Peugeot’s Dongfeng Deal Risks Board Bottlenecks for Cash

PSA Peugeot Citroen’s deal to sell stakes to France and Dongfeng Motor Corp. may end up trading a cash influx for a shareholder structure that threatens to hobble the manufacturer’s decision-making, analysts said.

The board of Europe’s second-largest carmaker will meet tomorrow to vote on the agreement. Under the outline of the plan, which Peugeot has said would raise 3 billion euros ($4.1 billion), the French government, Dongfeng and the Peugeot family would end up with roughly equal stakes.

Chairman Thierry Peugeot said in a letter last month to his cousin Robert that the plan will create a “three-headed governance” structure, making the Paris-based company difficult to run. Still, he was overruled and the family’s holding companies, which currently control 38 percent of Peugeot’s voting rights, supported going ahead with the deal.

“We see a risk of a Pyrrhic victory,” Max Warburton, an analyst with Bernstein Research, said in an open letter to Thierry. “The Dongfeng deal will close out strategic options,” and the involvement of France and the state-backed Chinese company “is hardly likely to lead to improved efficiency, competitiveness and growth.”

Question Marks

Question marks over the deal have grown as Peugeot nears its self-imposed deadline for reaching an agreement. Earlier this month, the Paris-based company, which has burned through more than 4 billion euros over the last two years, said that its board expressed “full support” for the proposal. The goal is to expand overseas to reduce exposure to Europe, where industrywide car demand is near a two-decade low.

Peugeot gained 40 cents, or 3.2 percent, to 12.79 euros at the close in Paris today. Dongfeng Motor Group Co. fell 1.6 percent to HK$10.96 in Hong Kong trading.

While Dongfeng seeks access to Western markets and technology, France is looking to protect local jobs and ensure the country’s largest auto manufacturer remains French. The descendants of founder Armand Peugeot have in turn struggled to find a common position, leaving the company adrift as Volkswagen AG pushes to become the world’s largest carmaker.

“I still don’t understand why they’re doing this deal,” said Florent Couvreur, an analyst with CM-CIC Securities in Paris. “The three main shareholders will have completely divergent concerns, with a high risk of conflict.”

Streamline Operations

Given the potential tension, some argue Peugeot would be better off on its own. As Europe’s auto market starts a gradual recovery this year, Bernstein’s Warburton said Carlos Tavares, Renault SA’s former chief operating officer who was hired to succeed Philippe Varin as chief executive officer this year, should be given a chance to streamline operations.

Tavares will become operations chief Feb. 19 and take over from Varin as CEO after the final deal with Dongfeng is officially signed during a state visit to France by Chinese President Xi Jinping in March, said a person familiar with the matter who asked not to be identified speaking about the plan ahead of the announcement. Pierre-Olivier Salmon, a spokesman for Peugeot, declined to comment on the timing.

There are alternatives to a share sale, said Philippe Houchois, a London-based analyst with UBS. Peugeot could divest its 51.7 percent stake in auto-parts maker Faurecia SA, which is worth about 1.9 billion euros at current market prices. It could also sell part of financing unit Banque PSA Finance SA, he said.

Capital Increase

Peugeot’s “preferred” scenario is to sell stakes to Dongfeng and the French state and then raise additional funds by selling stock to current investors. The company is also close to a deal for a joint venture with Banco Santander SA to strengthen its lending unit. The agreement would include cash in exchange for a loan portfolio, people familiar said last week.

The capital-increase discussions center on selling 14 percent holdings apiece to Dongfeng and France, which would each pay at least 750 million euros, according to people familiar with the matter. The Peugeot founding family would have their stock holding diluted to about 14 percent under the plan, the people said. Peugeot hasn’t commented on details.

The deal could also trigger a larger shakeup. French minority shareholders’ association ADAM said in a letter to Thierry Peugeot this month that Dongfeng, the French state and the family may be considered as acting together in their proposal. That could force them to make an offer to buy out other stockholders under French law.

Posting Losses

The French company’s shares have tumbled more than 50 percent over the past three years as the effects of the sovereign-debt crisis eroded demand for mid-market European cars. Peugeot, which will report 2013 results on Feb. 19, probably lost money for the second year in a row, according to analyst estimates.

The capital increase, equivalent to about 70 percent of Peugeot’s market value, would follow a 2012 share sale to raise 1 billion euros. That deal was part of a previous effort to reorganize, underpinned by an alliance with General Motors Co. That partnership failed to produce the targeted cost savings, and GM sold its entire 7 percent stake in Peugeot in December.

The new money would help Peugeot develop models and expand abroad. Dongfeng and Peugeot already operate three factories together in China, the world’s largest auto market, and plan to increase capacity by two-thirds by the end of 2015.

Wuhan-based Dongfeng is one of China’s top four automakers. It builds passenger cars and commercial vehicles under its own brands as well Peugeot, Nissan, Kia and Honda models as part of joint ventures. The Chinese company is investing 30 billion yuan ($4.9 billion) in its own auto operations to reduce its dependence on foreign carmakers.

Thierry Peugeot has favored raising capital by selling new stock on the market without investments by Dongfeng or France, according to people familiar with the situation. Some are hoping he can still thwart the deal.

“Before you give up, isn’t it worth one last try as an independent?,” Bernstein’s Warburton said in his appeal to Thierry Peugeot. “It’s not too late to turn back.”

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