PSA Peugeot Citroen (UG) is considering stake sales to Dongfeng Motor Corp. (489) and the French government to shore up funding as car sales in Europe plunge to a 20-year low, people familiar with the matter said.
Peugeot’s board will discuss a capital increase at a scheduled meeting on Oct. 22, said the people, who asked not to be identified because the gathering is private. The stock fell 9.1 percent, the biggest drop in more than two years, after Reuters first reported details of the possible sale.
The French government is monitoring talks with Dongfeng and may participate should the Chinese automaker decide in favor of a purchase, two of the people said. The negotiations are at an early stage and not expected to be completed for several weeks, they said.
A capital increase would provide Peugeot with needed cash and help in efforts to expand outside Europe, where the auto market is set to shrink a sixth straight year. Peugeot, which reported a first-half operating loss in its automotive unit of 510 million euros ($692 million), is cutting 11,200 French jobs and closing a factory outside Paris. The automaker has pledged to reduce its cash-consumption rate by 50 percent in 2013 after burning through 3 billion euros last year.
Peugeot is “examining industrial and commercial developments with different partners, including the financial implications that would result from them,” the Paris-based automaker said in a statement today, without providing details. “None of these projects has reached maturity yet.”
Dongfeng plans to buy a 30 percent stake for 10 billion yuan ($1.63 billion), China Business News reported Oct. 8, citing an unidentified official from the Chinese company. Peugeot intends to sell 3 billion euros of new stock, with Dongfeng and the French government taking matching holdings, Reuters reported Oct. 12, citing three unidentified people.
“Shareholders wouldn’t like to see the state involved as it would limit the scope of possible layoffs or restructuring quite a bit,” said Sascha Gommel, an analyst at Commerzbank AG who has an “add” recommendation on the shares. “The market wouldn’t like that.”
Peugeot shares dropped 1.12 euros to 11.25 euros, the most since Aug. 18, 2011, as of the close of trading today in Paris. The stock has more than doubled this year, valuing the French manufacturer at 3.99 billion euros.
Dongfeng, which already operates three assembly plants with Peugeot in China, said last month it’s doing “preliminary research” on an investment in the French automaker. Peugeot said in September it was examining all options to deepen the partnership, with a focus first on industrial cooperation. The Chinese company declined today to comment on the talks.
A government holding would increase the state’s ability to protect jobs. France already has one seat on the Peugeot board as part of a deal to guarantee 7 billion euros in bonds sold by the automaker’s banking arm.
“The state remains interested in Peugeot,” Finance Minister Pierre Moscovici said today on France Inter radio, without providing details. “What has to come before everything else is the industrial strategy.”
A stake purchase could face legal hurdles as well as resistance from the two largest investors, the Peugeot family and General Motors Co. (GM) Under French law, anyone buying a 30 percent holding or more in a listed company must make a tender offer for the remaining shares, the French market regulator said last week.
Peugeot family members, who own 25.5 percent of the carmaker, are divided over whether to participate in a capital increase, a person close to the family said. Some don’t want to invest additional funds in the automaker, while others would like to spend money to maintain some level of control even if the holding is still diluted, the person said.
GM, which owns the Opel and Vauxhall brands and is struggling to become profitable in Europe, bought a 7 percent stake in Peugeot last year as part of an alliance to develop cars and jointly purchase parts. Peugeot and GM have since then started their first joint purchasing negotiations and announced plans to produce vehicles for one another.
The Detroit-based carmaker has the option to terminate the alliance in the event of a change in control of the French manufacturer, according to Peugeot’s annual regulatory filings.
Peugeot investors voted in April to give management the option of issuing new shares in the company, or securities convertible to stock, worth as much as 50 percent of the capital as of March 12, 2013. Current owners have a pre-emptive right to purchase shares in any increase exceeding 20 percent.
“The situation is dire,” David Arnold, a London-based industry specialist at Barclays Capital, said in an e-mail to clients today. “It’s clear that cash is now much more of a drag and the company realizes that it cannot starve the business of investment or it will lose out long term.”
Peugeot management held its final meeting with unions last week over an offer to increase French production and investment over the next three years in exchange for reduced overtime pay and a salary freeze. Unions have until Oct. 22 to decide whether to back the plan.
A share sale to an outside investor is contingent on the success of those talks, said Christian Lafaye, head of the FO union at Peugeot. Five of the six main unions are likely to back the proposal, a person familiar said. The CGT will “absolutely not” support the plan, Jean-Pierre Mercier, a CGT official, said.