Market Overview

GM Edge Closer to Stake in Peugeot


Following weeks of speculation, and yesterday's Benzinga story about the profitability of the Big Three of General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler, it would seem that GM are very close to closing a deal to purchase a stake in Peugeot.

GM is looking to take up to a 7% stake in PSA Peugeot Citroen SA, which will form a large part of a new alliance between the two companies, which they hope will prop up the unprofitable European operations.

GM's investment in Peugeot would be worth approximately 270 million euros ($361.7 million), a number that is based on Peugeot's current market value of 3.81 billion euros.

According to the Wall Street Journal, the announcement of the conclusion of the deal could come as early as Wednesday, and there are currently no plans for Peugeot to make a reciprocal investment in GM.

People familiar with the talks told the WSJ that GM's plans do not look to reduce capacity at their own company or Peugeot, despite the facts that analysts and auto executives in Europe see that move as a necessity if either company is to turn a profit across the Atlantic.

By buying the stake in Peugeot, GM is basically stating that Peugeot will be its primary partner in Europe, sharing engineering and development costs. It will also provide funds to aid Peugeot in moves to reduce debt by selling assets.

Peugeot certainly needs help. The French company managed to get through 1.65 billion euros in hard cash last year, with declining demand for new cars hurting performance. Peugeot has net debt within the automotive division of 3.4 billion euros.

The hope will be that General Motors will be able to stop that rot, but it is far from a forgone conclusion as GM's European operations are also currently unprofitable, losing $747 million last year.

Still, with an enviable global brand, GM is still in position to make something happen, and it has more than $30 billion in liquidity. The fact that GM is still 26.5% owned by the U.S. government could cause a few hiccups, but the deal would seem to be smooth sailing from this point on.

On February 23, Deutsche Bank said in a research report that media reports indicating that GM and PSA were in talks about potential joint ventures had led investors to speculate on whether this signals the start of broader European Industry consolidation. In fact, Deutsche Bank said, comments from GM's new management since the company's IPO have consistently suggested that a broad combination of GM's Opel division with another automaker is relatively unlikely.

Well, Deutsche Bank was very likely wrong about that. However, their reasons for being skeptical are worth another look. “A merger-like combination/alliance would not help (and it could potentially hurt) efforts to achieve internal capacity reduction. And it could distract from GM achieving a number of longer term targets (i.e. GM would like to drive its regional operations towards the use of the company's own common global platforms/architectures/powertrains). That said, we do see opportunities for specific ventures/collaborations similar to those which have been pursued between GM and other automakers in the past. GM has in fact pointed to the relative attractiveness of these types of arrangements, and contrasted them with numerous examples of alliances/ mergers which have failed.”

The success or failure of the deal and collaboration will make for fascinating viewing.

Posted-In: Deutsche BankEarnings News Analyst Ratings Best of Benzinga


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