A Peugeot and Mitsubishi Deal: Why?

A decade after Renault shocked the auto world by buying a controlling stake in Nissan (NSANY), another Franco-Japanese alliance is in the cards. PSA Peugeot Citroen, Europe's second-biggest carmaker, is mulling a decision to take control of Mitsubishi Motors. According to a Japanese newspaper, the Nikkei English News, Peugeot could spend up to $3.5 billion to buy a 30% to 50% stake in the ailing Japanese automaker. The paper added that Mitsubishi may take a stake in Peugeot as part of the deal. With sales of 4.45 million vehicles in 2008, the combination of Peugeot and Mitsubishi would be the world's sixth-largest automotive group. The two companies are also looking at even more ambitious plans. A source close to the French automaker told Bloomberg BusinessWeek that Peugeot is considering taking a 53% stake in Mitsubishi Motors, an investment worth about $3.8 billion before the news lifted Mitsubishi shares 13.4% by the 3pm market close. Mitsubishi Motors would then take an 18% stake in Peugeot. He added that Peugeot lawyers are currently conducting due diligence and that an extraordinary meeting for its board, led by Philippe Varin, could be called in the next month to study the proposal. A vote on whether to proceed could follow as early as January. "There's a lot of movement on this," said the source, who asked not to be identified because he was discussing confidential company plans. "Unless something new comes up, it's likely to happen." Mitsubishi declined to comment on the details of the rumored alliance but said it was "open to any possibility of deepening our existing relationship." Peugeot said it was looking into a strategic partnership with Mitsubishi. Shares at the Japanese company soared by as much as 22% during intra-day trading, closing at 135 yen, up 13.45%. Peugeot shares leaped 4.2% at the news. independence and synergyTaking control of Mitsubishi Motors would constitute a brave move by Peugeot. The tie-up would be the third time a foreign automaker has had a significant stake in the Tokyo-based company. In the 1970s, Chrysler took a 15% stake, increasing it to over 20% in the 1980s, though by 1993 it had sold all its shares. More recently, between 2000 and 2001, Daimler bought a controlling 37% for $2.4 billion. The deal, beset by a costly recall scandal and cultural difficulties, wasn't a success, and the German company had sold all its stock by the end of 2005, recouping less than half of its original investment. The two automakers will hope that any deal will have more in common with the Renault-Nissan alliance, which industry watchers regard as unusually successful. That could be one reason Peugeot and Mitsubishi may use a similar ownership template. Nissan, Japan's No. 3 carmaker, is 44% owned by Renault, while Nissan has a 15% stake in Renault. That setup allows both to function independently yet achieve big savings through joint purchasing agreements and vehicle development. Analysts aren't hopeful of a repeat, however. "Nissan's turnaround was a combination of Nissan's excellent manufacturing and R&D capabilities and [CEO] Carlos Ghosn's exceptional ability at crisis management," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo. "It is optimistic to expect similar things from Mitsubishi Motors." Indeed, many doubt Mitsubishi is the right partner for the French carmaker. For Peugeot, Mitsubishi brings SUV production experience, a presence (albeit small and shrinking) in the U.S., and nascent electric vehicle technology. The latter is particularly attractive: This year, Mitsubishi became the first major automaker to begin selling electric vehicles when it began taking orders for its i-MiEV electric car. Teaming up with Peugeot could boost sales of EVs and speed up cost reductions. Mitsuru Kurokawa, a Tokyo-based analyst with the Global Automotive Group, says Peugeot may also be interested in Mitsubishi's minicar know-how and presence in southeast Asia. worth the money?But is any of that—or all of it together—worth $3 billion or more? For one thing, in markets where Peugeot lacks a presence, it's hard to argue that Mitsubishi is strong. In the U.S., for instance, Mitsubishi's November sales slipped 43%, to just 2,925. A bit like Peugeot, Mitsubishi lags rivals in China, the world's biggest auto market. And in India, another market with big potential and where Peugeot has been dragging its feet for over a year on a decision to open a 100,000 annual-capacity car plant, Mitsubishi isn't a leading player. Critics add that the two could easily deepen ties without Peugeot's needing to spend so much on the Japanese company's stock. After all, they signed an agreement on electric vehicles in September, work together developing SUVs, and have a production joint venture in Russia. And Mitsubishi Motors' stock isn't even cheap. While it has fallen sharply in recent months, before today's surge its market capitalization at $7.5 billion was roughly double that of Mazda (MZDAF). That's despite Mazda's higher profits and annual sales, and an arguably better lineup of cars. Analysts say Mitsubishi is costly because it is a favorite of Japanese retail investors attracted to the name and the implicit guarantee that Mitsubishi group companies will come to its rescue in times of trouble. The ability of the two companies to build on a deal is also open to question. It's not as if either company comes to the table in a strong position. Peugeot suffered a $1.25 billion operating loss during the January-June half, and only appointed Varin as chief executive in June after firing Christian Streiff three months earlier. Last month, Varin said the company aims to cut debt by a quarter in 2010—something that could be difficult if it has to raise money to buy Mitsubishi stock. Moreover, analysts warn that Peugeot's business prospects are likely to get worse before they get better. One reason: 2010 will be tough because the European market will likely suffer a sales hangover once the impact of cash-for-clunkers and other government programs supporting the auto industry wears off. fears of management chaosThe Japanese automaker is even weaker. Under CEO Osamu Masuko, Mitsubishi has won plaudits for its bold plans for electric vehicles. But with sales depressed in most markets, Mitsubishi expects worldwide sales to plunge 17%, to just 836,000 vehicles, during the current financial year, down from 1 million last year. Yet while Peugeot would bring financial and scale benefits, others worry that another set of foreign owners will create a new set of tensions and confusion within the company just four years after Daimler cashed out. "This repeated change in the management creates chaos [inside the company]," says Koji Endo, an analyst at Advanced Research Japan in Tokyo. A handful of Mitsubishi group companies, which own about a third of the Japanese automaker, may have most to gain from Peugeot taking control. In 2005, Mitsubishi Corp., Mitsubishi Heavy Industries, and Mitsubishi UFJ Financial Group received about $3 billion of preference shares as part of a $5.2 billion Mitsubishi Motors bailout. Beginning next year the automaker must start paying $230 million annually in dividends—something it may struggle to afford. The fresh investment would likely be used to redeem the preference shares, enabling the group companies to avoid pushing the automaker toward a possible bankruptcy or facing a standoff with their own shareholders if they were to waive the payments. "The solution is to find a buyer like Peugeot," adds Endo.

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