Peugeot Chief Seen Buffeted Between Founders and Politics
After Philippe Varin steered steelmaker Corus Group Ltd. away from bankruptcy 10 years ago, he was made commander of the order of the British Empire for “services to the U.K. steel industry.” As chief executive officer of PSA Peugeot Citroen (UG), there’s scant chance he’ll get a similar honor in France.
With contentious job cuts and a possible capital increase in the works, Varin this week starts his second four-year term as head of the loss-making Paris-based company. To ensure its survival, he will have to navigate two groups: the Peugeot family, split over some of his moves, and the French government, which has sought to thwart job losses and has taken a board seat in exchange for its financial backing.
“The uneven management of Peugeot is far less linked to the personality of Varin than to the fact that he hasn’t been able to impose his choices,” said Bernard Jullien, an economist at French automotive think tank Gerpisa.
Peugeot has struggled more than most European carmakers with the region’s slump. Much of its production is in high-cost France, and unlike German carmakers, its vehicles lack the cachet to command higher prices and attract customers overseas.
The 116-year-old French company lost about 510 euros ($658) on each car it sold last year, the Center for Automotive Research at the University of Duisburg-Essen in Germany estimates. Renault SA (RNO) lost about 241 euros and Volkswagen AG, Europe’s No. 1 carmaker, earned 751 euros, the center says.
With the automaker continuing to consume cash after using up 3 billion euros in 2012, a capital increase is one option being weighed to raise funds, three people familiar with the matter said. The deliberations over a share sale include concerns over demand from potential investors, said the people, who asked not to be identified because the talks are private. Peugeot spokesman Jonathan Goodman declined to comment.
“There’s no doubt that it will need to find new means to offset these losses and the debt option has already been used,” said Joffrey Ouafqa, a portfolio manager at Convictions AM, who has about 550 million euros under management and sold his last Peugeot shares in 2011. “If Peugeot goes on increasing its debt, it will have a solvency issue.”
Peugeot’s shares have gained 26 percent this year, recovering from a 23-year low reached in 2012 on concern that the European Union might block 7 billion euros in bond guarantees from the French state for Peugeot’s financing unit. VW is down 2.2 percent in 2013 and Renault has surged 46 percent in the same period.
The EU, which is investigating whether the French aid is anticompetitive, gave preliminary approval in February for the automaker to sell 1.2 billion euros in bonds with government backing. Peugeot sold the bonds in March. Any need for a capital increase is partially dependent on the EU’s final decision, one of the people said.
With European auto sales contracting for a sixth straight year, a quick turnaround at Peugeot isn’t likely. After an operating loss of 576 million euros in 2012, the carmaker is forecast to lose 317 million euros this year, according to the average of 14 analyst estimates compiled by Bloomberg.
Varin didn’t have any direct automotive experience before joining Peugeot. That means he will have to draw on his turnaround background from the metals industry and team skills developed as a rugby player to reach his goal of taking in more money next year than Peugeot spends.
His experience heading capital-intensive companies dates from his time at Pechiney, a former French industrial group, where he oversaw aluminum production. Varin learned to grapple with change, though an attempt to merge Pechiney, Canada’s Alcan and Switzerland’s Algroup to form a $21 billion aluminum behemoth ultimately failed in 2000 after months of work.
“Those were tough times,” said Jean-Dominique Senard, CEO of Michelin & Cie (ML), who worked with Varin on the merger effort. “He’s a former rugby man. He knows what a team is.”
Varin, 60, will need those traits. The heirs of founder Armand Peugeot hold about 25 percent of the company’s shares. Robert Peugeot sought the top job at the company in 2007, but his cousin Thierry blocked his efforts.
Family tensions escalated last year as the car crisis worsened in Europe. Varin’s decisions to sell a 7 percent stake to General Motors Co. (GM) to secure an automaking alliance, and to divest assets such as Peugeot’s truck unit Gefco, sparked heated debates in the family, two people familiar with the matter said.
“There were moments of doubt and interrogation,” Varin said in a March interview with the French weekly Le Nouvel Observateur when asked about a reported threat to resign because of strained relations with the family. The tensions compelled the board of directors last June to issue a statement supporting Varin.
The CEO turned down requests to be interviewed for this story, Goodman said.
The largest remaining asset that Peugeot could sell is its 57 percent stake in Faurecia SA (EO), whose shares are up 49 percent this year, valuing the parts-maker at 1.93 billion euros. Peugeot is reluctant to dispose of the holding because Faurecia is a profit driver for the automaker, two of the people said.
Varin has had to accept the government’s growing influence after it agreed to guarantee 7 billion euros in bonds for Peugeot’s banking arm. The bailout led to the appointment of former European Aeronautic Defence & Space Co. CEO Louis Gallois as state representative to its board of directors. The deal also included the nomination of two labor representatives.
The government initially opposed Varin’s plans to eliminate 11,200 jobs by 2015 and shut a factory near Paris. When Peugeot announced its restructuring plan last July -- about two months after the election of President Francois Hollande of the Socialist party -- Industry Minister Arnaud Montebourg accused Varin of “lies.”
The constraints didn’t keep Varin from taking action. In March, he streamlined the top ranks, cutting two executives from its management board, which now numbers four. Varin also set targets for each product line and made top managers directly responsible for them.
In a sign that the executive can win over critics, Montebourg apologized on French television six months later, and the government is letting the restructuring move forward. Even unions are voicing support.
“Varin came in the middle of the storm,” said Jean-Francois Kondratiuk, one of the two new employee representatives on the board of directors. “It would be dangerous to change the boss now.”
Peugeot’s CEO, a father of four, was born in Reims in the Champagne region. He became CEO of Corus, a steelmaker formed after British Steel Plc bought Koninklijke Hoogovens NV, in 2003.
At the time, Corus was close to collapse after racking up 2 billion pounds ($3.1 billion) in losses over four years. Under Varin, the steelmaker scrapped 1,150 jobs, swapped out about a third of its management, and sold its aluminum unit. After the changes, Tata Steel Plc paid $12.9 billion for Corus, outbidding Brazil’s CSN SA.
Varin’s restructuring efforts at Peugeot cleared a hurdle last month when the hard-line CGT union agreed to end a walkout and drop legal action aimed at blocking the closing of the Aulnay factory near Paris.
Up next for Varin is negotiating a deal with unions to increase productivity in France. He also said in April that further cost savings may be necessary next year if Europe’s car market doesn’t improve. At the very least, he’s won the respect of some labor leaders.
“I hope he’ll stay,” said Christian Lafaye, head of the FO union at Peugeot. “Of all the Peugeot CEOs I’ve known over my 37-year-old career, he’s the one who’s most capable of listening.”
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