Troubled Peugeot sparks GM doubt

2012-11-14 09:39

LONDON/FRANKFURT/PARIS - General Motors and alliance partner PSA Peugeot Citroen have halted talks on a deeper tie-up amid misgivings about the French carmaker's worsening finances and government-backed bailout, people familiar with the matter said.

The companies, already pursuing an operational partnership announced in February, 2012, had also been exploring a full combination of Peugeot with GM's European unit Opel, which is based in Germany.


Two sources with direct knowledge of those discussions said they were broken off after Peugeot accepted a state guarantee for its lending arm in October, 2012 and announced a further deterioration of its cash position.

The automakers have agreed to a "pause" in early-stage talks on a Peugeot-Opel deal, said one of the sources. The government bailout is "sabotaging the plan", he added.

Another source said: "They now consider that any deeper tie-up is unlikely before 2014, when the market picks up.

"The government bailout conditions rule out French job cuts, which means a deal can't happen any faster," he said. "It would be politically impossible to have all the cuts falling on the German side."

A Peugeot spokesman said there were no Opel tie-up talks currently in progress, breaking a month of silence since such talks were first reported.

"There are no such discussions underway," the spokesman said, declining to comment on past conversations.

A Detroit-based spokesman for GM said the automaker is "fully focused on earning the benefits from the alliance that we have identified", citing previously announced plans. He refused to elaborate on any other discussions.

With their costly French and German plants and exposure to austerity-strapped southern European markets, Peugeot and Opel are major casualties of Europe's protracted slump in auto sales, which has left the industry struggling with surplus capacity.

Peugeot, is scrapping 10 000 jobs and a domestic plant. GM, is in union talks to close an Opel factory in Bochum, Germany.

An imminent tie-up would have required deeper plant and workforce cuts on both sides, the same sources said.

Unlike 15 percent state-owned Renault, Peugeot has no government shareholder. But political influence has grown as its finances weakened, leading to the refinancing deal equivalent to R206.3-billion that put a ministerial representative on the board.

Unveiling the bailout, including a R78-billion state guarantee, ministers said they would expect to be consulted on strategy and sounded a cautious note on the GM alliance.

The French bailout stirred doubts in Detroit, which further deepened with Peugeot's warning that net debt would rise in 2012 as the group consumes cash faster than it can sell assets.

Peugeot shares have plunged 57% in 2012, compared with a 25% gain by GM based mainly on strong US sales.

"GM is looking at this and saying, 'What the heck are we doing here?'" said a person familiar with the company's thinking.

"Peugeot's incentives to cooperate may have changed because the French government is at the table," he said. "They're not going to want to have Opel building Peugeot product."


GM and Peugeot announced plans in February and March to pool European purchasing, logistics and vehicle programmes, including a project dropped in October, 2012 for a future small car for Brazil.

The deal also saw GM pay the equivalent of R3.5-billion for a 7% percent stake in its troubled French partner.

The decision to shelve a deeper tie-up may renew critical scrutiny of the existing alliance plan, already questioned by some investors.

Credit Suisse analyst Erich Hauser said the dropped car programme in Brazil, where Peugeot needs a partner to cut costs, hurts the company "in the area where they needed help the most."

Peugeot has sacrificed other relationships and markets to pursue the broader GM alliance, which is now falling short of early expectations.

Ford, a long-standing engine partner, said in April 2012 it would stop making larger diesels with Peugeot, and BMW dissolved their hybrid parts venture to team up with Toyota instead.

The French automaker blamed financing problems for its February decision to halt sales to Iran - the Peugeot brand's second-biggest market - but GM told investors its new partner had promised to exit the country.

Peugeot had also flagged plans to build cars with GM in India and seek a partner to develop rechargeable hybrids, but GM said it was interested in neither project.

Setbacks aside, the depth of Europe's slump is making the alliance and its promise of eventual gains seem irrelevant, according to Credit Suisse's Hauser.

"It's become obvious that the plan announced in February is just inadequate," he said. "For it to make sense there would have to be a plan B."