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Dongfeng mulls capital tie-up with PSA

Dongfeng Motor and the French government would each inject €1.5 billion into PSA and acquire 20 to 30 percent of the carmaker, according to a Reuters report.

A French delegation of executives, government officials and bankers is heading to China for talks to prepare an outline for a deal that could be signed within weeks, Reuters said, citing people with knowledge of the matter. Peugeot hopes to conclude the deal this year.

“The €3 billion cash injection would amount to 68 percent of the French carmaker’s €4.39 billion market value. It would be worth about 40 percent of the new share capital and also dilute the 7 percent stake held by General Motors Co.,” writes Reuters.

According to PSA’s fiscal report, the company had sales of €55.446 billion in 2012, down 30 percent compared with the previous year. PSA’s global sales decreased 17.5 percent cumulatively in the past three years.

Currently, PSA suffers a loss of €7 million per day. The company has sold out property assets and subsidiary’s stakes which is worth €1.5 billion since 2012 and plans to shut down a plant in Aulnay, France in 2014.

Amid poor sales performance and European debt crisis, the family-held French company has been seeking partners to resolve financial difficulties.

Last July, it was reported that PSA chairman and member of the founding family Thierry Peugeot was pinning his hopes on cooperation with Dongfeng, PSA’s partner in China.

The tie-up with Dongfeng would provide PSA with urgent needed funds and expand PSA’s market possibilities in China, the world’s largest emerging automobile market. But Reuters said the Peugeot family would lose control of the company because the cash injection would dilute its 25.4 percent stake and 38.1 percent in voting rights.

Analysts believe that for Dongfeng, cross-border M&A is high on its agenda, following examples of Geely, BAIC and SAIC. Dongfeng plans to take this opportunity to expand cooperation with the European automaker that has a history of over 200 years, aiming to enhance Dongfeng’s brand image and awareness, as well as its R&D capability.

But Zhang Zhiyong, a local analyst, believes that the large investment for Dongfeng to acquire PSA’s stake may further affect Dongfeng’s current weak profitability, especially if the tie-up fails to give priority to the company growth in China after the merger. Currently, French brand vehicles only accounted for 3 percent of market share in China.

“GM will be in big problem if the deal goes through,” commented Roman Mathyssek, an independent analyst of the global truck industry, on the sideline of the 4th CBU/CAR annual international heavy-duty conference on October 14.

According to GM’s fiscal report, the value of GM’s 7 percent stocks in PSA has shrunk sharply to $220 million from $432 million a year ago. GM CEO Dan Ackerson indicated in June in Shanghai that GM would not further invest in PSA. Moreover, Dongfeng is direct competitor of SAIC, GM’s partner in China in segments such as MPVs, microvans and light trucks, according to a local analyst.

From a strategic sense, PSA’s EMP2 platform brings considerable cost saving, and likely to get high additional volume from GM cooperation, said Mathyssek earlier to CBU/CAR. Although PSA is not willing to lose the important alliance with GM, the French automaker may not have much of a choice but to seek cooperation from its partner in China. China may be the only growth potential for PSA as Europe is already a mature market.

Despite PSA’s global sales decline, sales of Dongfeng-Peugeot-Citroën totaled 276,900 vehicles in the first half of the year, up 32.7 percent. The JV’s operating revenue reached ¥30.7 billion ($5.02 billion) in the first half, up 43 percent year-on-year. China has become PSA’s largest single market since last May.

“The acquisition of PSA will be good for Dongfeng in many ways,” a senior Dongfeng executive who declines to identify himself told CBU/CAR. “If the deal goes through, Dongfeng will benefit from PSA’s brand image, R&D capabilities as well as overall market coordination in China as well as globally.”

The PSA-Dongfeng merger may affect the new JV relationship between PSA and Dongfeng’s other competitor Chang’an Auto. The Chang’an-PSA JV in Shenzhen is projected to contribute 3 percent of PSA’s market share in China by 2015. Chang’an might be a loser if the acquisition comes through.

But Wayne Xing, honorary editor of CUB/CAR, believes that it may be a good thing for Chang’an, forcing it to be further committed to developing its independent brands.

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