PSA begins stock sale after Dongfeng, France buy stakes

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PARIS (Bloomberg) -- PSA/Peugeot-Citroen is offering stock to investors at 6.77 euros a share after selling stakes to Chinese partner Dongfeng Motor and the French state at a higher price.

Dongfeng and France are paying 7.50 euros a share for new stock in a 1.95 billion-euro ($2.7 billion) rights offer that is part of the automaker's 3 billion euro capital increase to help fund expansion outside its European home markets.

The lower price for the rights offer is further negative news for the company, following an "underwhelming Back in the Race presentation on April 14 and disappointing first-quarter revenue last week," Credit Suisse Group analyst Mike Dean said today.

Erich Hauser, a London-based automotive analyst at International Strategy & Investment Group, said the price was lower than he expected given Dongfeng's and France's commitment. "It could just be that the banks said: 'I'm not sure if I can sell all the shares at 7.50, but I'm sure I can sell them all at 6.77.' "

Dongfeng and France separately bought about 1.05 billion euros of new stock and will acquire more in the wider sale, with a target of reaching a 14 percent stake each.

PSA is teaming up with Chinese carmaker Dongfeng to expand outside Europe, where demand is recovering from a two-decade low. "They need a lot of money, especially for the new developments in China with Dongfeng," Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen in Germany, said. "If they can make it, it’s a sound road for the future."

PSA fell as much as 9.6 percent to 11.79 euros, the steepest intraday drop since Jan. 20, and was trading down 8.9 percent at 11.87 euros as of 9:10 CET in Paris. That pared the stock's gain this year to 26 percent, valuing the carmaker at 4.21 billion euros.

Investors can apply to buy seven new shares for every 12 shares already held, PSA said. The subscription period will be May 2 to 14, with the new stock entering trading May 23.

Peugeot family

The reorganization brings to an end the Peugeot founding family's control of the 118-year-old company, with the relatives' holding falling to 14 percent from 25.5 percent.

Dongfeng, the French government and the Peugeot family will each get two seats on the PSA board, which is scheduled to meet today with Louis Gallois, a former head of the corporate forerunner of Airbus Group NV and of French state railway SNCF, as its new chairman.

PSA CEO Carlos Tavares, who took over a month ago, is also working to reduce costs and streamline product offerings to focus on more profitable models.

PSA has been cutting production and jobs to stem losses as Europe's auto market declined for six straight years. Tightening ties with Dongfeng is part of PSA's strategy to expand in China, the world's largest auto market. Dongfeng, set up in 1969, already operates three factories in the country with its French partner.

PSA reported a 177 million euro operating loss in 2013, its second unprofitable year in a row. Cash consumption was cut 86 percent to 426 million euros, and the company said in February that it's planning on positive operational free cash flow by 2016 at the latest. First-quarter revenue rose 1.9 percent to 13.3 billion euros as deliveries jumped 16 percent in Europe and 18 percent in China, PSA said on April 25.

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