General Motors and Peugeot Are Close to a Deal, Sources Say

The alliance would see GM acquire up to 7% of Peugeot shares, according to several reports, while both Peugeot and GM have so far refused to comment on a possible deal.

Struggling French automaker PSA Peugeot Citroen appears to be on the verge of a deal to join forces with General Motors.

Several sources said that the company will issue new shares to existing investors to the tune of 1 billion euros ($1.35 billion), a significant increase for the automaker that is currently valued at 3.6 billion euros.

The rights issue would reduce the involvement of the Peugeot family, which controls 30.3% of the capital and 45.75% of voting rights in the firm, France's largest carmaker and second only to Volkswagen in Europe.

PSA's sales fell 1.5% last year and its net profit was cut in half to 588 million euros ($777 million).

France's Financial Markets Authority on late Tuesday called for the company to make an announcement "as soon as possible," while several sources said a deal would be announced at the latest by the end of the week.

An Alliance Would Benefit GM's Opel

The alliance would see GM acquire up to 7% of Peugeot shares, according to several reports, while both Peugeot and GM have so far refused to comment on a possible deal.

The Financial Times has reported that an alliance would see Peugeot and GM's European subsidiary Opel Vauxhall jointly developing parts and engines for vehicles sold under their respective brands, which together account for 20% of European sales.

An alliance would allow GM "to help Opel recover by pooling a number of costs and PSA to penetrate emerging markets much more quickly," said Yann Lacroix, analyst with Euler Hermes.

But the Wall Street Journal said there are no plans to cut production capacity, even though industrialists believe Europe has substantial excess production capability.

Last year, the French firm, which employs 205,000 people worldwide, sold 3.5 million cars, two-thirds of them in Europe.

French President Nicolas Sarkozy is facing a tough re-election battle in a two-round April-May vote, and the announcement of layoffs could be disastrous for his campaign.

The expected venture also highlights anguished debate in France about a perceived decline of capabilities throughout manufacturing and an industrial sector that lags behind that of Germany.

GM, which two years ago went into bankruptcy and recovered only with massive U.S. government help, tried to sell the Opel business in 2009 but then decided to keep it on concerns that a sale would compromise its technology.

Ideological U-Turn for Peugeot

The potential alliance would mark an ideological U-turn for the French company, which traditionally has preferred technological cooperation to actual partnerships, with the Citroen family keen to conserve the brand's identity.

"They were afraid that adding new blood would dilute the identity," said Bernard Jullien, head of the Gerpisa auto-industry research network.

However, Robert Peugeot on Tuesday told the Express news magazine that the family would not be opposed to lessening its involvement.

"Independence means remaining the shareholder of reference, whatever the percentage" of ownership, Robert Peugeot said.

The group already has cooperation agreements with Germany's BMW to build petrol engines, with Fiat and Turkey's Tofas to build light trucks, and with Ford for diesel engines.

PSA also works with Japan's Mitsubishi to build SUVs and electric cars, with Toyota for small cars and with its historic French rival Renault to build motors and mechanical parts.

But the group has struggled to compete globally with industry titans such as GM, Toyota and Volkswagen and auto alliances such as Renault-Nissan and Fiat-Chrysler. Fiat on Tuesday said that it is keeping an eye open for possible alliances.

Nevertheless, analysts noted that auto alliances are more often doomed to failure than success, often because of the difficulties of merging company cultures.

"Most big alliances, big acquisitions, have failed. Overall, it's not a sector that has the highest success rate in terms of acquisitions," said Fitch ratings-agency analyst Emmanuel Bulle.

The Renault-Nissan alliance is a rare success story in the sector, while Volkswagen continues to be highly successful after making a series of acquisitions over the last 20 years, including in Eastern Europe.

"The alliance formula where you don't try to do everything together is perhaps a more prudent formula," said Jullien.

Copyright Agence France-Presse, 2012

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