Peugeot Wins Union Nod for Cuts as Stake Sale Considered

PSA Peugeot Citroen can now focus on a possible share sale to Dongfeng Motor Corp. and the French state after reaching a deal with unions to slash operating costs, two people familiar with the matter said.

A plan for a capital increase of at least 3 billion euros ($4.1 billion), in which Dongfeng and France may take equal stakes of about 20 percent, is making slow progress, said the people, who asked not to be identified because the talks are private. The goal is for a deal by year’s end, they said.

Unions representing more than 60 percent of workers said yesterday they’ll support a proposal to reduce overtime pay and freeze salaries in exchange for investment guarantees and new models to boost capacity utilization. Peugeot, which reported a first-half operating loss in its automotive unit of 510 million euros, is looking to raise money for development spending and an expansion outside Europe, where demand is at a two-decade low.

“The shares have been pretty volatile in recent weeks due to ongoing rumors regarding government participation,” said Sascha Gommel, a Frankfurt-based analyst at Commerzbank AG who recommends selling the stock. “It would be clearly negative if the French government is getting involved because it would dilute the restructuring measures as the government wants to protect jobs in France.”

Peugeot dropped as much as 38 cents, or 3.6 percent, to 10.16 euros and traded 1.5 percent lower as of 1:18 p.m. in Paris today. The stock has climbed 90 percent this year, valuing the Paris-based automaker at 3.68 billion euros.

Union Support

Four of the six main unions, the CFE-CGC, SIA, CFTC and FO, have told Bloomberg they will support the effort to cut labor costs. The CFDT hasn’t made a decision, while the CGT said it won’t back the plan.

“This agreement allows the group to open the discussion to external investors,” Christian Lafaye, head of the FO union at the automaker, said yesterday in a phone interview. “This was a necessary and useful deal.”

The Peugeot board’s strategy committee met Oct. 20 to consider the share sale, which is complicated by concerns from the two largest shareholders on the impact of a capital increase and the need for Chinese and French state backing, the people said. The full board will discuss its options today at a scheduled meeting ahead of the third-quarter results tomorrow. Peugeot spokesman Jon Goodman declined to comment.


“The market was not expecting a capital increase and was hoping for PSA to de-leverage the balance sheet helped by a recovery of the EU market and cost savings,” Jose Asumendi, an analyst with JPMorgan in London. “It’s not clear how the capital increase is ultimately helping the company reestablish its cash-generation cycle.”

Industry Minister Arnaud Montebourg said in an interview published in Le Parisien today that the automaker is in “very serious difficulty” and will remain a French company.

Dongfeng currently has nothing that it can disclose on the acquisition, spokesman Zhou Mi said in an e-mail today. The Chinese automaker places great value in Peugeot as a strategic partner, hopes for opportunities to broaden the partnership and that Peugeot will overcome its financial difficulties, he said.

The Peugeot family, which owns 25.5 percent of the automaker, is divided over how much to spend on any capital increase or whether to invest at all, a person said.

General Motors Co., which has a 7 percent stake, may pull out of its alliance with the French carmaker should Dongfeng purchase a holding because GM works with rival SAIC Motor Corp. in China, another person said. The Detroit-based carmaker has the option to terminate the partnership if there’s a change in control of the French manufacturer. Ulrich Weber, a spokesman for GM’s European division, declined to comment.

Assessing Investment

Zhu Fushou, Dongfeng’s general manager, said last week that the automaker was still assessing whether an investment made sense, rather than on getting regulatory approval. Chinese state-owned companies usually obtain permission from the National Development Reform Commission, the top planning agency, before commencing formal talks on foreign investments.

Peugeot is also continuing to proceed with other options to raise funding, including the possibility of selling a minority stake in the automaker’s banking unit, a person said.

Chief Financial Officer Jean-Baptiste de Chatillon said last week the carmaker is on target to cut cash consumption by 50 percent this year after burning through 3 billion euros in 2012. Peugeot has “absolutely no problem of liquidity or financial security” and is actively looking for industrial partnerships to strengthen the carmaker, the CFO said.

Deadline Looming

Unions have to decide today whether to officially accept the proposals from Chief Executive Officer Philippe Varin aimed at improving the competitiveness of factories.

The manufacturer has agreed not to shut additional French plants in the next three years and add a new model at each of five locations to boost capacity utilization to 100 percent in 2016 from 61 percent currently. Peugeot is already eliminating 11,200 jobs and will close a factory near Paris this month.

Under the plan, Peugeot will cut overtime pay by 20 percent to 25 percent and freeze salaries next year in its French automotive operations, which employed 76,136 people at end of 2012 or 65 percent of its global production workforce.

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