Mi said he was not aware of the reason behind the suspension.

The share trading halt came after sources in France told Reuters on Friday that PSA negotiators and French government officials would be in China this week, for what they hoped will be a final round of negotiations on the tie-up with the China's second biggest automaker.

The deal would see Dongfeng and French government take matching stakes in the PSA through a 3 billion euro ($4.1 billion) share issue. The deal has caused discord among members of the founding Peugeot family, currently the company's biggest shareholder, and protests from minority shareholders.

The draft deal would see PSA stakes sold to Dongfeng and the French government in a reserved capital increase, followed by a rights issue in which all shareholders could buy more stock. The proposed combination is likely to swell PSA's board from the current 15 members to 22, according to a source close to the talks: three for each major shareholder, three for the staff and 10 independents including a new chairman.

About 1 billion euros of the new financing is likely to come from the reserved capital increase and the remaining 2 billion from the rights issue, one source said.

The industrial details of the tie-up plan, agreed early on, have so far been kept largely under wraps, prompting some concern about the deal rationale even among supporters. "You don't go into a capital increase without a story to tell, and that's what we're missing at this stage," a source close to PSA said.

The company has said it is considering a fourth Chinese factory with Dongfeng as well as an exclusive agreement to develop its HybridAir transmission technology.

"It's a very good opportunity for them [Dongfeng] to have a tighter, closer relationship with a developed country's automaker," said Jeff Chung, a Hong Kong-based analyst at Daiwa Securities Group. ''That will help them to diversify geographical risk, product risk and also right now given that they have a lot of cash, Dongfeng Motor still has an upper hand in these negotiations."

PSA said in January that it's targeting a formal deal with Dongfeng and France by the time the company reports full-year earnings on Feb. 19. The company hasn't specified the size of the potential stakes Dongfeng and the French state may buy.

"If we invest in PSA, it'll bring benefits such as technology and other resources that will help us develop our own cars," Dongfeng General Manager Zhu Fushou said in an interview last month in Beijing. "PSA's main problem is its heavy reliance on Europe, which it should address by shifting focus to emerging markets."

PSA probably lost money for the second year in a row in 2013, according to analyst estimates, as industrywide car sales in Europe reached a two-decade low. The company's financing arm is already being kept afloat by a 7 billion euro loan guarantee from the French state.

Bloomberg and Reuters contributed to this report

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