PSA completes share sale to raise funds for turnaround

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PARIS (Bloomberg) -- PSA/Peugeot-Citroen has completed the sale of 289 million new shares as part of a 3 billion euro ($4.1 billion) capital increase to help the money-losing carmaker finance a turnaround under new CEO Carlos Tavares.

Investors bought 1.95 billion euros of stock in the rights offering, PSA said on Wednesday. Chinese partner Dongfeng Motor and the French government each acquired shares in the sale to reach targeted stakes of 14.1 percent apiece. Demand exceeded supply by 45 percent, the company said.

PSA, which has been unprofitable since mid-2011, is tightening ties with Dongfeng to expand in China as demand in Europe revives from a two-decade low. Tavares's turnaround strategy includes investing in hybrid drives, reorganizing South American and Russian units and cutting the model lineup while turning the DS subbrand into a stand-alone marque.

"We're a little bit nervous that the capital increase is not enough to cover the cash burn," Kristina Church, a London-based analyst with Barclays said. "They need to continue cutting costs and considerably invest in new products in order to compete."

DS strategy

Tavares outlined plans in April to scale back the carmaker's lineup by almost half, to 26 models by 2022 from 45 vehicles now, and set up a separate business unit for DS, which was originally an upscale part of the Citroen brand. The strategy includes what PSA called an “aggressive” push into China, where the carmaker already operates factories jointly with Dongfeng.

“The whole PSA team and management is proud to be able to carry out our turnaround plan, knowing we have enough gas to run the race,” Chief Financial Officer Jean-Baptiste de Chatillon said in an interview at PSA‘s headquarters in Paris. “It’s a great satisfaction after what we’ve gone through the past few years.”

Cost cuts

The reorganization comes in addition to cost-cutting moves in the past two years that included closing a car plant near Paris, reducing the French workforce by 17 percent and disposing of the Citer vehicle-rental unit and a majority of the Gefco trucking division. PSA doesn’t need to sell its 52 percent stake in supplier Faurecia, the manufacturer’s only remaining large asset outside automaking, de Chatillon said.

“Faurecia remains far from the value of its peers, and we’re quite confident that there’s a potential for an increased valuation,” he said. “For Faurecia, which is not a strategic activity, we’ll make a decision that will be in the best interest of the shareholder depending on our investment needs.”

PSA’s long-term debt is rated four levels below investment grade by Moody’s Investors Service and Standard & Poor’s Ratings Services. The carmaker was able to cut cash consumption by 86 percent last year to 426 million euros, and PSA said in February that it’s planning on positive operational free cash flow by 2016 at the latest. The carmaker has a target of slashing financial costs 50 percent by that year from 650 million euros in 2013, de Chatillon said.

Partners’ purchase

Dongfeng and France spent a combined 1.05 billion euros in a purchase in April that initiated the capital increase. The two investors paid 7.50 euros a share in that transaction, while stock in the rights offering cost 6.77 euros a share. After the completion of the second sale, each will have invested 800 million euros for their stakes in the automaker.

The stock sale ended 118 years of control by descendants of founder Armand Peugeot as the family’s 25.5 percent holding fell to 14.1 percent, matching those owned by Dongfeng and the French state. Last month, Louis Gallois, a former head of the corporate forerunner of Airbus Group who also once ran French state railway SNCF, became the first PSA supervisory board chairman from outside the founding family.

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