French negotiators in final Peugeot mission to China

PSA Peugeot Citroen (PEUP.PA) negotiators and French government officials are leaving for China this weekend, sources familiar with the matter said, for what they hope will be a final round of tie-up negotiations with Dongfeng Motor Group (0489.HK).

Peugeot and joint-venture partner Dongfeng are in the final straight of talks on a deal that would see the Chinese carmaker and French government take matching stakes in the Paris-based company through a 3 billion euro ($4.1 billion) share issue.

The final push for an agreement, due to be presented to the French carmaker’s board on February 18, follows public discord among members of the founding Peugeot family and protests from minority shareholders over the planned capital increase.

“The proposed cash infusion by Dongfeng into PSA is likely to further cement cooperation between the two companies,” Bernstein analyst Max Warburton said.

The state-owned Chinese carmaker “would bring zero operational expertise, but it would bring capital and might give PSA privileged market access,” he added in a recent note.

Crippled by Europe’s six-year market slump, Peugeot has said it needs fresh funding to survive in the medium term. The company’s financing arm is already being kept afloat by a 7 billion euro loan guarantee from the French state.

The draft deal to be negotiated next week would see Peugeot stakes sold to Dongfeng and the French government in a reserved capital increase, followed by a rights issue in which all shareholders could buy more stock.

The pricing under discussion ranges between about 7.50 and 8.50 euros per share, sources close to the talks said. The stock closed 2.5 percent higher at 11.49 euros on Friday in Paris, valuing the company at 3.96 billion euros.

Peugeot declined to comment on the ongoing talks.

In a letter leaked to French media, Chairman Thierry Peugeot had championed an alternative plan that would have raised more of the cash on the market and reduced the holding sold directly to the French state.

But he was outgunned on the Peugeot board, which this week reiterated its support for the tie-up plan led by outgoing Chief Executive Philippe Varin, expected in China shortly for the final round of negotiations.

A prominent French shareholders’ rights group, ADAM, had also voiced concerns about governance problems posed by the arrival of two new major shareholders and the dilution of existing investors.

The proposed combination is likely to swell Peugeot’s board from the current 15 members to 22, according to a source close to the talks: three for each major shareholder, three for the staff and 10 independents including a new chairman.

About 1 billion euros of the new financing is likely to come from the reserved capital increase and the remaining 2 billion from the rights issue, one source said.

The industrial details of the tie-up plan, agreed early on, have so far been kept largely under wraps, prompting some concern about the deal rationale even among supporters.

“You don’t to into a capital increase without a story to tell, and that’s what we’re missing at this stage,” a source close to Peugeot said.

The company has said it is considering a fourth Chinese factory with Dongfeng as well as an exclusive agreement to develop its HybridAir transmission technology.

source: reuters

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