PSA Peugeot Citroen (UG), Europe’s second- largest automaker, faces an in-depth European Union probe into whether 7 billion euros ($9.2 billion) in French government bond guarantees are in line with antitrust rules.
The European Commission will determine whether the aid would hurt competition and if planned job cuts and a factory closing will restore the company’s long-term financial viability without continued state support, the Brussels-based regulator said in a statement today.
Peugeot needs the state guarantees to keep down borrowing costs for its financing unit, which is key to offering loans to buyers that are competitive with rivals such as Volkswagen AG (VOW), the region’s biggest automaker. Paris-based Peugeot, which reported a 576 million-euro operating loss in 2012, said last month that first-quarter revenue fell 6.5 percent to 13 billion euros as Europe’s market sinks for a sixth straight year.
“Today’s announcement is clearly negative,” said Sascha Gommel, an analyst at Commerzbank in Frankfurt with a reduce rating on the shares. “PSA would have problems to access bond markets without government support at the moment. However, we regard it as rather unlikely that the EU Commission or France will allow PSA to go out of business.”
The shares declined as much as 28 cents, or 4.6 percent, to 5.80 euros and were down 2.9 percent as of 2:16 p.m. in Paris trading. The stock has gained 8 percent this year, valuing the French automaker at 2.09 billion euros.
The regulator in February granted temporary EU approval for the state to guarantee 1.2 billion euros of bonds at Banque PSA Finance, which the carmaker’s finance arm successfully sold in March. The EU said today it’s also examining grants and repayable advances of 85.9 million euros.
“This is a completely normal and usual procedure, and by no means a surprise,” said Jean-Baptiste Mounier, a spokesman for Peugeot. The company is cooperating with the EU, he said.
The proposed plan includes a restructuring of the industrial organization and the administrative structures, and a research and development project in the field of hybrid technologies, the EU said.
“It forecasts a return to viability in 2015 and a number of compensatory measures to limit distortions of competition,” the commission said.
A French court last month approved plans by Peugeot to move forward with the elimination of 11,200 jobs and a factory closing over the objections of two unions. Labor leader representing 75 percent of workers signed off this week on the restructuring measures.
Peugeot aims to shrink its French automotive workforce by 17 percent over the next two years in response to the downward spiral in European auto sales, which are near a 20-year low. The automaker is also closing a factory on the outskirts of Paris in Aulnay, selling assets and building a strategic alliance with General Motors Co. (GM:US)
Large state subsidies require EU approval and regulators can impose conditions, including asset sales, to counter any advantage the aid gives the company over rivals. EU rules say this can involve withdrawal from loss-making activities, making operations more efficient or diversification toward new and viable operations.
“My belief is that the state did what it had to do so that the PSA bank could finance itself in a satisfactory way,” Finance Minister Pierre Moscovici said in Paris. “We discussed the matter with European Commission and we continue to discuss it. What we did was completely in line with European law.”
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