Peugeot to Begin Talks for New Capital Increase

PARIS--The board of PSA Peugeot Citroën SA has approved the broad outline of a possible EUR3 billion capital increase that would reshape the car maker's ownership, and result in Chinese partner Dongfeng Motor Co. and the French state becoming leading shareholders, a person familiar with the matter said.

Following a nearly five-hour meeting that dragged late into the evening on Sunday, board members gave chief executive Philippe Varin a mandate to start more formal talks with Dongfeng and the French government, the person said.

At stake is how to provide the loss-making company with the financial means to pursue the heavy industrial, R&D and commercial investment that it needs to ensure its future and bolster its presence in overseas markets.

The central scenario under discussion calls for Dongfeng Motor Co. and the French state to stump up between a third and half of the necessary amount, according to people familiar with the negotiations.

The Peugeot family, the group's largest shareholder with a 25.4 % stake, would spend between EUR80 million and EUR120 million to buy some of the newly-issued shares, and avoid being diluted too much, these people said.

The company would make an additional public rights issue to make up the required amount, they said.

Upon completion of the transaction, Dongfeng, the state and the family would hold roughly equal stakes, they added.

Sunday's board means Dongfeng, the French government and the Peugeot family must now formally agree on the scope of the overall capital increase, the size of the Dongfeng and French government investments, and the amount of the Peugeot family share purchase.

Some Peugeot family members, notably group Chairman Thierry Peugeot, would like to avoid relying on Dongfeng and the French state, and instead raise the necessary EUR3 billion entirely through a public rights issue, the people familiar with the matter said.

But many Peugeot executives and board members are concerned that investors, despite a recent rally on stock markets, may not have the stomach for a large rights issue, especially by a company that keeps bleeding cash quarter on quarter, the people said.

A spokesman for Peugeot declined to comment on what was discussed during Sunday's board meeting.

Dongfeng couldn't be immediately reached for comment. The company has said it was considering deepening its tie-up with Peugeot but hasn't provided details. The two companies have a long-established industrial and commercial cooperation.

French Finance Minister Pierre Moscovici said in a radio interview on Sunday that the government would do everything in its power to ensure that Peugeot remains rooted in France.

Last week, French President François Hollande said that his government had money to finance an investment in Peugeot should the car maker call for help.

"If we are solicited, we will take action," Mr. Hollande said at a news conference in Paris.

Write to David Pearson at [e-mail]

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