Tags: GM | Peugeot | Stake

GM to Buy Peugeot Stake in Deal to Revitalize Operations

Wednesday, 29 Feb 2012 02:19 PM

General Motors Co. and PSA Peugeot Citroen announced a broad alliance that will include joint purchasing and vehicle development in an effort to revitalize their European operations.

GM will buy 7 percent of the French carmaker to become the second largest shareholder after the Peugeot family, and take part in a 1 billion-euro ($1.34 billion) rights offering, the automakers said in a joint statement today.

The partnership also includes a restructuring at both GM and Peugeot that will result in plant closures and job cuts, a person familiar said. The two are still working out the specifics and will not disclose them for several weeks or even months due to political concerns in France, said the person, declining to be identified discussing private deliberations. Today’s release did not mention any job cuts or plant closures.

Peugeot announced plans this month to sell assets and delay investments as debt more than doubled in the second half to 3.4 billion euros, while Detroit-based GM is looking for ways to turn around its unprofitable Opel brand. The two are seeking about $2 billion in cost savings annually within five years, which will come in part from joint development of new vehicles.

“All capacity and cost reductions can only be taken positively,” said Sascha Gommel, a Frankfurt-based Commerzbank analyst who has a “hold” rating on Peugeot. “The capital increase is a negative, as it dilutes earnings per share.”

Cost Savings

GM climbed as much as 41 cents, or 1.6 percent, to $26.55 and was up 0.2 percent as of 1:18 p.m. in New York trading. Peugeot fell 33 cents, or 2.1 percent, to 15.05 euros at the close in Paris today.

The costs savings will be evenly split between the two companies and will come primarily through the development of vehicles together, with a focus on small and midsize cars, multi-purpose vehicles and crossovers, the companies said. They will also reduce costs through global joint purchasing with combined volumes of $125 billion in materials annually.

“The alliance synergies in addition to our independent plans, position GM for long-term sustainable profitability in Europe,” Chief Executive Officer Dan Akerson said in the statement.

Both automakers know they need to shed jobs and factory capacity and view the pact as a way to get political support to do so, the person said. The deal also holds appeal to GM, the world’s largest carmaker, because it may give GM access to Peugeot’s PSA bank and another lender to finance vehicle sales in Europe, the person said.

Political Influence

Political interference and strong unions have hampered both companies from shutting factories and laying off workers to rein in costs. French Labor Minister Xavier Bertrand warned Peugeot CEO Philippe Varin last week against cutting jobs as a result of the GM deal. President Nicolas Sarkozy, who’s running for re- election this year, summoned Varin on Nov. 17 to ask him to reconsider plans to cut as many as 6,800 jobs, including temporary staff employed by partners.

Peugeot, Europe’s second-biggest automaker after Volkswagen AG, is projected to use just 62 percent of its European capacity this year, compared with 74 percent at Opel, according to LMC Automotive in Oxford, England. Carmakers risk losses when they use less than 90 percent of their capacity, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.

Family Holdings

Peugeot, whose origins date back to the early 19th century laminated steel- and toolmaker Peugeot-Frères et Jacques Maillard-Salins, is still controlled by the Peugeot family, which owns 30 percent of the carmaker and said today it will participate in the rights offering.

The company’s current chairman, Thierry Peugeot, is the great-grandson of Eugene, who jointly led the company with his cousin Armand when it produced its first automobile in 1891. Thierry is joined on the board by relatives Roland, Robert and Jean-Philippe Peugeot, and Marie-Helene Roncoroni.

Perella Weinberg Partners LP, the New York advisory firm founded in 2006 by Peter Weinberg and others, advised the Peugeot family.

“With the strong support of our historical shareholder and the arrival of a new and prestigious shareholder, the whole group is mobilized to reap the benefit of this agreement,” Varin said in the statement.

Sales Drop

Peugeot’s 2011 sales in Europe plunged 8.8 percent to 1.68 million vehicles, while GM’s dropped 1.9 percent to 1.17 million. The prospects for a turnaround aren’t improving with auto demand in the region poised to drop for the fifth straight year in 2012 as the sovereign debt crisis unsettles consumers.

GM, which this month posted a record annual net income of $9.19 billion for 2011, is planning more cost cuts for its unprofitable European unit after the last turnaround plan failed to end losses there. The automaker’s Europe business, including the Opel brand, lost $747 million last year before taxes and interest.

“There would be a better response from shareholders if both companies admitted that they both need to cut costs and trim down,” Manoj Ladwa, a senior trader at ETX Capital in London, said in a Bloomberg Television interview.

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