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Employees work at a production line of a Dongfeng Peugeot Citroen Automobile factory in Wuhan (Reuters)
Employees work at a production line of a Dongfeng Peugeot Citroen Automobile factory in Wuhan (Reuters)

Peugeot’s $3-billion loss shows rescue deal is just a start Add to ...

PSA Peugeot Citroen <PEUP.PA> plans to build new cars and expand in Asia under a French-backed rescue deal agreed with China’s Dongfeng, the carmaker said on Wednesday, as it posted a $3.2-billion (1.9 billion pounds) loss that underscores the scale of the task ahead.

The Paris-based group announced a long-awaited 3 billion euro fundraising that will bring it new leadership, more time to turn itself around and an end to two centuries of family control.

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Dongfeng Motor Group <0489.HK> and the French state will each pay €800-million for 14 per cent of the carmaker to match the founding Peugeot family’s reduced holding, Peugeot said, confirming earlier Reuters reports.

Peugeot shares jumped as much as 9 per cent after it unveiled new goals for the partnership with Dongfeng and said it had slashed cash burn last year, beating an interim recovery goal.

“The improving situation in Europe is starting to affect the company,” said ISI Group analyst Erich Hauser, adding he was “surprised by how much better the performance at PSA was in the second half” of last year.

But Peugeot said it still made a 2.32 billion euro (1.9 billion pounds) net loss, and warned it may not stem the red ink until 2016, a year later than initially promised.

Peugeot has been one of the biggest casualties of a six-year slump in Europe’s car market, with insiders saying it has been too slow for years to adapt to competitive threats and had missed opportunities to deepen partnerships with BMW <BMWG.DE>, Toyota <7203.T> and Mitsubishi Motors 7211.

Chief Financial Officer Jean-Baptiste de Chatillon said Peugeot would use its new capital to catch up in hybrid technology, low-cost cars and Mediterranean markets where it has been left behind by French rival Renault-Nissan <RENA.PA>.

“Everything is in place to give Peugeot a new lease of life as a major international carmaker,” Chatillon said. “We have the products, the teams, the know-how and now we have a new balanced and stable ownership.”

Incoming CEO Carlos Tavares said there was still “huge room for improvement” on costs.

“Our challenge is to be the best of the Europeans in terms of (our) manufacturing and distribution model, which frankly is not the case today,” he told analysts and reporters.

While the loss at Peugeot’s core auto division narrowed 30 per cent to €1.04-billion last year, net debt rose by about the same figure to 4.15 billion despite drastic investment cuts.

THE NEW PLAN

Under their framework deal, Peugeot and Dongfeng pledged to expand their existing joint venture, adding new models to target 1.5 million annual vehicle sales in 2020, and generate €400-million of savings for the French partner.

Dongfeng-Peugeot will also create a major new research and development centre in China and a sales venture to export their cars to other South East Asian markets, the companies said.

Peugeot will raise €1.05-billion in a share sale to Dongfeng and the French state at 7.50 euros – a 40 per cent discount to the current market price. Both will subscribe to a rights issue backed by banks to raise another €1.95-billion, including 150-250 million from the Peugeot family.

Current shareholders will also receive warrants allowing them to buy three new Peugeot shares at the same discounted price for every 10 held – raising up to €770-million more.

The deal marks the end of an era, with Chairman Thierry Peugeot and CEO Philippe Varin both stepping down. Former Renault No.2 Tavares, whose appointment was announced in December, took over the operational leadership on Wednesday.

Dongfeng, France and the Peugeot family will each have two board seats, according to a summary of their shareholder agreement published by the Chinese carmaker. The Peugeot board is “expected to be chaired by an independent member”, it said.

But in a sign of potential governance headaches arising from the new “three-headed” ownership, France made clear there was no consensus on the nomination as it pushes senior civil servant Louis Gallois as its own candidate.

“There will be a discussion between the shareholders,” Industry Minister Arnaud Montebourg said, adding it was “too early to say” whether the chairman would be independent.

Peugeot’s operational cash consumption came in at €426-million before restructuring, outperforming its goal of cutting the previous year’s 3 billion cash burn by half.

The company promised a return to positive cash flow by 2016 “at the latest”, a year later than Varin had initially pledged in a recovery plan unveiled two years ago.

The 2.32 billion euro net loss last year, which compares with a 5 billion loss hit by asset writedowns in 2012, was exacerbated by currency effects that also led to a 2.4 per cent decline in group sales to €54.09-billion.

Peugeot said it had 6.6 billion in cash reserves as of December 31 and had renewed a 2.7 billion euro credit line with nine banks for up to five years.

The carmaker confirmed it was in exclusive talks with Spain’s Banco Santander <SAN.MC> on a European lending joint venture that will replace €7-billion of French state guarantees that expire next year.

The deal will lead to the deconsolidation of the Banque PSA Finance business, which contributed €368-million of profit last year, narrowing the group operating loss to 177 million.

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