PARIS -- PSA/Peugeot-Citroen said it will carry out a 1 billion euro ($1.32 billion) capital increase to fund its alliance with General Motors Co.
GM will pay about 320 million euros for a 7 percent stake in PSA, making it the second-largest shareholder of the Paris-based company after the Peugeot family.
PSA said the capital increase would offer 16 new shares for an existing 31 shares at a subscription price of 8.27 euros per share from March 8-21. The Peugeot family and GM has committed to take 31 percent of the shares issued, PSA said.
"This will allow us to accelerate our international expansion and our move into higher-end models faster than we would have been able to do on our own," said Jean-Baptiste de Chatillon, PSA's chief financial officer, said on Tuesday.
PSA said it would not pay a dividend for 2011 because it wanted to "give priority to allocating financial resources to the group's development."
The Peugeot family has committed to exercise 32.8 million preferential subscription rights, putting in a total of roughly 140 million euros. After the capital increase, the family will hold 25.2 percent of the capital and 37.9 percent of the voting rights.
The price offered in the capital hike represents roughly a 42 percent discount from Peugeot's closing price of 14.21 euros on Monday.
Asked about the discount, de Chatillon said it was within normal ranges for a rights issue that would last roughly two weeks.
Analyst opinion was divided on the discount with one London-based analyst calling it "very steep."
"I suppose that's the price to get it underwritten," he added.
But Gaetan Toulemonde analyst from Deutsche Bank, argued that many rights issues in the two years had been done with such discounts, pointing to a similar one done at a roughly 25-30 percent discount by tire maker Michelin in late 2010.
"The environment for the auto space is probably a little worse in terms of outlook, overcapacity and so on," he said.
The capital hike is being done as part of the alliance announced by the two companies on February 29, which aims to save $2 billion via pooling purchasing and research and development, as well as building vehicles on shared platforms.
The agreement also calls for at least four products to be manufactured within four years or planned for production within the following 18 months, GM said in a regulatory filing with the U.S. Securities and Exchange Commission on Monday.
The term of the pact is 10 years, with automatic renewal periods of three years, GM added.
The alliance can end early if one of GM's competitors buys 10 percent or more of PSA stock, either directly or indirectly, GM said in the filing.
The deal can also end if the Peugeot family's stake falls below 15 percent and a competitor comes to own 5 percent or more of PSA or if another automaker buys 3 percent of PSA through a deal with PSA or the Peugeot family.
Both GM and PSA will continue to separately market and sell their vehicles.
GM is banking on the deal to help it reverse 12 years of losses in Europe, mainly on its Opel brand. PSA, which relies heavily on the European market, hopes to increase sales in other global markets.
Sources: Reuters and Bloomberg