Peugeot to Pursue $4.1 Billion Capital Increase

PSA Peugeot Citroen (UG), Europe’s second-largest automaker, is planning a two-step capital increase of 3 billion euros ($4.1 billion) to shore up its financing as the unprofitable French manufacturer consumes cash.

Dongfeng Motor Corp. (489) in the first phase may contribute funds through a sale reserved for Peugeot’s Chinese partner, and then participate in a broader rights offering after that, the Paris-based automaker said. The French state may also buy shares in both sales, Peugeot said.

The 118-year-old manufacturer is seeking a cash injection after burning through 4 billion euros in the last two years as auto demand in its European home region sank. The new funding is equal to 81 percent of Peugeot’s value and follows a share sale in March of 2012 to raise 1 billion euros in which General Motors Co. (GM) bought a 7 percent stake that it later sold.

“The cash inflow would reduce leverage and could buy the company some time,” Emmanuel Bulle, a Fitch Ratings senior analyst, said in a statement today. “However, issuing new shares and changing the shareholder structure would not address the key challenges of weak profitability and negative free cash flow from industrial operations.”

Peugeot climbed 35 cents, or 3.4 percent, to 10.55 euros and traded up 2.3 percent as of 9:11 a.m. in Paris, valuing the automaker at 3.7 billion euros. The stock plunged as much as 12 percent yesterday following reports that the automaker’s board had signed off on the share sale.

Family Divided

Dongfeng and the French government would each contribute at least 750 million euros in exchange for holdings of about 14 percent apiece, a person familiar with the matter said yesterday. The automaker would then hold a rights issue of about 1.4 billion euros for the rest of the funding, said the person, who asked not to be identified discussing private talks.

The controlling Peugeot family would invest about 100 million euros to maintain a stake in the manufacturer of 14 percent, the person said. Members of the family, whose current holding totals 25.5 percent, are divided over whether to accept the deal, people familiar said.

Peugeot aims to reach final agreement by Feb. 19 when it reports annual results, the automaker said in yesterday’s statement, adding that it’s looking at alternative capital increase scenarios. Existing shareholders would be given the right to buy shares at the price that Dongfeng and France pay in their reserved capital increase.

Strategic Shift

“This goes into the right direction as this will provide funding for the company to invest into new models and turn back the focus into the operating business,” said Sascha Gommel, a Frankfurt-based analyst with an add recommendation on the shares. “There needs to be some more clarity on the eventual discount rate” and how the deal will be eventually structured.

An investment from Wuhan-based Dongfeng and France would mark a shift in strategic emphasis after an alliance between Peugeot and GM missed savings goals. The Detroit-based carmaker sold its Peugeot stake in December, 21 months after acquiring the holding. Cost reductions from the tie-up will total $1.2 billion through 2018, 40 percent less than the $2 billion originally predicted.

Peugeot and Dongfeng, established in 1969 and one of China’s top four automakers, opened their third joint assembly plant in July to produce four models in the country. Peugeot also has a Chinese factory with Chang’An Automobile Group to make DS models. Peugeot plans to have production capacity for 950,000 vehicles in the country by 2015.

Emerging Markets

“If we invest in Peugeot, it’ll bring benefits such as technology and other resources that will help us develop our own cars,” Dongfeng General Manager Zhu Fushou said in an interview yesterday in Beijing. “Peugeot’s main problem is its heavy reliance on Europe, which it should address by shifting focus to emerging markets.”

The French manufacturer has a target of selling more than 50 percent of its cars outside Europe by 2015. That figure reached 42 percent in 2013.

Peugeot is also in the process of changing top management, hiring Carlos Tavares, a former Renault (RNO) executive, to become chief executive officer later this year. Tavares told unions last week that the automaker needs to focus on returning to a positive free cash flow, better managing vehicle stocks and increasing its market share in Europe, two people familiar with the matter said.

Peugeot, which reported a first-half operating loss in the automotive unit of 510 million euros, reiterated last month a target to reduce cash burn by at least 50 percent to 1.5 billion euros for 2013 and reach breakeven this year.

Tavares plans to give his diagnosis on the state of Peugeot in about 100 days and is likely to take over as CEO before then, said the people.

To contact the reporter on this story: Mathieu Rosemain in Paris at

To contact the editor responsible for this story: Chad Thomas at

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