GM-Peugeot Seen as Europe Money-Losers Still Losing Money

GM, Peugeot Confirm Plan to Create Strategic Alliance
A logo sits in the hood of a Peugeot 407 vehicle during assembly at the PSA Peugeot Citroen plant in Kaluga, Russia. Photographer: Alexander Zemlianichenko Jr./Bloomberg

General Motors Co. and PSA Peugeot Citroen announced a broad alliance that will include joint purchasing and vehicle development in an effort to revitalize their European operations.

GM will buy 7 percent of the French carmaker to become the second-largest shareholder after the Peugeot family, the automakers said in a joint statement today. Peugeot will sell new shares in a 1 billion-euro ($1.34 billion) rights offering.

The partnership also includes a restructuring at both GM and Peugeot that will result in plant closures and job cuts, a person familiar said. The two are still working out the specifics and won’t disclose them for several weeks or even months because of political concerns in France, said the person, who asked not to be identified discussing private deliberations. Today’s release did not mention any job cuts or plant closures.

“There are tremendous opportunities and synergies to be realized in this alliance,” Dan Akerson, GM chief executive officer, said today on a call with analysts. “We expect unmatched purchasing power on a global scale and capital expenditures on future product programs that are much less than each of us going it alone.”

Peugeot announced plans this month to sell assets and delay investments as debt more than doubled in the second half to 3.4 billion euros, while Detroit-based GM is looking for ways to turn around its unprofitable Opel brand. The two are seeking about $2 billion in cost savings annually within five years, which will come in part from joint development of new vehicles.

‘Route Forward’

“All capacity and cost reductions can only be taken positively,” said Sascha Gommel, a Frankfurt-based Commerzbank analyst who has a “hold” rating on Peugeot. “The capital increase is a negative, as it dilutes earnings per share.”

Peugeot CEO Philippe Varin said today’s announcement “maps out the route forward” for the French automaker.

“This alliance was born over recent months out of a growing realization of the tremendous potential for very concrete synergies that exist between our companies,” he told analysts.

GM slipped 0.5 percent to $26.02 at the close in New York. Peugeot fell 33 cents, or 2.1 percent, to 15.05 euros at the close in Paris.

Cost Savings

The costs savings will be evenly split between the two companies and will come primarily through the development of vehicles together, with a focus on small and midsize cars, multi-purpose vehicles and crossovers, the companies said. They will also reduce costs through global joint purchasing with combined volumes of $125 billion in materials annually.

“Just to be clear, this is an alliance, not a merger,” Akerson said. “And this is designed to enhance actions that we are already taking. This alliance does not replace our company’s ongoing, independent effort to return our European operations to sustainable profitability.”

Both automakers know they need to shed jobs and factory capacity and view the pact as a way to get political support to do so, the person said. The deal also holds appeal to GM, the world’s largest carmaker, because it may give GM access to Peugeot’s PSA bank and another lender to finance vehicle sales in Europe, the person said.

Analyst Skepticism

Skepticism of the deal’s benefits emerged as soon as word leaked about the possible alliance last week.

“How does a complex assortment of collaborations between two rivals that, assuming they can overcome cultural and organizational biases in both companies that will prevent them from working together, and take years to see any benefit to either company solve Opel’s problems in the short term?” Maryann Keller, principal of a self-named consulting firm in Stamford, Connecticut, said today in an e-mail.

“Opel has decent models in the pipeline and a financially stable parent, but none of this solves the fundamental issue of excess capacity and sky-high German labor costs,” Keller said.

Lewis Booth, Ford Motor Co. chief financial officer, said the GM-Peugeot deal is “an indication people are looking for different solutions” to the European crisis.

“But just putting two companies together doesn’t solve a capacity issue,” he said. “So something is going to have to happen.” Ford will continue its “fruitful” diesel-engine alliance with Peugeot, Booth said.

Political Influence

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 CEO 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.

GM and Peugeot said they spoke with their unions about the deal.

Peugeot, trailing only Volkswagen AG in Europe, may use 62 percent of its European capacity this year, compared with Opel’s 74 percent, said LMC Automotive in Oxford, England. Carmakers risk losses when they use less than 90 percent of capacity, said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.

Family Holdings

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, which owns 30 percent of the carmaker and said today it will participate in the rights offering.

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.

Morgan Stanley advised Peugeot and Goldman Sachs Group Inc. worked with GM. Perella Weinberg Partners LP advised the Peugeot family. All three firms are based in New York.

“With the strong support of our historical shareholder and the arrival of a new and prestigious shareholder, the whole group is mobilized to reap the benefit of this agreement,” Varin said in the statement.

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.

“There would be a better response from shareholders if both companies admitted that they both need to cut costs and trim down,” Manoj Ladwa, a senior trader at ETX Capital in London, said in a Bloomberg Television interview.


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