Peugeot's Dongfeng deal under scrutiny

Concerns over the proposed three-way shareholder structure have grown as French carmaker's board meets today to vote on stake sale

PUBLISHED : Tuesday, 18 February, 2014, 4:34am
UPDATED : Tuesday, 18 February, 2014, 4:34am

PSA Peugeot Citroen's deal to sell stakes to China's Dongfeng Motor and the French government may end up trading a cash influx for a shareholder structure that threatens to hobble the manufacturer's decision-making, analysts said.

The board of Europe's second-largest carmaker will meet today to vote on the agreement.

Under the outline of the plan, which Peugeot has said would raise €3 billion (HK$31.8 billion), Dongfeng, the French government and the Peugeot family would end up with roughly equal stakes.

Chairman Thierry Peugeot said in a letter last month to his cousin Robert that the plan would create a "three-headed governance" structure, making the Paris-based company difficult to run. The family's holding companies, which control 38 per cent of Peugeot's voting rights, supported the deal.

"We see a risk of a Pyrrhic victory," Max Warburton, an analyst with Bernstein Research, said in an open letter to Thierry Peugeot. "The Dongfeng deal will close out strategic options," and the involvement of France and the state-backed Chinese company "is hardly likely to lead to improved efficiency, competitiveness and growth".

Question marks over the deal have grown as Peugeot nears its self-imposed deadline for reaching an agreement.

Earlier this month, the firm, which has burned through more than €4 billion over the past two years, said its board expressed "full support" for the proposal. The goal is to expand overseas to reduce exposure to Europe, where industrywide car demand is near a two-decade low.

While Dongfeng seeks access to Western markets and technology, France is looking to protect local jobs and ensure the country's largest car manufacturer remains French. The descendants of founder Armand Peugeot have in turn struggled to find a common position, leaving the firm adrift as Volkswagen pushes to become the world's largest carmaker.

"I still don't understand why they're doing this deal," said Florent Couvreur, an analyst with CM-CIC Securities. "The three main shareholders will have completely divergent concerns, with a high risk of conflict."

Peugeot's shares have tumbled more than 50 per cent over the past three years.

The new money would help Peugeot develop models and expand abroad. Dongfeng and Peugeot already operate three factories together in China, the world's largest car market, and plan to increase capacity by two-thirds by the end of next year.

Wuhan-based Dongfeng is one of China's top four carmakers. It builds passenger cars and commercial vehicles under its own brands as well Peugeot, Nissan, Kia and Honda models as part of joint ventures.

Dongfeng is investing 30 billion yuan (HK$38.3 billion) in its own operations to reduce its dependence on foreign carmakers.