PARIS (Bloomberg) -- PSA Peugeot Citroen plans a 1 billion-euro ($1.34 billion) rights offering to raise cash as debt increases, people familiar with the matter said.
General Motors Co. will buy about 7 percent of the French carmaker and take part in the new share sale, the people said, declining to be identified discussing private talks. Another report by Reuters this week said GM's stake would be less than 5 percent.
The Peugeot family, which owns 30 percent of the company as its biggest shareholder, agreed to participate in the rights offer, one of the people said.
Peugeot, Europe's second-biggest automaker after Volkswagen AG, announced plans this month to sell assets as debt more than doubled in the second half to 3.4 billion euros.
Peugeot and GM, the world's largest carmaker, are planning an alliance that may include developing engines and building vehicles together in Europe, a person familiar said last week. GM is looking for ways to turn around its unprofitable Opel brand in Germany.
"It signifies just how bad the situation must be for them," said Erich Hauser, a London-based Credit Suisse analyst. With the rights issue, which could dilute current shares by about 30 percent, and the planned asset sales, "future earnings power is now fundamentally impaired on a permanent basis."
Peugeot rose 7 cents, or 0.4 percent, to 15.37 euros in Paris trading today. The shares have gained 27 percent this year, valuing the carmaker at 3.6 billion euros. Peugeot spokeswoman Cecile Damide and GM spokesman Klaus-Peter Martin declined to comment.
Peugeot, whose origins date back to the early 19th century laminated steel- and toolmaker Peugeot-Frères et Jacques Maillard-Salins, is still controlled by the Peugeot family.
The company's current chairman, Thierry Peugeot, is the great-grandson of Eugene, who jointly led the company with his cousin Armand when it produced its first automobile in 1891. Thierry is joined on the board by relatives Roland, Robert and Jean-Philippe Peugeot, and Marie-Helene Roncoroni.
The share sale to GM would involve a standstill agreement by which GM would not take a greater holding in the Paris-based carmaker without permission, the people said.
Peugeot already cooperates with BMW AG on engines for the German carmaker's Mini brand in 2002, expanding the partnership with a 100 million-euro hybrid joint venture last year.
The company also produces diesel powertrains with Ford Motor Co. A PSA-Peugeot executive said today the automaker would consult with other partners before completing any new alliance agreement.
"If there's any agreement that goes beyond our existing partnerships, each of those partnerships will have to evaluate what can be done," PSA industrial director Guillaume Faury told reporters at a briefing on Tuesday.
Faury would not say whether PSA was in talks with GM.
PSA's partners would have to allow existing agreements to "evolve as a function of whatever deal is signed," Faury said.
"They want to demonstrate that the partnership is a close one, not simply on individual projects such as those Peugeot has with BMW, which might one day separate," said Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler. "Peugeot's dream partner, BMW, clearly wasn't interested, which is why they have gone to GM. It is an alliance of necessity."
Peugeot's 2011 sales in Europe plunged 8.8 percent to 1.68 million vehicles, while GM's dropped 1.9 percent to 1.17 million. The prospects for a turnaround aren't improving with auto demand in the region poised to drop for the fifth straight year in 2012 as the sovereign debt crisis unsettles consumers.
GM, which this month posted a record annual net income of $7.6 billion after dividends for 2011, is planning more cost cuts for its unprofitable European unit after the last turnaround plan failed to end losses there. The automaker's Europe business, including the Opel brand, lost $747 million last year before taxes and interest.
Political interference and strong unions have hampered both companies from shutting factories and laying off workers to rein in costs. PSA is projected to use just 62 percent of its European capacity this year, compared with 74 percent at Opel, according to LMC Automotive in Oxford, England.
"The history of collaborations in the auto industry that involve equity -- or even if they don't involve equity -- is miserable," Maryann Keller, a principal of a self-named consulting firm in Stamford, Conn., said in a telephone interview. "What in the world do you get by buying a tiny stake of a French company where you could never lay anybody off or close a factory?"
Carmakers risk losses when they use less than 90 percent of their capacity, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.
"If the Peugeot-GM hypothetical tie up becomes a reality, I sincerely hope it deals with the overcapacity issue," Fiat SpA CEO Sergio Marchionne, who estimates excess European auto capacity at 20 percent, said today in Brussels. "It's essential that the European situation will be addressed, whether I address it or other people address it, I don't particularly care."
Reuters contributed to this report.