Tags: Peugeot | Downgrade | GM | Deal

Peugeot Downgrade Adds to Doubts Over GM Deal

Friday, 02 March 2012 10:06 AM

PSA Peugeot Citroen had its debt rating cut to junk by Moody's, which said a proposed alliance with General Motors would not solve the French carmaker's problems, echoing investor concerns about the deal.

Credit rating agency Moody's Investors Service lowered Peugeot's debt rating one notch to Ba1, the highest "speculative" grade. The agency said the GM alliance would actually weigh on earnings in the short term - and might not yield the savings expected later.

"Mergers and alliances in the automotive industry have often not resulted in the anticipated competitive advantage and improved performance," it said.

Peugeot said the scope of the downgrade had been contained by additional cost-cutting measures announced last month. "We were expecting it," a spokesman said.

Moody's action put more pressure on Peugeot's shares, which had opened lower after Wednesday's announcement of the GM partnership and a 1 billion euro ($1.34 billion) capital increase. They were down as much as 7.7 percent immediately after the downgrade and 4.9 percent lower at 1532 GMT.

Analysts too were skeptical about the benefits of Peugeot's partnership with Detroit-based GM, saying it did nothing to tackle excess European production capacity.

"The alliance leaves the main issue for both partners unsolved," said Thomas Besson, a London-based analyst with Bank of America Merrill Lynch.

Peugeot and GM's Opel division need to address their "imperative need to execute a large restructuring in Europe, in a complicated political context," Besson said in a note to clients.

Under the plan, unveiled on Wednesday, GM will take a 7 percent stake in Peugeot as part of a global alliance targeting synergies eventually reaching $2 billion annually.

The two automakers will share purchasing and new vehicle platforms, starting with a new generation of subcompacts and mid-sized cars to be introduced from 2016.

The companies said the partnership would have "no impact" on European plants — estimated by analysts to be blighted by excess capacity of about 25 percent.

In its own statement on Wednesday, the French government underlined that the GM-Peugeot plan included no joint production.

"We can't help but feel disappointed," Credit Suisse analyst Erich Hauser said. "Perhaps it's too politically sensitive to talk about a Plan B ahead of French elections in late April."

Nevertheless, Hauser added: "We're surprised that an operation with combined revenues close to 70 billion euros can't promise to deliver a more fundamental answer to the issues facing this industry."

Peugeot's share issue, while throwing a cash lifeline to the struggling automaker, also failed to win universal admiration.

"It must have taken a big discount of 15 percent or more for the banks to underwrite the shares not subscribed by GM or the Peugeot family," a trader said.

Peugeot burned through 1.6 billion euros of cash last year as its industrial net debt almost tripled to 3.4 billion, prompting the company to raise its 2012 cost-cutting goal by a quarter to 1 billion euros and put 1.5 billion euros of assets up for sale.

European deliveries of Peugeot and Citroen cars plunged 8.8 percent last year, outpacing the industry's 1.4 percent sales contraction and wiping a percentage point off the group's market share.

The misery continued last month, according to data published on Thursday. Peugeot's French light vehicle sales fell by a quarter, the biggest decline in the market, which shrunk 18 percent overall.

Moody's said Peugeot was under "tremendous operational stress" and faced a possible further downgrade this year.

© 2018 Thomson/Reuters. All rights reserved.

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Friday, 02 March 2012 10:06 AM
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