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Chinese Automaker and French Government to Invest in Peugeot After Two Centuries, Peugeot Family Cedes Control
(about 7 hours later)
PARIS — Dongfeng Motor, one of China’s biggest car companies, and the French government will become major shareholders in PSA Peugeot Citroën, the largest French automaker, the companies said on Wednesday, in an alliance that will bring an injection of 3 billion euros in new capital to the French firm. PARIS — The family business that grew into PSA Peugeot Citroën got its start more than 200 years ago, making manufactured goods like pepper mills, bicycles and whale-bone corsets on its way to becoming the largest automaker in France. This week the Peugeot family, one of the country’s wealthiest, agreed to give up control of the company it had been running for eight generations.
Peugeot said the capital increase, worth $4.1 billion, would be used for increasing its footprint in China and Southeast Asia, and would result in cost savings of about €400 million a year by early in the next decade. Peugeot also said the deal would reinforce its European business by helping the company finance strategic investments and pay down high-interest debt. As part of a 3 billion euro, or $4.1 billion, plan to raise new capital, announced Wednesday, the family will reduce its holding to 14 percent from just over 25 percent. That opens the way for Dongfeng Motor, a big Chinese car company, and the French government to each buy 14 percent stakes of their own.
The Peugeot family currently holds 25.4 percent of the company’s shares. As part of the deal, it will reduce its stake to 14 percent, paving the way for the French government and Dongfeng to each take 14 percent stakes for about €800 million each, buying shares at a 40 percent discount to the closing price on Tuesday. There will be an offering to the company’s existing shareholders at the same discounted rate, bringing the total capital increase to about €3 billion. The company, which ranks second to Volkswagen in Europe and employs 90,000 people in France, has been on the ropes, losing money and market share along with the sharp downturn in the European auto industry. It needs cash to retire high-interest debt and help fund crucial research and development.
Ranked by sales, the French group is the second-largest automaker in Europe, behind Volkswagen, and employs more than 200,000 people worldwide, including about 90,000 in France. But it has been losing market share to VW and to its French rival, Renault, and its heavy dependence on the European market left it hemorrhaging money as that market took a sharp downturn after the financial crisis. After General Motors sold its 7 percent investment in Peugeot last year, the company turned to its Chinese partner and President François Hollande’s Socialist government, in the hope that the money would come without too many strings attached. Some analysts, however, are skeptical the company can succeed with such fragmented oversight.
The announcement came as Peugeot on Wednesday reported 2013 sales in its automotive division of €36.5 billion, down 4.8 percent from a year earlier, and said the division’s operating loss narrowed to €177 million from €1 billion. The investment of public money by Mr. Hollande’s government is aimed at preserving the factories and jobs in France. It is also seen as a guarantee that Peugeot remains a French company, even as it relies on its Chinese partner to help it through its financial troubles and smooth an expansion into growing markets in Asia.
It reduced the amount of cash it burned through last year to €426 million from €3 billion. The operating loss and cash flow figures were both better than analysts had expected. The deal came over the strident objections of Thierry Peugeot, the chairman of the company’s board. In a public dispute rare for the usually tight-lipped clan, Thierry last month sent a letter to his brother Robert, head of FFP, the family’s €2.1 billion listed holding company, protesting the “strategy of disengagement,” a letter that was quickly leaked to the financial daily Les Échos.
Peugeot also announced that it has secured a renewed credit line of €2.7 billion from a syndicate of banks, giving it an additional source of funds to draw on to finance its activities. Arguing for the family to increase its investment, Thierry Peugeot wrote in the letter, “We must demonstrate the historic attachment that we have for the group by being present when it has a need for it.”
Shares of Peugeot had risen more than 3 percent in afternoon trading in Paris, having earlier risen by more than 4 percent. Dongfeng stock fell more than 1 percent in Hong Kong. But in the end, according to a person close to the family, Thierry Peugeot found himself “very isolated,” and he abstained from voting on Monday when the rest of the family voted to welcome the new investors.
Peugeot also announced that Carlos Tavares, the former No. 2 at Renault, was taking over from Philippe Varin as Peugeot’s chief executive, effective March 31. To bring its vision to fruition, the company has appointed Carlos Tavares, a respected industry veteran who had been the No.2 to Carlos Ghosn at Renault, to take over from Philippe Varin as Peugeot’s chief executive at the end of March, when shareholders will vote on whether to approve the capital increase.
The company said it was entering into exclusive negotiations with Banco Santander of Spain to create a partnership for Banque PSA Finance, Peugeot’s junk-rated consumer finance business, which is dependent on €7 billion of credit guarantees from the French Finance Ministry. Speaking at a press conference, Mr. Tavares said the strategy was to move into higher market segments where possible and to reduce the variety of vehicles it produces, with a “core-model strategy,” allowing it to reduce costs and improve the profitability of the cars it does make.
Dongfeng, based in the city of Wuhan, has had a partnership with Peugeot since 1992. The new deal allows Dongfeng, hardly a household name outside of its home country, the opportunity to take its first steps on the global stage, while it gains access to Peugeot’s technology and to its European distribution network. Mr. Tavares said the company also intended to stop making B-segment, or “supermini” cars, in Europe because they could not be made profitably there. But he said the company, which last year sold 2.8 million cars worldwide, had committed to producing at least one million cars a year in France.
