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Peugeot Examining Partnerships to Expand Outside Europe

Peugeot Citroen Factory
Workers assemble Citroen Berlingo and Peugeot Partner automobiles on the production line at the PSA Peugeot Citroen plant in Mangualde. Photographer: Mario Proenca/Bloomberg

PSA Peugeot Citroen, Europe’s second-biggest carmaker, is considering new cooperation agreements to raise cash for investments and expand outside its home continent, where demand is at a 20-year low.

The French automaker “is examining new industrial and commercial development projects with different partners, including the financial implications that would accompany them,” Jean-Baptiste Thomas, a Peugeot spokesman, said today. “None of these projects has reached maturity at this stage.”

Dongfeng Motor Corp. plans to buy a 30 percent stake in Peugeot for 10 billion yuan ($1.63 billion), China Business News reported yesterday, citing an unidentified official from the Chinese company. The two automakers said last month that they are talking about deepening their partnership.

An investment from Dongfeng would provide Peugeot with cash to shore up its finances and also help in the French automaker’s efforts to expand outside Europe, where the auto market is set to sink for a sixth straight year. Peugeot and Dongfeng already operate three assembly plants together in China, the world’s largest auto market.

“Everybody knows they need cash,” says Florent Couvreur, an analyst at CM-CIC Securities who recommends selling the shares. “The two main questions are: how much do they need and where they’ll find the money? I’m betting they need about 2 billion euros ($2.7 billion) in order to face their debt obligations in 2014.”

Holding Talks

Peugeot climbed as much as 34 cents, or 2.7 percent, to 12.65 euros and was up 0.1 percent as of 1:03 p.m. in Paris trading. The stock has more than doubled this year, valuing the manufacturer at 4.38 billion euros.

Dongfeng said last month that the company is doing “preliminary research” on a Peugeot investment. Philippe Varin, the French automaker’s chief executive officer, said in September that he was examining all options to deepen the Dongfeng partnership, with a focus first on industrial cooperation before any financial links.

Peugeot, which reported a first-half operating loss in its automotive unit of 510 million euros, is cutting 11,200 French jobs and closing a factory outside Paris to reduce spending. Varin has pledged to reduce the manufacturer’s cash-consumption rate by 50 percent in 2013 after burning through 3 billion euros last year.

Potential Hurdles

Peugeot is negotiating with unions to reduce overtime pay and freeze salaries, in exchange for increased French production and investments over the next three years, to lower labor costs. Any share sale to an outside investor is contingent on the success of those talks, Christian Lafaye, head of the FO union at Peugeot, said today by phone.

A stake purchase of 30 percent would also raise legal questions as well as potential hurdles with the two largest investors, the Peugeot family and General Motors Co.

Under French law, anyone buying a 30 percent stake or more in a listed company must make a tender offer on all the remaining shares, Florence Gaubert, a spokesman for French markets regulator AMF, said by phone today.

A stake sale could lead the Peugeot family, which currently has 25.5 percent of the shares, to lose control of the French company.

Peugeot investors voted in April to give management the option of issuing new shares in the company, or securities convertible to stock, worth as much as 50 percent of the capital as of March 12, 2013. Current owners have a pre-emptive right to purchase shares in any increase exceeding 20 percent.

GM Alliance

GM, which owns the Opel and Vauxhall brands and is struggling to become profitable in Europe, bought a 7 percent stake in Peugeot last year as part of an alliance to develop cars and jointly purchase parts. Peugeot and GM have since then started their first joint purchasing negotiations and announced plans to produce vehicles for one another.

The Detroit-based carmaker has the option to terminate the alliance in the event of a change in control of the French manufacturer, according to Peugeot’s annual regulatory filings.

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