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PSA Peugeot Citroen (UG), the unprofitable French carmaker, agreed to bring in Dongfeng Motor Corp. and France as investors as part of a 5.27 billion-euro ($7.26 billion) rescue plan to fund new vehicles. The shares rose to a two-year high.
Peugeot will shore up financing by selling new stock and warrants and setting up a partnership with Banco Santander SA (SAN), the Paris-based manufacturer said today. Dongfeng and France will each pay 800 million euros for a 14 percent stake apiece, accounting for about half of a 3 billion-euro capital increase.
The sale marks a turning point for the 118-year-old carmaker, Europe’s second biggest, as the founding Peugeot family relinquishes control for the first time in a bid to finance model development and push into emerging markets. Dongfeng said today that the partnership with the French company is targeting 1.5 million annual vehicle sales under its own nameplate and the PSA brands by 2020.
“It’s a good deal for both Dongfeng and PSA,” said Han Weiqi, a Shanghai-based analyst at CSC International Holdings Ltd. “Dongfeng can tap PSA’s core technologies and overseas network for expansion. For PSA, the investment helps them coming out of an imminent crisis.”
Peugeot surged as much as 1.10 euros, or 8.8 percent, to 13.60 euros, the highest intraday price since March 20, 2012, and was up 8.6 percent as of 9:12 a.m. in Paris trading. Dongfeng fell 1.1 percent to close at HK$10.84 in Hong Kong.
Dongfeng, established in 1969 and based in the central Chinese city of Wuhan, operates three factories with Peugeot in the country. The companies plan to raise their joint production by two-thirds to 750,000 vehicles by the end of 2015.
Peugeot, among the producers worst-hit by a contraction in Europe’s auto market 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 plunged 86 percent to 426 million euros, beating Peugeot’s target of cutting the figure by half.
“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.”
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 today 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 French company is currently controlled through a 25.5 percent equity stake owned by descendants of Armand Peugeot, who set up the automaker in 1896. The family also holds 38.1 percent of the voting rights.
Peugeot will sell another 770 million euros in warrants carrying the right to shares at the same price as in the rights offer. The carmaker also said today that it renewed a 2.7 billion-euro credit line with banks.
“We need to redefine a winning strategy in Latin America and Russia, which will require global products and low-cost platforms that will be localized in these countries,” Chief Financial Officer Jean-Baptiste de Chatillon said on a conference call. The investment and debt-reduction packages will let Peugeot “invest in research and development and deal with our product plans” through 2019.
Lending ventures to be set up in Peugeot’s main European markets between the Banque PSA Finance division and Madrid-based Banco Santander, Spain’s biggest bank, carry “potential cash upstream” of as much as 1.5 billion euros by 2018, the carmaker said. The tie-up with the Spanish company’s Santander Consumer Finance unit will cover 90 percent of Banque PSA’s activities.
Peugeot’s deliveries in Europe fell faster than at competitors as the global credit crunch and regional sovereign-debt crisis led to a six-year drop in industrywide demand for autos through 2013. The company’s market share in the region shrank to 10.9 percent last year from 12.8 percent in 2007. Peugeot has either posted declining earnings or was unprofitable in five of the last seven years.
Chief Executive Officer Philippe Varin responded 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 that included 7 billion euros in French state guarantees on the division’s bonds and 11.5 billion euros in refinancing from banks.
The carmaker said today that Carlos Tavares, a former manager at French competitor Renault SA (RNO), will succeed Varin as CEO on March 31 after taking responsibility for group operations tomorrow. Tavares, 55, joined Peugeot in January in preparation for the appointment.
Peugeot has a target of delivering at least half of its vehicles outside Europe by 2015. The proportion of non-European sales increased to 42 percent last year from 38 percent in 2012. China, the world’s biggest auto market, accounted for 20 percent of the carmaker’s global deliveries last year.
The French company’s first model designed for China was the Peugeot 408 sedan, introduced in early 2010. The carmaker inaugurated a plant late last year with a separate joint venture partner, Chang’An Automobile Group, to make the Citroen nameplate’s premium DS vehicles. Peugeot group Chinese sales last year rose 26 percent, outpacing the passenger-car market gain in the country.
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