GM in talks to buy 7% PSA stake, report says

PSA/Peugeot-Citroen may announce as soon as this week plans to sell a stake of about 7 percent in the French carmaker to General Motors Co. as part of a development alliance, people familiar with the matter told Bloomberg.

The deal would involve a standstill agreement by which GM would not take a greater holding in the Paris-based carmaker without permission, said the people, who asked not to be identified because the talks are private. PSA may offer additional shares through a rights issue as part of the transaction, the people said.

Separately, Reuters cited sources saying that GM would likely buy a stake of less than 5 percent. Any purchase by GM would be "purely symbolic" to cement the commercial alliance, a source told Reuters. At PSA's current market value of $4.8 billion, a 5 percent stake would be worth $240 million.

A GM-PSA alliance may include developing engines and building vehicles together in the region, a person familiar with the situation said last week.

For GM, an alliance would provide a means to lower operating costs at its loss-making European unit, Opel/Vauxhall, while PSA would gain much-needed access to international markets at a time when auto sales in Europe are sagging, sources said previously.

PSA, which is heavily reliant on the French and European markets, has been under pressure to find a partner to broaden its presence around the world and gain access to growth markets like Latin America, China and Russia.

An industry banker, who declined to be identified because he was not authorized to speak with the media, said: "The challenge for Peugeot is that it's not in the U.S. market, one of the world's largest, and its presence in China is growing but still small."

Analysts skeptical

The tie-up plan has met with some skepticism in the United States, with industry experts and analysts saying that for GM, the potential benefits from such an alliance are less clear.

PSA would bring well-regarded diesel engine and small engine technology to the table, but PSA is grappling with the same problems that Opel has and the planned tie-up does not help GM outside Europe, analysts said.

"Frankly we believe it will introduce complications at a very delicate time in its own restructuring," Guggenheim analyst Matthew Stover said last week. "In the grand scheme of things, GM has much more to offer PSA than the other way around."

Sources close to the talks said PSA wants this alliance more than GM does.

Analysts said it could take a decade to fully realize the benefits of the pact. They also said more steps would be needed to overcome the core problem for both automakers in Europe: overcapacity

PSA's 2011 sales in Europe plunged 8.8 percent to 1.68 million vehicles. GM's dropped 1.9 percent to 1.17 million. Auto executives expect deliveries in the region to shrink in 2012 for a fifth year.

Existing partnerships

On Tuesday, PSA said it would consult existing engine partners Ford and BMW about any new alliance with GM or another automaker.

"If there's any agreement that goes beyond our existing partnerships, each of those partnerships will have to evaluate what can be done," PSA industrial director Guillaume Faury told reporters at a briefing.

PSA produces gasoline engines and hybrid vehicle parts with BMW and diesel powertrains with Ford.

PSA's partners would have to allow existing agreements to "evolve as a function of whatever deal is signed", Faury said.

PSA CEO Philippe Varin said this month that the company was willing to investigate partnerships as long as they were in line with the group's strategy, including expansion outside Europe, and contributed synergies while maintaining PSA's independence.

PSA, Europe's second-biggest automaker after Volkswagen AG, announced plans Feb. 15 to sell 1.5 billion euros in assets to reduce debt, which has widened to 3.4 billion euros as profit and sales fell.

GM, which this month posted annual net income of $7.6 billion after dividends for 2011, is planning more cost cuts for its unprofitable European unit after the last turnaround plan failed to end losses there.

GM's European business, including the Opel brand, lost $747 million last year before taxes and interest. While that's an improvement from $1.95 billion lost in 2010, GM had planned to break even in the region until November, when it pulled back the forecast as the European outlook worsened.

PSA, whose carmaking division missed a target of breaking even in 2011, said Feb. 15 it will sell property as well as a holding in the Gefco trucking unit that has yet to be determined. The disposals include the Citer vehicle-rental unit that PSA sold to Enterprise Holdings Inc. on Feb. 1 for 440 million euros.

Earnings before interest, taxes and one-time gains or costs fell to 1.32 billion euros in 2011 from 1.8 billion euros a year earlier, PSA said this month. The company's deliveries globally fell 1.5 percent to 3.5 million vehicles in 2011, led by the drop in Europe.

Sources: Bloomberg and Reuters