Peugeot Reviews GM Pact to Possibly Pave Way for Dongfeng
PSA Peugeot Citroen (UG) is reviewing whether to back away from parts of a broader alliance with General Motors Co. (GM), a move that could open the door to a deeper partnership with Dongfeng Motor Corp. (489) in China.
Europe’s second-largest automaker will study if it still makes sense to jointly build small cars with GM after announcing today that a $1 billion savings target from working together may not be reached in 2016 as originally planned.
“This alliance isn’t going to grow anymore,” Erich Hauser, an London-based analyst with International Strategy & Investment Group, said in an interview with Mark Barton on Bloomberg Television. “If Peugeot wants to get out of trouble, they need another partner. Dongfeng could be really good.”
Dongfeng and the French state are considering taking equal stakes in Peugeot of about 20 percent in a capital increase to raise at least 3 billion euros ($4.13 billion), people familiar with the matter said this week. Dongfeng would offer Peugeot opportunities to boost profit through expansion in China, whereas the GM alliance is focused on cost reductions in the shrinking European market, where demand is at a 20-year low.
Peugeot and Dongfeng currently operate three factories together in China -- which is still growing and already the world’s largest auto market -- with annual production capacity set to rise by two-thirds to 750,000 vehicles by the end of 2015. Peugeot’s nine-month sales in the country climbed 29 percent to 403,000 vehicles. Peugeot has a second Chinese joint venture and opened a fourth factory in the country last month.
“The focus is on finding profitable, long-term projects and then we’ll be looking at the way to finance them,” Chief Financial Officer Jean-Baptiste de Chatillon told analysts today, without providing additional details. “We have to look far ahead, and look to long- or mid-term projects to assure the profitability of the group.”
The shares gained as much as 50 cents, or 4.8 percent, to 10.90 euros and were up 2.4 percent as of 1:26 p.m. in Paris. The stock has climbed 94 percent this year, valuing the French manufacturer at 3.77 billion euros.
Peugeot’s alliance with GM is primarily aimed at reducing costs in Europe by buying parts together and jointly developing vehicles to lower costs by a combined $2 billion annually. The purchasing agreement will save the two automakers 60 million euros this year, Peugeot said today.
GM, which has a 7 percent Peugeot stake, may pull out of the alliance should Dongfeng purchase a holding because GM works with rival SAIC Motor Corp. (600104) in China, a person said this week. The Detroit-based carmaker has the option to terminate the partnership if there’s a change in control of the French manufacturer.
“As soon as it became clear that Peugeot is talking to Dongfeng, the alliance with GM was under watch,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler who recommends buying the shares. “It doesn’t mean the beginning of the end, but it’s sensitive as GM has big ambitions in China and has different partners.”
Peugeot announced earlier this month plans to shift production of a compact minivan to a GM factory in Spain. GM’s Opel unit will build a new generation of a jointly developed small multi-purpose vehicle at its Zaragoza factory starting in late 2016.
“We’re taking the projects one-by-one and examining their economic feasibility first,” Peugeot spokesman Jean-Baptiste Thomas said. “Some projects are not economically feasible, which is why they are dropped.”
GM spokesman Ulrich Weber, who said the two are “moving forward with the implementation” of the current efforts, declined to comment on whether the U.S. automaker will also lower its 2016 savings goal of $1 billion.
Peugeot today reiterated a target to cut cash consumption by at least 50 percent this year after burning through 3 billion euros in 2012. Third-quarter sales dropped 3.7 percent to 12.1 billion euros, slightly missing the 12.2 billion-euro estimate of five analysts surveyed by Bloomberg.
The automaker has won concessions from employees, with unions representing more than 60 percent of workers saying this week they’ll support a proposal to reduce overtime pay and freeze salaries in exchange for investment guarantees and new models. Peugeot is already cutting 11,200 jobs and closing a factory near Paris at the end of this week.
Peugeot forecasts that the latest labor agreement will yield 125 million euros in annual savings starting next year, Jean-Baptiste Mounier, a spokesman for the manufacturer, said in a phone interview today.
The automaker’s board at a meeting yesterday discussed the share sale, which is complicated by concerns from GM and the Peugeot family, the two largest shareholders, over the impact of a capital increase, the people said. The goal is to reach a deal by the end of the year, the people said.
The Peugeot family, which owns 25.5 percent of the automaker, is divided over how much to spend on any capital increase or whether to invest at all, a person said.
Zhu Fushou, Dongfeng’s general manager, said last week that the automaker was still assessing whether an investment made sense, rather than on getting regulatory approval. Chinese state-owned companies usually obtain permission from the National Development Reform Commission, the top planning agency, before commencing formal talks on foreign investments.
Peugeot, which reported a first-half operating loss in its automotive unit of 510 million euros, is also continuing to proceed with other options to raise funding, including the possibility of selling a minority stake in the automaker’s banking unit, a person said.
To contact the reporter on this story: Mathieu Rosemain in Paris at email@example.com