Bloomberg News

France Discusses Peugeot Stake Option After Writedowns

February 08, 2013

France Floats Peugeot Stake Option After Automaker’s Writedowns

An employee polishes the hood of a Peugeot 308 automobile, produced by PSA Peugeot Citroen. Peugeot is writing down the automotive division’s property, plants and other assets, which were valued at 14.5 billion euros at the end of June, by 3.89 billion euros. Photographer: Balint Porneczi/Bloomberg

France’s budget minister floated the possibility of buying a stake in PSA Peugeot Citroen after the ailing automaker announced second-half writedowns of 4.13 billion euros ($5.53 billion) amid Europe’s plunging auto sales.

“Let’s be clear: this company cannot, must not disappear,” Jerome Cahuzac said on RMC radio today. “We’ll have to do what we have to do to save this company.” A representative for Prime Minister Jean-Marc Ayrault responded that buying a holding is not currently on the agenda.

The government is debating aiding Peugeot, which employs more than 100,000 workers in France. Europe’s second-largest automaker, which a union leader said last week is losing 7 million euros per day, already plans to cut 17 percent of its French workforce and close a factory near Paris in response to the biggest slump in European Union auto sales in 19 years.

“If the French government takes a stake in Peugeot, they will probably demand a more socially acceptable restructuring,” said Sascha Gommel, a Frankfurt-based analyst with Commerzbank AG who has a reduce rating on the shares. “This could slow the restructuring and it would take longer for Peugeot to return to profitability.”

The shares gained as much as 30 cents, or 5.1 percent, to 6.17 euros and were up 1.2 percent, to 5.95 euros as of 12:45 p.m. in Paris. The stock has plunged 57 percent in the last year, valuing the carmaker at 2.11 billion euros.

Studying Stake

France is studying taking a Peugeot stake as a “hypothesis of last resort,” French daily Liberation reported today, without citing anyone. The government could also support a capital increase if necessary, the newspaper said. Pierre- Olivier Salmon, a Peugeot spokesman, declined to comment.

“The only thing I can tell you, and I can’t say whether it’s true or false, is that it’s possible because there’s the Strategic Investment Fund,” Cahuzac told the radio station. “If the FSI enters into the capital of this company, it’s in fact the state one way or another that’s entering.”

France already is the largest owner in Renault SA, France’s second-biggest automaker. Renault has announced plans to slash 7,500 French jobs.

Peugeot is writing down the automotive division’s property, plants and other assets, which were valued at 14.5 billion euros at the end of June, by 3.89 billion euros. The automaker is also taking a second-half charge of 243 million euros for what it called “onerous contracts.”

Bond Guarantees

“This calculus results from cautious assumptions about the European economic environment,” Chief Financial Officer Jean- Baptiste de Chatillon told reporters in Paris late yesterday. “We think that this European car market will remain affected by the crisis for a long time.”

France has already offered the automaker 7 billion euros in bond guarantees. The European Union is currently reviewing the offer to determine whether its anti-competitive.

By pointing to the FSI, Cahuzac may be indicating President Francois Hollande’s reluctance to put government funds directly into the carmaker at a time when the French state is struggling to reduce its budget deficit to 3 percent of gross domestic product this year from 4.5 percent in 2012.

The European Commission, the Organization for Economic Cooperation and Development and the International Monetary Fund, all currently estimate that France is on track to miss the target, unless further action is taken.

Raising Taxes

Hollande has already raised taxes by about 27 billion euros since coming to power in May and has pledged to cut spending over the coming years, further limiting his room for maneuver.

The FSI, the sovereign wealth fund set up by former President Nicolas Sarkozy, has about 19.7 billion euros under management, according to its website.

The government wanted Louis Gallois, who ran Airbus parent European Aeronautic, Defence & Space Co. for almost six years until May 2012, to take over as chief executive officer from Philippe Varin, Liberation said today. Gallois, 68, turned down the job, the French daily said. The prime minister’s representative declined to comment on whether Gallois was offered the post.

The government in December appointed Gallois to Peugeot’s board. The French state and Peugeot’s labor unions each won board representation at the manufacturer as part of the agreement in October for the government to guarantee the new bonds sold by the carmaker’s Banque PSA Finance division. Peugeot’s lending arm needs the cheaper financing to offer competitive loan rates to customers.

Selling Assets

Peugeot has sold assets in the last year to raise cash, and entered into a strategic alliance with General Motors Co (GM:US). that is meant to generate $2 billion for the partners in annual cost savings and sales improvements within 5 years.

Peugeot’s plan to eliminate 11,200 jobs and close a factory in Aulnay are on hold after a Paris court said last month that the automaker can’t cut the positions until Faurecia SA, 57 percent-owned by Peugeot, fully informs its workers about the impact of the carmaker’s restructuring. Automakers have announced more than 30,000 job cuts in Europe since July.

Peugeot said yesterday net debt rose in the second half to 3 billion euros from 2.45 billion euros at the end of June. The automaker reports second-half earnings next week.

The writedowns, which are all non-cash, will directly impact Peugeot’s net income for the half. The writedowns follow guidelines issued by the French securities regulator and do not impact the group’s liquidity, solvency or cash flow targets, Peugeot said.

Capacity Reduction

“Peugeot isn’t in danger of collapsing in the short term, but needs to get fixed, as well as variable costs, under control to be able to compete with Volkswagen and Renault-Nissan in the long run,” Gommel, the Commerzbank analyst, said. “There’s no way around a capacity reduction.”

Europe’s car market is forecast to drop to 12.3 million vehicles this year, 23 percent below the pre-crisis peak, IHS Automotive estimates. GM is closing a German factory and Ford Motor Co (F:US). is shutting three plants across Europe in response. Peugeot’s CFO said yesterday the market may fall as much as 5 percent this year.

“Peugeot’s current weakness is mainly due to the weak southern European market, including France,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “A lot depends on market recovery, which could start at the end of 2013.”

To contact the reporters on this story: Mathieu Rosemain in Paris at mrosemain@bloomberg.net; Mark Deen in Paris at markdeen@bloomberg.net; Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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