Peugeot Drops After Announcing $1.5 Billion Currency Hit

PSA Peugeot Citroen (UG) fell 7.6 percent after saying 2013 profit will take a 1.1 billion-euro ($1.5 billion) hit from currency swings and savings from a General Motors Co. (GM) alliance will be less than planned.

The Peugeot-GM partnership’s annual cost reductions will only reach $1.2 billion in 2018, 40 percent less than originally announced and two years later than targeted, they said. GM said it was selling its entire 7 percent stake in Peugeot because it was no longer needed to underpin cooperation.

The scaled back GM alliance and persistent losses have propelled Peugeot to pursue a deeper cooperation with current Chinese partner Dongfeng Motor Corp. (489) to boost sales in growth markets. Europe’s second-largest automaker for the first time today acknowledged plans for a possible capital increase.

“Peugeot needs to prove that they’re a sustainable business,” said Ian Fletcher, an analyst with IHS Automotive in London. “They need to move forward on these turnaround projects as quickly as possible.”

The shares dropped 88 cents, the most since Oct. 14, to 10.63 euros at the close of trading today in Paris. The stock has gained 94 percent this year, valuing the company at 3.77 billion euros.

Photographer: Tomohiro Ohsumi/Bloomberg

A worker prepares to paint a vehicle, seen through the windows of a clean room, in the paint shop of a plant operated by Dongfeng Peugeot-Citroen Automobile Ltd., the joint venture between Dongfeng Motor Corp. and PSA Peugeot Citroen, in Wuhan, China. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

A worker prepares to paint a vehicle, seen through the windows of a clean room, in the paint shop of a plant operated by Dongfeng Peugeot-Citroen Automobile Ltd., the joint venture between Dongfeng Motor Corp. and PSA Peugeot Citroen, in Wuhan, China.

The controlling Peugeot family, which has been at odds over how to progress, this week agreed to pursue a capital increase of at least 3 billion euros, two people familiar with the matter said. Dongfeng and the French state would each invest 1.5 billion euros as part of the deal, said the people, who asked not to be identified because the talks are private.

Preliminary Stage

A final deal, which the French government is directly involved in negotiating, is not expected until sometime in the first quarter, one person said. Peugeot said in a statement today that current talks with Dongfeng and others are “at a preliminary stage” and no outcome is assured.

Dongfeng is still working with PSA on “feasibility research” and negotiations will take quite some time, said Zhou Mi, a spokesman at the Chinese carmaker. Peugeot spokesman Jonathan Goodman declined to comment beyond the automaker’s earlier statement. A spokeswoman for Finance Minister Pierre Moscovici also declined to comment.

In a nod to Peugeot’s efforts to find new partners, Detroit-based GM said today it will support Peugeot aligning with another automaker as long as the GM cooperation is still supported. The two also agreed to continue working together even if fewer projects than initially planned are completed.

Getting Squeezed

“The alliance remains strong with our focus on joint vehicle programs, cross manufacturing, purchasing, and logistics,” GM Vice Chairman Steve Girsky said today in a statement announcing the sale of 24.8 million shares to institutional investors. “We’re making good progress while remaining open to new opportunities.”

Peugeot is getting squeezed by expanded small-car offerings from upscale manufacturers such as Bayerische Motoren Werke AG and by growing budget brands like Renault SA (RNO)’s Dacia. In Europe, where the Paris-based manufacturer delivers more than half of its cars, its sales this year have fallen more than any other automaker. Peugeot reported a first-half operating loss of 510 million euros in its automotive unit.

Worsening auto markets and unfavorable exchange rates in Russia and Latin America will cause Peugeot to take the 1.1 billion-euro non-cash charge, which will hit operating income and cash flow at its automotive unit.

Every 1 percent change in the value of the euro against currencies such as the Brazilian real, Argentine peso and Russian ruble has an impact of about 80 million euros on automotive operating profit.

Euro Strength

The euro has strengthened 19 percent against the real, 36 percent against the peso and 13 percent against the ruble in the past 12 months. Peugeot isn’t alone in suffering from the euro’s strength, which hurts the value of vehicles sold outside the region.

Italy’s Fiat SpA (F) cut its 2013 profit target by as much as 13 percent to take into account the impact of fluctuations in the Brazilian real and other currencies. German carmakers are better hedged after setting up factories in the U.S. in the 1990s after currency swings hit finances.

Peugeot, which plans to step up efforts to offset exchange-rate fluctuations, reiterated today a target to reduce cash burn by at least half to about 1.5 billion euros this year and break even in 2014.

The existing GM partnership is focused on cutting costs in Europe and offers limited potential because the two carmakers largely compete for the same customers. Peugeot said in October that it’s reviewing backing away from part of the cooperation. The two today dropped plans to cooperate on subcompact vehicles.

Peugeot will make a compact crossover for both carmakers at its factory in Sochaux, France, the two said today. The manufacturers earlier agreed that GM will assemble a small van for both companies in Zaragoza, Spain.

The alliance with GM “continues to progress and is a key component of the group’s turnaround plans in Europe,” said Philippe Varin, the French company’s chief executive officer.

To contact the reporters on this story: Alex Webb in Munich at awebb25@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Aaron Kirchfeld in London at akirchfeld@bloomberg.net

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

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