French car maker PSA Peugeot Citroën SA plans to raise about €1 billion, or $1.34 billion, in connection with an alliance it is negotiating with General Motors Co. that the companies hope will lift their unprofitable European operations, a person familiar with the talks said.
The funds will come from a so-called rights issue, a common means for European companies to raise money, involving the sale of shares to existing investors, the person said.
GM is to take a roughly 7% stake in Peugeot as part of the share sale, this person and others said. That would be valued at as much as €250 million based on Peugeot’s market capitalization of €3.58 billion.
The Peugeot family, which owns 30.3% of the auto maker’s stock but holds 46.26% of the voting rights, will participate in the rights issue, one of the people said, though it is unclear to what extent.
The family won’t give up control of the French auto maker, this person added.
Disclosure of the share sale and GM alliance could come as early as Wednesday, the people said. Peugeot declined to comment.
Peugeot shares, which had earlier risen as much as 9%, erased much of their gain after The Wall Street Journal reported the rights-issue plan. The stock finished up 0.4% at €15.37 in Paris trading.
Rights issues are normally priced at a discount to a company’s existing share price and often have the effect of sending its stock price lower.
The auto makers’ plan doesn’t aim to reduce capacity at either company, people familiar with the talks said. Reducing capacity is seen by analysts and auto executives as a necessity in Europe if mass-market car makers are to turn a profit.
Europe would be the main stage for the alliance, but both sides envision cooperation in other regions as well, said a person familiar with the arrangement. GM views the alliance as an opportunity to access technology and, potentially, entire vehicles at lower costs than if it were to develop them itself, that person said.
Peugeot recently reported its automotive division suffered a €497 million operating loss in the second half of last year. The company burned through €1.65 billion in cash for all of 2011 amid slowing demand for new cars and fierce competition in Europe’s oversupplied auto market.
GM’s operations in Europe are also unprofitable, losing $747 million in 2011 and a cumulative $14 billion since 1999.
Peugeot said last week that it was in discussions with a potential partner with a view to broadening the company’s global footprint while improving operational performance.
GM has more than $30 billion in liquidity. Despite the small amount involved in taking a small stake in Peugeot, the move to invest in a struggling European auto maker could trigger new backlash for GM, which is 26.5% owned by the U.S. government.
Investors on Tuesday pressed for an explanation from GM as to how it would benefit, according to Wall Street bankers who handle GM accounts.
The U.S. Treasury declined to comment on the plan.
Some analysts said they doubted the benefits of a cost-sharing partnership involving a small investment in Peugeot by GM when Opel-Vauxhall, GM’s European unit, is also struggling.
“We struggle to see the benefits of an Opel/PSA alliance given that both companies face the same problem” of falling prices and volumes, said Credit Suisse analyst Erich Hauser.
“Two weeks ago [Peugeot] was talking about one billion [euros] in cost savings and 1.5 billion [euros] in asset sales as being the answer to their problems,” Mr. Hauser said; now the talk is of a dilutive rights issue. “One can be excused for getting the impression that things have become a lot worse than the company has been saying over the last two weeks,” he added.
The potential impact for Peugeot of GM’s acquisition of a 7% stake in cash would be small in the context of Peugeot’s €3.36 billion in net debt at its automotive division, Mr. Hauser said.
Addressing Peugeot’s lack of scale with a closer tie-up with Rüsselsheim, Germany-based Opel-Vauxhall would “first require addressing the French cost structure before any potential merger of industrial operations,” analysts at UBS said.
Meanwhile, the head of car makers Fiat SpA and Chrysler Group LLC on Tuesday reiterated his interest in finding a partner, either in Europe or elsewhere. But he declined to comment on whether he was interested in joining with GM and Peugeot.
Sergio Marchionne, who is chief executive of both Italy’s Fiat and Chrysler, said on Tuesday that he is open to any proposals, whether they be in Europe or elsewhere.
“There aren’t very many partners left in Europe…I am looking at everybody,” he told reporters at an event held by the European Automobile Manufacturers’ Association, or ACEA, where he holds the presidency for the year.
In reference to a GM alliance with Peugeot, he said: “I sincerely hope that it deals with the overcapacity issue; it has to.”