Dongfeng could sell PSA stake, report says

HONG KONG/BEIJING/LONDON -- Dongfeng Motor is exploring options for its 2.2 billion-euro ($2.5 billion) stake in PSA Group including a potential divestment, people with knowledge of the matter said, as the companies grapple with a global slowdown in the auto market.

The Chinese state-owned automaker held talks in recent weeks with potential advisers about ways to monetize part or all of its 12.2 percent stake in the French automaker, according to the people.

As part of the strategic review, Dongfeng has discussed possible transactions including a straight sale of PSA shares or issuing exchangeable bonds backed by PSA stock, the people said.

The funds would allow Dongfeng to invest in other areas at a time when its rivals are spending billions on electric vehicles and autonomous driving systems.

The global car market is deteriorating as shifts in technology and weakening economic growth give consumers fewer reasons to go to the showroom. The slump has prompted traditional automakers to fight back by slashing jobs and pursuing mergers.

Dongfeng, which has a Chinese joint venture with PSA, plans to coordinate with the French company if it decides to sell down so that it can preserve a good working relationship, they said. Deliberations are at an early stage, and there is no certainty they will lead to a deal, according to the people.

The Chinese automaker may hold onto part of its stake in PSA to potentially benefit from future industry consolidation, the people said. PSA said in May that it is open to "any opportunities" to create long-term value amid reports of tie-ups with other automakers.

PSA and Fiat Chrysler Automobiles had explored sharing car manufacturing investments in Europe, people familiar with the matter said earlier this year.

Any selldown could upset the delicate balance between Dongfeng, the French state and the Peugeot family, which each own 12.2 percent of the company. PSA CEO Carlos Tavares said in October the parties' shareholding pact is stable and that a change is not in the works.

A representative for Dongfeng said the company does not have any information regarding the plan at the moment. Representatives for PSA, the Peugeot family and the French finance ministry declined to comment.

Dongfeng got the stake in 2014 as part of a bailout after the more-than century old PSA fell behind rivals in investing in new technology and development. The company used the funds to overhaul its lineup. As part of the revamp, PSA and Dongfeng also agreed to team up in China, giving the European automaker access to the world's largest auto market.

The company's faith in PSA's turnaround plans has paid off. Dongfeng bought shares at 7.50 euros apiece in 2014 when it made the 800 million euro investment. Five years on and the stock's trading at more than double the price.

Still, the global auto market has been slowing and proceeds from the sale would give the Chinese automaker much-needed funds to weather the worst slump in a generation.

In a sign that PSA is struggling to keep its Chinese plants busy, Tavares has said he would consider making cars for the U.S. market in China. Renting out the facilities is also among ways to tackle the capacity issue, PSA Chief Financial Officer Philippe de Rovira has said.

Underscoring the depressed state of the market, Dongfeng Motor's Hong Kong-listed unit saw second-half profit fall 30 percent, the most on record. The company is slated to disclose first-half results later this month.

China's largest automaker, SAIC Motor, expects its annual sales to fall for the first time in at least 14 years, people familiar with the matter said last month.