Feb. 29 (Bloomberg) -- PSA Peugeot Citroen plans a 1 billion-euro ($1.34 billion) rights offering to raise cash as part of a partnership with General Motors Co., according to people familiar with the matter.
GM, the world’s largest carmaker, will buy about 7 percent of the French carmaker and take part in the new share sale, the people said, declining to be identified discussing private talks. The Peugeot family, which owns 30 percent of the Paris-based company as its biggest shareholder, agreed to participate in the rights offer, one of the people said.
The alliance will include restructuring at both carmakers, resulting in plant closures and job cuts, said another person familiar with the deal. The two are still working out the specifics and will not disclose them for several weeks or even months due to French political concerns, the person said.
Peugeot, Europe’s second-biggest automaker after Volkswagen AG, announced plans this month to sell assets as debt more than doubled in the second half to 3.4 billion euros. Peugeot and Detroit-based GM are planning an alliance that may include developing engines and building vehicles together in Europe, a person familiar said last week. GM is looking for ways to turn around its unprofitable Opel brand in Germany.
“It signifies just how bad the situation must be for them,” said Erich Hauser, a London-based Credit Suisse analyst, who has an “underperform” rating on the stock. With the rights issue, which could dilute current shares by about 30 percent, and the planned asset sales, “future earnings power is now fundamentally impaired on a permanent basis.”
Peugeot dropped as much as 60 cents, or 3.9 percent, to 14.76 euros and was down 2.6 percent to 14.97 euros as of 1:47 p.m. in Paris trading. The shares have gained 23 percent this year, valuing the carmaker at 3.49 billion euros. Peugeot spokeswoman Cecile Damide and GM spokesman Klaus-Peter Martin declined to comment on the rights offer yesterday.
The French market regulator AMF is following the Peugeot matter very closely and urges Peugeot to release details of its plan as soon as possible to respect market disclosure rules, a spokeswoman for the AMF said today. She declined to be cited by name in line with the regulator’s policy.
Both companies know they need to shed jobs and factory capacity and view the pact as a way to get political support to do so, one person said. The deal also held appeal to GM because it gives them access to Peugeot’s PSA bank and another lender to finance vehicle sales in Europe, the person said.
Political interference and strong unions have hampered both companies from shutting factories and laying off workers to rein in costs. French Labor Minister Xavier Bertrand warned Peugeot Chief Executive Officer Philippe Varin last week against cutting jobs as a result of the GM deal. President Nicolas Sarkozy, who’s running for re-election this year, summoned Varin on Nov. 17 to ask him to reconsider plans to cut as many as 6,800 jobs, including temporary staff employed by partners.
PSA is projected to use just 62 percent of its European capacity this year, compared with 74 percent at Opel, according to LMC Automotive in Oxford, England. Carmakers risk losses when they use less than 90 percent of their capacity, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.
“If the Peugeot-GM hypothetical tie up becomes a reality, I sincerely hope it deals with the overcapacity issue,” Fiat SpA CEO Sergio Marchionne, who estimates excess European auto capacity at 20 percent, said yesterday in Brussels. “It’s essential that the European situation will be addressed, whether I address it or other people address it, I don’t particularly care.”
Peugeot, whose origins date back to the early 19th century laminated steel- and toolmaker Peugeot-Frères et Jacques Maillard-Salins, is still controlled by the Peugeot family.
The company’s current chairman, Thierry Peugeot, is the great-grandson of Eugene, who jointly led the company with his cousin Armand when it produced its first automobile in 1891. Thierry is joined on the board by relatives Roland, Robert and Jean-Philippe Peugeot, and Marie-Helene Roncoroni.
The share sale to GM would involve a standstill agreement by which GM would not take a greater holding in the Paris-based carmaker without permission, the people said.
Peugeot already cooperates with Bayerische Motoren Werke AG on engines for the German carmaker’s Mini brand in 2002, expanding the partnership with a 100 million-euro hybrid joint venture last year.
“They want to demonstrate that the partnership is a close one, not simply on individual projects such as those Peugeot has with BMW, which might one day separate,” said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, who recommends selling Peugeot stock. “Peugeot’s dream partner, BMW, clearly wasn’t interested, which is why they have gone to GM. It is an alliance of necessity.”
Peugeot’s 2011 sales in Europe plunged 8.8 percent to 1.68 million vehicles, while GM’s dropped 1.9 percent to 1.17 million. The prospects for a turnaround aren’t improving with auto demand in the region poised to drop for the fifth straight year in 2012 as the sovereign debt crisis unsettles consumers.
GM, which this month posted a record annual net income of $9.19 billion for 2011, is planning more cost cuts for its unprofitable European unit after the last turnaround plan failed to end losses there. The automaker’s Europe business, including the Opel brand, lost $747 million last year before taxes and interest.
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