Peugeot Plans Model Makeover With $7.26 Billion in Funds

Carlos Tavares, PSA Peugeot Citroen’s incoming chief executive officer, laid out plans to use 5.27 billion euros ($7.26 billion) in funds from investors to overhaul the automaker’s lineup.

Tavares, a former Renault SA executive who takes over as CEO next month, said today that the French manufacturer, which has fallen behind competitors in spending on new technology, needs to increase research and development funding and focus model offerings on the most profitable vehicles.

The money will come in part from a 3 billion-euro capital increase, in which Dongfeng Motor Corp. and the French state will contribute about half the money in exchange for stakes of 14 percent apiece. Banco Santander SA will also provide funds through a partnership with Peugeot’s lending arm.

The reorganization brings to an end control by the Peugeot family of the 118-year-old carmaker, which was unable to keep up with rivals as the automotive industry shifted from a regional focus to large worldwide players. Peugeot, which has been forced to slash costs as Europe’s auto market declined for six straight years, currently spends 1-to-2 percentage points less on R&D than the industry average.

“This company has the potential to become a global car company,” Tavares told analysts on a conference call. He said his plan is to focus on fewer models and “scare” competitors with the new vehicles in the coming years.

Shares Surge

Peugeot, Europe’s second-largest automaker, surged as much as 9.1 percent to 13.64 euros, the highest intraday price since March 20, 2012, and was trading up 3.2 percent as of 2:47 p.m. in Paris. Dongfeng fell 1.1 percent to HK$10.84 at the close of trading in Hong Kong.

Tavares said he’ll detail his ``Back in the Race'' turnaround plan in mid-April as he looks to end Peugeot’s steady loss of competitiveness to regional leader Volkswagen AG.

VW controlled 24.8 percent of the car market last year in western Europe, more than double Peugeot’s 11.1 percent share. Ten years ago, the region’s two biggest carmakers were much closer, with VW’s share at 18.2 percent compared with Peugeot’s 14.8 percent, according to data from industry trade group ACEA.

While Paris-based Peugeot largely stayed focused on mid-market cars in Europe, the German competitor expanded the luxury Audi brand and invested abroad, especially in China. Since 2003, VW’s global deliveries have surged 94 percent to 9.73 million vehicles, while Peugeot’s have declined 14 percent to 2.82 million, according to data compiled by Bloomberg.

DS Brand

It won’t be a quick fix. With new models taking years to develop, Tavares said remaking the DS subbrand into a full-fledged marque that can compete with the likes of Audi may take two decades.

Tavares’s strategy also includes scaling back Peugeot’s lineup in countries such as Russia, where the automaker currently sells 27 models and is losing money.

“We envisage a future where, in the near term, Peugeot has to increase its spending significantly and yet does not expect to see the benefits for many years,” Kristina Church, a London-based analyst at Barclays Plc, said in a report to clients.

Peugeot is aiming to remake its fortunes by teaming up with Dongfeng to expand in China, the world’s largest auto market. Dongfeng, set up in 1969 and based in the central Chinese city of Wuhan, already operates three factories in the country with the French partner. The companies plan to raise joint production by two-thirds to 750,000 vehicles by the end of 2015. Dongfeng said it’s targeting 1.5 million in annual deliveries under its own nameplate and the Peugeot and Citroen brands by 2020.

European Decline

Peugeot, among the producers hardest hit as Europe’s auto market contracted to a two-decade low, reported a 177 million-euro operating loss in 2013, its second unprofitable year in a row. That was narrower than the 247 million-euro average loss of nine analyst estimates compiled by Bloomberg. Cash consumption was cut 86 percent to 426 million euros, beating Peugeot’s target of reducing the figure to about 1.5 billion euros.

“The balance sheet at the end of second half is actually much better than I would have thought,” Erich Hauser, a London-based analyst at International Strategy & Investment Group who recommends buying the shares, said by phone. “They’re not doing this deal out of necessity, but out of choice. It makes an important distinction.”

Equal Holdings

Dongfeng and France will buy their holdings in a two-step transaction, initially acquiring new stock at 7.50 euros a share and then spending more in a rights offer on the same terms, Peugeot said. The founding family will take part in the capital increase so its ownership matches the Dongfeng and French state stakes. The Peugeots, Dongfeng and France will each hold two board seats.

“It’s an absolutely strategic investment,” French Finance Minister Pierre Moscovici said on RTL radio station. “The idea for the state is to guarantee the presence of PSA in France. We’ll be a stable, sound and non-sleeping shareholder.”

The family, which steered the automaker through two world wars, was split in recent months over the best rescue plan, with Chairman Thierry Peugeot arguing for a go-it-alone strategy while his cousin Robert, who also sits on the board, backed bringing in Dongfeng and the French state.

Six-Hour Meeting

The board met for six hours yesterday to weigh its options, with all members ultimately voting in favor of the plan, current CEO Philippe Varin said. The executive said he’s “confident” the transaction will win European Union regulatory approval and shareholder backing.

Any concerns that the French state may limit Peugeot’s prospects should be allayed, given the government stake in local competitor Renault, which “has managed to become a more global player than we are today,” Varin said in a Bloomberg Television interview.

Peugeot will also sell 770 million euros in warrants carrying the right to shares at the same price as in the capital increase. The carmaker renewed a 2.7 billion-euro credit line with banks as well.

“PSA is a company that is now fit for growth, and we will soon push hard on the accelerator,” Varin told analysts. “There have been tough moments, sad moments” over the past few years.

Bank’s Separation

The Banque PSA Finance auto-lending division will set up ventures in Peugeot’s main European markets with Madrid-based Banco Santander, Spain’s biggest bank, carrying “potential cash upstream” of as much as 1.5 billion euros by 2018, the carmaker said. The tie-up, covering 90 percent of Banque PSA’s activities, will lead to the unit’s separation from the French carmaker, Chief Financial Officer Jean-Baptiste de Chatillon said on the conference call.

Varin responded to the automaker’s losses by disposing of trucking and vehicle-rental businesses, shutting a car plant outside Paris and reaching agreements with unions to cut the French workforce by 17 percent and freeze pay for remaining employees. Varin, 61, also supervised a rescue of Banque PSA with 7 billion euros in French state guarantees for the unit’s bonds and 11.5 billion euros in refinancing.

Tavares, 55, will succeed Varin as CEO on March 31 after taking responsibility for group operations tomorrow.

Because of Peugeot’s current state, “there is humility in this company, and that is a strength because humility is a characteristic of champions,” Tavares said.

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