PSA Chairman urged to scrap Dongfeng deal

PARIS -- An industry analyst has written an open letter to PSA/Peugeot-Citroen Chairman Thierry Peugeot urging him to scrap a planned capital tie-up with China's Dongfeng Motor and raise capital in other ways.

"We see a risk of a Pyrrhic victory," Max Warburton, an analyst with Bernstein Research, writes. "The Dongfeng deal will close out strategic options," and the involvement of the French government and the state-backed Chinese automaker "is hardly likely to lead to improved efficiency, competitiveness and growth," the letter says.

Warburton advises the PSA chairman to let industry veteran Carlos Tavares work fast and aggressively to cut costs at the cash-strapped company. Tavares was most recently Renault's chief operating officer. He is expected to become PSA's operations chief on Feb. 19 and take over current CEO Philippe Varin's role after the final deal with Dongfeng is officially signed during a state visit to France by Chinese President Xi Jinping in March.

Tavares was instrumental at Renault in squeezing out 2.3 billion euros in working capital in three years by squeezing suppliers, cutting logistics chains, reducing work-in-progress and pushing more financial burden onto dealers. "That's more than twice the money you're apparently asking the Chinese for," Warburton writes.

Other ways to raise capital, Warburton says, are to:

• Sell PSA's controlling stake in the supplier Faurecia. "Why are you so hung up on this business? We understand it contains the original founding parts of PSA, but it's not a technology leader and owning it provides few obvious special benefits," Warburton writes.
• Halt research and development spending for a year. "Your products are competitive and you can afford to take a short break from spending," the analyst says.
• Close a Spanish plant and exit some of the most loss-making emerging markets.

The Peugeot family, the largest shareholder in PSA was meeting Monday to decide whether to give its blessing to a recapitalization deal under which the French state and Dongfeng will both take direct stakes in the group. The family's consent is needed so PSA can announce a memorandum of understanding on the deal alongside its 2013 results on Wednesday.

Fiat, Ford examples

Warburton urges Thierry Peugeot to follow the examples of Bill Ford and John Elkann, who hired chief executives who helped save their troubled family-controlled companies, Ford Motor and Fiat, respectively.

"Their family stakes remain intact," the analyst notes. "Their shareholders are happy. Neither are reporting to government officials. There are lessons for you and the rest of the Peugeot family from their experiences. It's not too late to turn back from Wuhan and fight on."

PSA has burned through more than 4 billion euros over the last two years. The automaker aims to raise 3 billion euros ($4.1 billion) through a capital increase that would see the French government, Dongfeng and the Peugeot family end up with roughly equal stakes of 14 percent in the company. Dongfeng and France would each pay at least 750 million euros, according to people familiar with the matter.

Thierry Peugeot has favored raising capital by selling new stock on the market without investments by Dongfeng or France, according to people familiar with the situation. He said in a letter last month to his cousin, Robert, that the plan will create a "three-headed governance" structure, making the Paris-based company difficult to run. He was overruled and the family's holding companies, which currently control 38 percent of PSA's voting rights, supported going ahead with the deal.

"Before you give up, isn't it worth one last try as an independent?" Warburton said in his appeal to Thierry Peugeot. "It's not too late to turn back."

Conflict risk

Other analysts echoed Warburton's concerns. "I still don't understand why they're doing this deal," said Florent Couvreur, an analyst with CM-CIC Securities in Paris. "The three main shareholders will have completely divergent concerns, with a high risk of conflict.

Philippe Houchois, a London-based analyst with UBS, said there are alternatives to a share sale. PSA's 51.7 percent stake in Faurecia, is worth about 1.9 billion euros at current market prices. It could also sell part of financing unit Banque PSA Finance, he said.

The capital increase, equivalent to about 70 percent of PSA's market value, would follow a 2012 share sale to raise 1 billion euros. That deal was part of a previous effort to reorganize, underpinned by an alliance with General Motors Co. That partnership failed to produce the targeted cost savings, and GM sold its entire 7 percent stake in PSA in December.

The new money would help PSA develop models and expand abroad. Dongfeng and PSA already operate three factories together in China. The Chinese company is investing 30 billion yuan ($4.9 billion) in its own auto operations to reduce its dependence on foreign carmakers.

Keeping French control

Thierry Peugeot is concerned about a clause inserted in the draft deal by the French government under which the three major future stakeholders commit not to increase their stakes in the carmaker for several years, possibly a decade, the Wall Street Journal reported Friday.

The restriction is meant to prevent Dongfeng from taking control of PSA but Thierry Peugeot is concerned that it will also stop the Peugeot family from regaining control of the automaker at a future date, French newspaper Les Echos reported.

The French government and Dongfeng are still arguing with the family over who should replace Thierry Peugeot as company chairman. The government supports former Airbus chief Louis Gallois, a PSA board member. Some Peugeot family members favor Gerard Hauser, former CEO of French cable maker Nexans. Dongfeng would like the future chairman to be independent, the Wall Street Journal said.

Les Echos said outgoing CEO Philippe Varin had also been mentioned for the chairman's post but discarded, not least because incoming CEO Tavares would oppose such a move.

Bloomberg and Reuters contributed to this report