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Peugeot Loses as Much as Government Offers in Auto Aid

PSA Peugeot (UG) Citroen’s automotive unit lost as much money in the first six months as the French government plans to plough into the industry to try and protect automakers from a fifth consecutive year of shrinking sales.

France will spend about 665 million euros ($807 million) to bolster the country’s auto sector, protect jobs and build the “vehicles of tomorrow,” Industry Minister Arnaud Montebourg said in Paris today, adding the government is making available to auto-parts suppliers 450 million euros in financing.

“When you spread the amount across the French car market it does not provide any help to the French manufacturers,” said Jose Asumendi, a Baader Bank analyst in Unterschleissheim, Germany. “Ultimately, what they should let them do is restructure their operations.”

The French government has raised concerns over Peugeot’s plans to cut 8,000 jobs and close a factory in Aulnay on the outskirts of Paris. Peugeot’s auto division posted a first-half recurring operating loss of 662 million euros, prompting Fitch Ratings and Standard & Poor’s Ratings Services to lower their ratings to BB from BB+, or two levels below investment grade.

Fitch “is particularly concerned about the extent of automobile operating losses and cash burn in Europe, stemming from falling revenue and structurally poor cost structure,” analyst Emmanuel Bulle said in an e-mailed statement. “In addition, contrary to other manufacturers, the group is losing money in several international markets.”

Cash Burn

Standard & Poor’s said the company is “burning substantial cash flow” with little prospect of reaching credit ratios in the coming 18 months commensurate with its previous ratings. Peugeot has been burning through 200 million euros in cash monthly for the last year, the automaker said this month.

Moody’s Investors Service placed its Ba1 rating on Peugeot, already junk, under review on July 13, and put the carmaker’s bank, Banque PSA Finance, on watch for downgrade four days later.

Peugeot dropped 16 cents, or 2.5 percent, to 6.08 euros in Paris trading today. The stocked has slumped 77 percent in the last year, valuing the French company at 2.16 billion euros.

Operating profit plunged to 4 million euros from 1.16 billion euros a year earlier, the Paris-based company said. Revenue fell 5.1 percent to 29.6 billion euros.

Cost Reductions

Peugeot said the restructuring in France, along with lower capital spending in Russia, Latin America and China and its alliance with General Motors Co. (GM), will reduce costs by 1.5 billion euros through 2015. These reductions come on top on a 1 billion-euro savings plan for 2012 announced earlier this year.

“Their cost-reduction plan is called ‘Rebound 2015’ and this seems a bit late to me,” said Erich Hauser, a Credit Suisse analyst in London with an underperform recommendation on the shares. “It’s too far out.”

The 116-year-old French manufacturer, which earned 75 percent of revenue in Europe last year, is fighting with the government over the headcount reduction program. France will extend a research tax break for the auto industry, raise incentives for the purchase of hybrid and electric cars and provide loans to auto suppliers, Montebourg said today.

“This plan reinvents the French car, with the support of the government, the manufacturers, the workers, and all the French people,” Montebourg said at the Paris press conference. “We want to muscle up the sector.”

Overcapacity

Peugeot’s European factories have been running at 76 percent of their capacity over the first half of the year compared with 86 percent a year earlier, Chief Executive Officer Philippe Varin said at a press conference today. The French automaker has been burning about 200 million euros in operating cash flow monthly over the last year.

Peugeot first-half car sales in Europe fell 14 percent to 827,163 vehicles, according to the Brussels-based European Automobile Manufacturers’ Association, or ACEA. Renault SA (RNO), which reports earnings July 27, earlier this month scrapped its 2012 sales-growth target after posting a first-half drop in deliveries of 3.3 percent. Varin said today he expects the European market to remain at the 2012 level until 2015.

Net debt as of June 30 fell to 2.4 billion euros from 3.4 billion euros at the end of 2011, the carmaker said today. Free cash flow was a negative 954 million euros in the first half, excluding one-time items.

Net Loss

“Management’s assumptions for their plan are a bit too optimistic,” said Sascha Gommel, a Commerzbank AG analyst in Frankfurt with a hold recommendation on Peugeot. “They’re basing them on a stable European market until 2015. In the meantime, unemployment rates in Italy and Spain may worsen.”

The carmaker reported a first-half net loss of 819 million euros compared with net income of 806 million euros a year earlier.

“The depth and persistence of the crisis impacting our business in Europe requires the launch of the reorganization of our French production base and a reduction in our structural costs,” Varin said. “We have a clear understanding of how hard this project is for a large number of our employees.”

Peugeot this year issued 1 billion euros in new stock to existing shareholders and announced plans to sell 1.5 billion euros in assets to raise cash and lower its debt load. The company is planning to sell a majority stake in its profitable Gefco trucking unit, Luc Nadal, chief executive officer of the subsidiary, said two weeks ago.

Peugeot plans to close the Gefco sale by September, Varin said today, adding that no additional asset sales are planned and that his strategy for Faurecia SA (EO), in which Peugeot owns 57 percent, is “unchanged.”

Asset disposals thus far have included the Citer vehicle- rental unit that the carmaker sold to Enterprise Holdings Inc. on Feb. 1 for 440 million euros and an agreement announced April 2 to sell Peugeot’s 48-year-old headquarters building in Paris to Ivanhoe Cambridge for 245.5 million euros.

To contact the reporter on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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