Peugeot Shares Fall on Possibility of Deal to Raise Capital

PARIS â€" Shares of PSA Peugeot Citroën tumbled on Monday as investors anticipated that the struggling French automaker was closing in on a deal to raise fresh capital that would dilute the value of its stock.

There has been speculation since early summer that Peugeot, the second-largest European automaker after Volkswagen, was seeking a tie-up with Dongfeng Motor Group, a state-owned Chinese company with which Peugeot jointly assembles vehicles in China. Expectations were heightened by a Reuters report over the weekend that said Peugeot had drafted a plan to raise 3 billion euros, or about $4.1 billion, of new capital.

According to Reuters, which did not identify its sources, Dongfeng and the French government may each inject 1.5 billion euros of capital into Peugeot in return for stakes of 20 to 30 percent each. A separate report last week from China Business News said Dongfeng was prepared to pay about $1.6 billion for 30 percent of Peugeot.

Peugeot’s stock closed 9 percent lower in Paris on Monday as investors wagered that the shares they now held would lose much of their value if diluted by the new capital. Peugeot has a market value of just under 4 billion euros. Even after the decline Monday, the shares are up 104 percent this year because of hopes for a turnaround.

“It’s no mystery that Peugeot is looking for industrial partners,” Finance Minister Pierre Moscovici told France Inter radio on Monday, adding that the company was not facing immediate financial difficulties. Asked about reports that representatives of the French government had accompanied Peugeot executives on a delegation to China to smooth the way for a deal, Mr. Moscovici replied: “We are completely invested in the fate of this company.”

Cécile Damide, a Peugeot spokeswoman, declined to comment on the latest reports. She cited a company statement Monday that said management was “examining industrial and commercial developments with different partners, including the financial implications that would result from them.”

“None of these projects has reached maturity yet,” she added.

Peugeot has been hurt by its heavy reliance on the European market, where sales shrank 5.2 percent in the first eight months of 2013 from the same period last year, reaching the lowest level in decades. The company has been cutting jobs and reducing capacity in Europe to slow its cash burn, but analysts say it needs to grow outside of its home market if it is to achieve the kind of scale it needs to flourish.

If the capital tie-up is realized, Dongfeng, one of China’s largest automakers, would gain access to Peugeot’s technology and European distribution network. The Chinese company has said that it is studying a possible investment in its French partner.

Peugeot directors are to discuss the company’s finances at a board meeting on Oct. 22, a day before the company releases its third-quarter financial results. But building a new shareholding and management structure would be a complex task. A deal of the magnitude that appears to be under discussion would require the Peugeot family, which holds just over 25 percent of the automaker’s shares and about 38 percent of the voting rights, to give up control of the company.

Such a deal would also require the acquiescence of General Motors. The American automaker became Peugeot’s second-largest shareholder in February 2012, paying about 1 billion euros for a 7 percent stake. The two companies have agreed to cooperate on a number of projects intended to cut their costs in Europe. G.M., which is restructuring its own unprofitable European operations, has said it has no interest in increasing its investment in Peugeot.

The involvement of the French government might also raise complications. The state does not own a stake in Peugeot, but it gained a big say in the company’s management last year when it agreed to provide the automaker’s consumer finance unit with 7 billion euros in credit guarantees and appointed Louis Gallois, the former chief executive of European Aeronautic Defense and Space, to a seat on Peugeot’s board.

Bernard Jullien, director of Gerpisa, an automobile research network, said that another concern was that the size of the investment from Dongfeng that has been suggested might not be enough to get Peugeot out of its troubles, because it was roughly equivalent to the amount of cash the French company was expected to burn through this year.

“It’s enough money to remain in place,” he said, adding that a tie-up with Dongfeng might eventually pay off for Peugeot in the form of entry into emerging markets like Malaysia and Indonesia. “But it’s not enough to help it compete with Volkswagen and the others in Europe.”

“I don’t think they have a strategy,” he said of the French company. “What they have is a lot of problems that need to be solved quickly. Then they’ll come up with a strategy.”