Peugeot Talks Said to Hit Snag on Dongfeng Holding Size

PSA Peugeot Citroen’s plan to raise funds through a share sale have hit a snag as Dongfeng Motor Corp. seeks a smaller stake than first discussed, people familiar with the matter said.

Dongfeng is weighing buying about 10 percent, half the size of the original proposal, said the people, who asked not to be identified discussing private talks. The Chinese company is more interested in expanding an existing industrial venture than buying a stake, they said.

Peugeot initially proposed a capital increase of at least 3 billion euros ($4 billion), in which Dongfeng and the French state would take equal stakes of about 20 percent, people familiar said last month. 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 to expand outside Europe, where demand is at a two-decade low.

“Peugeot’s issues today are so global that having Dongfeng buying 10 percent of its shares won’t change anything,” Florent Couvreur, an analyst at CM-CIC Securities in Paris who recommends selling the shares. “Peugeot has to deal with restructuring its European activities; its synergies with GM, which are non-existent; the inconsistency of its product range and its huge operational problems.”

Peugeot, Europe’s second-largest automaker, dropped 76 cents, or 7 percent, to 10.17 euros at the close of trading yesterday in Paris. The stock has gained 86 percent this year, valuing the French manufacturer at 3.61 billion euros.

Government Influence

A smaller Dongfeng stake would potentially give the state, interested in protecting jobs and retaining the automaker’s base in France, greater say. Some in the Peugeot family, which owns 25.5 percent, are concerned about the French government’s increased influence and want guaranteed board seats or other protections as a counterweight after a capital increase likely dilutes their holding, the people said.

Another option Peugeot has would be selling its 57 percent Faurecia SA stake, with Canadian parts-maker Magna International Inc. and other industrial competitors showing interest in the French supplier, people said. Peugeot thus far has said that it intends to keep the holding.

Faurecia gained 82 cents, or 3.4 percent, to 24.82 euros.

Pierre-Olivier Salmon, a Peugeot spokesman, declined to comment. Marianne Zalc-Muller, Industry Minister Arnaud Montebourg’s spokeswoman and Tracy Fuerst, a Magna spokeswoman, didn’t respond to requests for comment. Zhou Mi, Dongfeng’s spokesman, said he’s unaware of information that the talks with Peugeot have hit a snag and that the automaker is seeking a smaller stake.

GM Partnership

A 10 percent stake by Dongfeng and focus on expanding the existing joint venture would more closely mirror the Paris-based automaker’s current partnership with General Motors Co., which owns 7 percent of Peugeot. Dongfeng and Peugeot already operate three factories together in China, with annual production capacity set to rise by two-thirds to 750,000 vehicles by the end of 2015.

The share sale is progressing slower than planned as Dongfeng, the French government and Peugeot’s controlling family bargain over influence and the size of their eventual holdings, with a final agreement not expected until the end of the year at the earliest, the people said.

Peugeot, which is also talking to other potential industrial partners, is not likely to look more closely at Faurecia until completing the Dongfeng deal, the people said.

Peugeot is also considering the sale of a stake in its banking unit and continues to hold talks with Banco Santander SA in Spain regarding a holding in Banque PSA Finance, people familiar said. A Santander representative declined to comment.

Family Dispute

Peugeot family members are at odds with one another over how best to secure the automaker’s future, with Thierry, who heads the automaker’s supervisory board, wanting to retain greater control and Robert, who heads the publicly traded investment vehicle FFP, opposed to sticking additional funds into the carmaker, two people familiar with the matter said.

Their cousin, Jean-Philippe, has been trying to negotiate between the opposing camps to reach an agreement, they said. Jean-Philippe’s support is critical to any final decision because he heads EPF, the family’s unlisted holding company. EPF controls the listed FFP, which in turn owns the family’s main Peugeot stake.

The family clashed with the French government last month after a state official went to China to discuss Peugeot without the knowledge of the family or carmaker’s executives, a person said. Louis Gallois, the state’s Peugeot board representative, is now acting as the main conduit for negotiations between the family and government, the person said.

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