UPDATED: 12/13/13 4:20 pm ET
(Bloomberg) -- PSA Peugeot Citroen shares plunged 12 percent Friday after General Motors announced plans to sell its entire Peugeot stake amid the struggling French carmaker's efforts to seek financial help from its Chinese partner.
GM purchased the 7 percent holding just last year as part of an alliance the two formed to improve the results of both companies.
The partnership since then has struggled to meet the original goals, with Peugeot saying Thursday that savings from the cooperation will be 40 percent less than originally planned.
The scaled-back alliance and persistent losses have propelled Peugeot to pursue deeper cooperation with Dongfeng Motor Corp. to boost sales in China and other growth regions as the European market declines for a sixth straight year.
GM, which is partnered in China with rival SAIC Motor Corp., said Thursday it will support Peugeot aligning with another automaker provided their existing partnership continues.
"GM's exit could make it easier at the end of the day to get a deal with Dongfeng, since GM and Dongfeng are direct competitors in China," said Erich Hauser, an analyst with International Strategy and Investment Group in London. "But the timing is not ideal for Peugeot and raises questions about the future of their cooperation."
Peugeot shares declined 1.29 euros to 9.34 euros, the lowest close in Paris trading since July 30. The stock has dropped 22 percent this week, valuing the French manufacturer at 3.31 billion euros ($4.54 billion). GM shares closed down 1 cent at $40.04 in New York trading on Friday.
GM's stake, purchased in March 2012 for 320 million euros as part of a cooperation aimed at finding savings through joint purchasing and product development, was worth 264 million euros at the close of trading Thursday.
GM will sell its 24.8 million shares through a private placement to institutional investors, the U.S. automaker said. Goldman Sachs Group Inc. is managing the transaction.
The share sale was priced at 10 euros apiece, according to a person with knowledge of the transaction who wasn't authorized to speak publicly.
"The sale is a surprise and reflects negatively on the GM-Peugeot partnership," said Sascha Gommel, an analyst with Commerzbank in Frankfurt. "On the other hand, it signals that the negotiations with Dongfeng are well advanced and that a deal is more likely."
On Thursday, Europe's second-largest automaker for the first time acknowledged plans for a possible capital increase to boost its financing amid ongoing financial losses. Worsening auto markets and unfavorable exchange rates in Russia and Latin America will cause Peugeot to take a 1.1 billion-euro non-cash charge.
Peugeot reported a first-half operating loss of 510 million euros in its automotive unit.
The controlling Peugeot family, which has been at odds over how to progress, agreed this week to raise at least 3 billion euros, two people familiar with the matter said.
Dongfeng and the French state would each invest 1.5 billion euros as part of the deal, said the people, who asked not to be identified because the talks are private.
The two may take equal stakes of about 20 percent, people familiar said in October.
A final deal, which the French government is directly involved in negotiating, is not expected until sometime in the first quarter, one person said. Peugeot said Thursday that current talks with Dongfeng and others are "at a preliminary stage" and no outcome is assured.
Dongfeng and Peugeot already operate three factories together in China, the world's largest auto market, with annual production capacity set to rise by two-thirds to 750,000 vehicles by the end of 2015.
"There certainly seems to be increasing momentum to the speculation of the PSA-Dongfeng alliance, and GM's actions do help it clear one of the hurdles for such an arrangement," said Ian Fletcher, a London-based analyst with IHS Automotive.
Paris-based Peugeot will remain a French company and the government has the means to invest in the automaker should it choose to do so, French Industry Minister Arnaud Montebourg said Friday in an interview on RMC radio.
He declined to say whether the state intended to participate in a capital increase. Peugeot is getting squeezed by expanded small-car offerings from upscale manufacturers such as BMW AG and by growing budget brands like Renault SA's Dacia.
In Europe, where the manufacturer delivers more than half of its cars, its sales this year have fallen more than any other automaker.
The Peugeot-GM partnership's annual cost reductions will only reach $1.2 billion in 2018, 40 percent less than the $2 billion originally announced and two years later than targeted, the two said Thursday.
The carmakers said they remain committed to their partnership.
"Our equity stake was planned to support PSA in their efforts to raise capital at the time of the creation of the GM and PSA alliance, and that support is no longer needed," Steve Girsky, GM vice chairman, said yesterday in a statement posted on the company's website. "The alliance remains strong with our focus on joint vehicle programs, cross manufacturing, purchasing, and logistics."
The GM-Peugeot partnership, focused on cutting costs in Europe, offers limited potential because the two carmakers largely compete for the same customers.
The two have dropped plans to cooperate on subcompact vehicles. Peugeot will make a compact crossover for both automakers at its factory in Sochaux, France, the two companies said.
The manufacturers earlier agreed that GM will assemble a small van for both companies in Zaragoza, Spain.