France feels all protective about Peugeot
In the days of bitter recriminations following the end of the second world war in France, the owners of carmaker Peugeot found themselves hailed as resistance heroes for their attempts to sabotage production under the Nazi occupation. As a result they were allowed to remain independent, while at rival Renault, which was accused of collaborating, the owner was put in jail and the company was nationalised by the de Gaulle provisional government. But more than 60 years later, the French government is discussing for the first time taking a stake in Peugeot Citroen to protect the country’s industrial interest amid the worst European car market in two decades. Speculation over the capital increase and poor sales figures for September have driven Peugeot shares down 20 per cent so far this week. The state’s intervention would be in response to a deal under discussion between PSA Peugeot Citroën and carmaker Dongfeng about a capital injection by the Chinese group, which is already a partner producing cars in China. Any stake taken by the Chinese would be politically sensitive, and so the government is weighing up taking a stake itself, which would help to inject more money and also maintain French control, according to people close to the discussions. A Chinese newspaper last week said Dongfeng was in talks over a €3bn capital injection, citing a single source. An injection near that size would almost certainly result in the Peugeot family losing control of the business it founded in 1882. The family has a 25 per cent stake but 38 per cent of the voting rights. "The French government has looked at what the US has done with the US automakers and the success of that since and as such, if needed, are ready to provide similar assistance," says a person with knowledge of the talks. Peugeot on Monday said that it was "examining industrial and commercial developments with different partners, including the financial implications that would result from them. None of these projects has reached maturity yet." A capital injection would be a boon for the company in the long term, say analysts, assuaging fears over the carmaker’s continued losses and also providing funds for a long-overdue push into high-growth emerging markets. Peugeot, while doing well in China with its Dongfeng alliance, trails rivals such as Fiat in markets such as South America, and Renault-Nissan in tapping growth in southeast Asian markets. "It would allow them to reduce their debt and fund international expansion," says Philip Watkins, director of automotive research at Citi. "It could be a way for them to change their industrial footprint to focus on outside Europe." A capital injection would also allay worries over its ability to stomach continued losses in Europe – where the market will shrink for a sixth straight year in 2013 – providing a cushion as it tries to halve its annual cash burn to €1.5bn this year. Peugeot’s woes in Europe were underlined on Wednesday as data showed the company continued to post falling sales in the region, while all but one of its rivals increased their deliveries as demand edged upwards. But pulling off a significant capital raising will not be easy. For starters, it could pour cold water on a so-far successful purchasing and design partnership with US carmaker General Motors, which Peugeot has been developing since GM took a 7 per cent stake last year. Peugeot has already benefited handsomely from the alliance, citing it as a major reason for its positive operating cash flow in the first half of the year, against negative €3bn in 2012, and the two companies announced this month they will bring a jointly developed MPV to market in 2016. GM has consistently stressed that it is not interested in increasing its investment in Peugeot and has said it is not against a Dongfeng investment "in principle". However, complicating the possibility of them sitting side-by-side at the Peugeot boardroom table is GM’s deep partnership with Dongfeng’s Chinese rival SAIC, which is likely to resent any potential technology transfer between the companies. The capital raising will also be irksome for the rest of the existing shareholders, which includes BlackRock and the Ontario Teachers Pension Fund, which are set to have their stakes diluted. Existing shareholders matter because if the company is looking to raise €3bn – as has been reported, although far from confirmed – this would be a 75 per cent capital increase for a company with a market capitalisation of €4bn now. More than a 50 per cent capital increase has to be voted on by shareholders, who may not accept such a large dilution. Current owners have a pre-emptive right to purchase shares in any increase exceeding 20 per cent. On top of this problem the new boardroom could be a tricky one to manage, with the Peugeot family, a state-owned Chinese group, the French government and maybe GM rubbing shoulders. "It would be crowded in there," says one analyst. The rationale of the deal for Dongfeng, the first Chinese stakeholder in a major European carmaker, would be access to the sophisticated technology of Peugeot. This could mean it may not see eye to eye with the French government. Dongfeng may not even want to buy a stake in Peugeot if it knows this would trigger the French government becoming involved, with the express intention of counterbalancing Chinese influence. A French government stake in Peugeot could also have wider implications for the European car industry, because it could dash any hopes of a further reduction of the company’s bloated European production capacity. Peugeot accounts for 60 per cent of the country’s car production and employs close to 100,000 people in France, in an industry that, directly or indirectly, accounts for about one in 10 French jobs. Under partial state ownership, plant closures might well be even harder than is already the case. The underutilisation of capacity at the majority of European car factories is to blame for a river of red ink across carmakers’ balance sheets, with the continent’s mainstream carmakers expected to lose a combined €5bn this year. However, the government could be looking, if it does end up with a stake, in getting in and out relatively quickly. One French government official pointed to Alstom as a previous example of the state intervening to rescue a threatened company. In 2004, the government saved the engineering group from takeover by Siemens by subscribing to a rights issue, taking a 21 per cent stake. It sold out to the French company Bouygues in 2006, making a profit for the taxpayer of more than €1bn.