Peugeot mulls stake sales to Dongfeng, French gov't, report says

Move would dillute GM's 7% stake in automaker

UPDATED: 10/14/13 8 am ET - adds details

PARIS (Reuters) -- PSA/Peugeot-Citroen is preparing a 3 billion euro ($4.1 billion) capital increase in which the company's Chinese partner Dongfeng Motor and the French government would take matching stakes in the automaker, people with knowledge of the matter said.

A French delegation of executives, government officials and bankers is heading to China for talks to prepare an outline for a deal that could be signed within weeks, sources said. They asked not to be identified because the negotiations are confidential.

PSA's board will discuss the possible stake sale at a board meeting scheduled for Oct. 22, the day before the automaker reports third-quarter revenue figures, sources said.

"The situation is dire," David Arnold, an industry specialist at Barclays Capital, said in an e-mail to clients. "It's clear that cash is now much more of a drag and the company realizes that it cannot starve the business of investment or it will lose out long term."

Dongfeng Motor and the French government would each contribute 1.5 billion euros and acquire 20 to 30 percent of PSA, the sources said. The capital increase would be accompanied by an expansion of DPCA, the PSA-Dongfeng joint venture in China, adding more PSA vehicles and technology to target other markets in the region, the sources said.

Part of the new capital would be raised through a rights issue in which the Peugeot family would sell new stock to the French government, the sources said. The remainder would be raised in a reserved capital increase. The Peugeot family would lose control of the company because the cash injection would dilute its 25.4 percent stake and 38.1 percent in voting rights.

The 3 billion euro cash injection would amount to 68 percent of the French carmaker's 4.39 billion euro market value. It would be worth about 40 percent of the new share capital and also dilute the 7 percent stake held by General Motors.

PSA entered an alliance with GM last year and sold a stake to GM in a 1 billion euro capital increase. The future of that pairing could be affected by Dongfeng's level of influence over PSA in any expanded partnership, GM Vice Chairman Steve Girsky told Reuters last month. GM has the option to terminate the alliance in the event of a change in control of the French manufacturer, according to PSA's annual regulatory filings.

French Finance Minister Pierre Moscovici, speaking to reporters on the sidelines of an annual meeting of the International Monetary Fund (IMF) in Washington would not directly confirm, nor deny, rumors of the government taking a stake in PSA. "The issue is not primarily about the French government or a carmaker buying into the PSA capital but about developing good industrial partnerships for PSA," he said.

Union: 'Good news'

Xavier Lellasseux, spokesman for PSA's second-largest union, CFDT, said it is "absolutely vital" for the automaker to have a capital increase so the deal would be good news if confirmed. The key question would be whether French shareholders, including the government, keep a blocking power. "It would be good if there was still a control by all French shareholders which would limit the ambitions of one or the other incoming shareholders," he said.

Christian Lafaye of Force Ouvriere union, said a Dongfeng stake would be a sustainable solution. "We can't deny that the Chinese have the wind behind them and the money," he said.

However, Franck Bieri from the CGC management union warned that the consequences for the French market and labor force remained unclear. "It might be enough to keep activities going but it's not certain it would save all the jobs because PSA's market share is continuing to fall," he said.

PSA had an 18 percent drop in August registrations in Europe that eroded its market share to 11 percent for the first eight months of the year, down almost a percentage point year-on-year.

The automaker lost 5 billion euros ($6.6 billion) last year but said on July 31 it expected to beat its 2013 goal of halving industrial cash burn to 1.5 billion euros.

Today, PSA reaffirmed that it is examining new cooperation agreements to raise cash for investments and expand outside its home continent.

The company is "examining industrial and commercial developments with different partners, including the financial implications that would result from them," PSA said in a statement, without providing details. "None of these projects has reached maturity yet," the company said.

Bloomberg contributed to this report.

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