But Benjamin Asher, an Asia auto market analyst in the Bangkok office of LMC Automotive, a global consulting firm, said the deal would not give Dongfeng the truly global reach that the world’s largest automakers seek to achieve. “Outside of Western Europe, it is only in China, Iran, Brazil and Argentina that Peugeot achieves notable volumes,” he said (Peugeot’s market share in China last year was 3 percent). “They have no volumes at all in some key global markets like the U.S. and India.” And the company is rethinking its strategy for Russia and Latin America, he said, as investments there are not paying off as hoped.
Buying a modest stake in Peugeot is consistent with Dongfeng’s broader approach of keeping a fairly low profile and mostly serving as the legal Chinese partner for joint ventures with multinationals, which are almost never allowed more than 50 percent ownership of assembly plants in China. Despite pressure from the Chinese government for Chinese automakers to begin designing, engineering, building and marketing their own brands of cars, Dongfeng has done very little of any of that. It has shown few designs at auto shows, while its joint venture partners, Peugeot, Nissan, Honda and Kia, have taken prominent roles in managing their activities with Dongfeng. Still, the question of who will actually be running the show looms over the deal. Mr. Tavares will be responsible for the day-to-day operation of the company, but he will have a rather ungainly three-headed supervisor looking over his shoulder.
The measures announced on Wednesday “open a new page in the history of PSA Peugeot Citroën,” Thierry Peugeot, the automaker’s chairman, said in a statement. “By reinforcing its financial solidity whilst outlining perspectives for an ambitious international development, these measures will contribute to the long term future of the group as well as its future growth which will benefit the group’s clients, employees, shareholders and all its partners.” The French state, the Peugeot family and Dongfeng will each appoint two directors to the new 12-member board, who will be joined by two employee representatives and six independent directors. Thierry Peugeot’s job as chairman is up for grabs.
Still, analysts, having watched General Motors recently write off its own €1 billion investment in Peugeot, have been quite skeptical of the prospect that the company will fare better by becoming partners with the French government and a Chinese company with no international experience. Even the most successful of international auto industry partnerships, like the Renault-Nissan alliance, suffer from communication problems. Some analysts worry that Peugeot’s French and Chinese managers may end up with something more reminiscent of the ill-fated Daimler-Chrysler deal, which ended after the German company retreated after having lost billions of dollars.
Adding to the potential bureaucracy and confusion that could result from the tripartite ownership structure, Dongfeng in December announced an agreement to make 150,000 crossover vehicles a year with Renault, the No. 2 French automaker. Philippe Houchois, head of European auto industry research at UBS in London, warned in a recent note that the company could be setting itself up for a prolonged management mess. “With potentially diverging interests in the long run, we find the shareholding structure could block decisions or create tensions with each of the three large shareholders able to create a blocking minority by allying itself with one or the other,” he wrote.
Dongfeng, based in Wuhan, is hardly a household name outside China, and the deal gives it the opportunity to take its first steps on the global stage while it gains access to Peugeot’s technology and to its European distribution network. It has had a partnership with Peugeot since 1992; Peugeot’s market share in China last year was 3 percent.
But Benjamin Asher, who analyzes the Asian automobile market at the Bangkok office of LMC Automotive, a global consulting firm, said the deal would not give Dongfeng the truly global reach that the world’s largest automakers seek to achieve. “Outside of Western Europe, it is only in China, Iran, Brazil and Argentina that Peugeot achieves notable volumes,” he said. “They have no volumes at all in some key global markets like the U.S. and India.”
European Union antitrust officials are likely to scrutinize the terms of the French investment to ensure the company is not gaining an unfair advantage over its rivals. Company executives were confident they would succeed on that front and gain shareholder approval.
The French government and Dongfeng will acquire their 14 percent stakes for about €800 million each, buying shares at a 40 percent discount to the closing price on Tuesday. There would be an offering to the company’s existing shareholders at the same discounted rate, bringing the total capital increase to about €3 billion.
The announcement came as Peugeot on Wednesday reported 2013 sales in its automotive division of €36.5 billion, down 4.8 percent from a year earlier. It said the division’s operating loss was reduced to €177 million from €1 billion, better than analysts had expected.
Peugeot also said it has secured a renewed credit line of €2.7 billion from a syndicate of banks, giving it an additional source of funds to draw on to finance its activities.
Peugeot shares closed down 1.5 percent in Paris on Wednesday. Dongfeng shares fell more than 1 percent in Hong Kong.
The Peugeot family’s 200-plus year association with the company includes a long trajectory of growth that survived two world wars, with the family sabotaging its factories to disrupt production during the Nazi occupation. It bought Citroën in 1976, and in 1979 it bought Chrysler Europe, almost foundering in the process.
After the financial crisis, it sought help from General Motors, which took a 7 percent stake in 2012. It bailed out last year, refusing to get further involved with the French company at a time when its own European operations were in trouble.
Despite the history, in the end, the clan’s lukewarm feelings about their patrimony may come down to dollars and cents: Peugeot’s market value has declined along with the European car market, dropping to about €4.5 billion from around €16 billion in 2007, wiping billions from the family’s net worth.