GM, Peugeot target savings, test history with alliance
DETROIT/PARIS (Reuters) - General Motors Co and PSA Peugeot Citroen will form a global alliance targeting a cut in annual costs of at least $2 billion without plant closings or job cuts in Europe.
In a deal announced on Wednesday, GM will take a 7 percent stake in Peugeot, Europe's second-biggest automaker. GM has no plan to increase that stake.
The alliance will include pooled purchasing and research and development, as well as building vehicles on shared platforms to bring down costs, the companies said. GM and Peugeot will continue to separately market and sell their vehicles.
GM is banking on the deal to help it reverse 12 years of losses in Europe, mainly on its Opel brand, totaling more than $12 billion. Peugeot, which relies heavily on the European market, hopes to increase sales in other markets.
Analysts have viewed the GM-Peugeot negotiations with skepticism because of the long record of failed or frustrated automotive tie-ups. They said the success of the deal between GM and Peugeot would depend on the automakers overcoming political opposition to shutting European plants and eliminating jobs.
"If there isn't more (cutting) to come, then this is clearly a Plan B of sorts that while credible and interesting is not particularly exciting just because we've seen many of these alliances before," Citi analyst Itay Michaeli said. "Some turn out well. A lot do not."
The agreement calls for GM to buy into a roughly 1 billion euros ($1.34 billion) capital increase by Peugeot, becoming the French automaker's No. 2 shareholder.
This is the latest step taken by GM to save Opel and it was negotiated by GM Vice Chairman Steve Girsky, who was charged in November with stopping the red ink in Europe.
The automakers said the alliance will focus on small and midsize cars and crossovers. They said each partner's overcapacity in Europe would be addressed outside the agreement and no plant closings or job cuts were part of the deal, sidestepping a contentious issue for union-represented workers.
GM and Peugeot executives said they have discussed the alliance with their respective unions in Europe.
The savings from the deal will be limited in the first two years but are projected to total at least $2 billion a year within five years, split about equally, the companies said.
GM Chief Executive Dan Akerson said the purchasing power of the alliance would be "unmatched" with a combined annual budget of about $125 billion.
GM and Peugeot intend to build cars on the same platform, or vehicle architecture, starting in 2016. The cost of developing a new car runs into the billions of dollars and automakers around the world have looked to cut costs by building more models on fewer, shared platforms.
Further savings could come from additional cooperation in such areas as logistics and transportation, the companies said.
Morgan Stanley advised Peugeot on the deal and Goldman Sachs Group Inc advised GM. Perella Weinberg Partners advised the Peugeot family. Morgan Stanley, Societe Generale SA and BNP Paribas SA are joint bookrunners on Peugeot's planned rights issue.
DOES GM NEED PSA?
The deal, which comes as Peugeot and GM's Opel unit grapple with slow sales and overcapacity in Europe, was met with investor skepticism as the outlines of the transaction leaked out in recent days. Peugeot shares closed 2.1 percent lower, while GM's shares closed down 0.46 percent.
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"PSA needs GM, but GM doesn't need PSA," said Matthew Stover, an analyst with New York-based Guggenheim Securities. "It's hard for me to figure out how this deal helps GM within Europe."
Both automakers have excess capacity of about 25 percent in the region, Stover said, adding that the alliance plan risks "introducing complexity at a time when GM is at a very delicate point in its restructuring."
Like Peugeot, Opel is struggling to reverse mounting European losses compounded by the region's auto sales slump and cut-throat price competition. GM's European operations lost $747 million last year, while Peugeot's core auto division was 497 million euros in the red in the second half.
GM Chief Financial Officer Dan Ammann said "a good proportion" of the savings from the alliance would be realized in Europe, where the U.S. automaker is struggling to restructure operations.
The Peugeot family's holding company said it will invest 150 million euros in the capital increase, remaining the French automaker's largest shareholder.
The strategic pact does not cover the two companies' production activities, French Industry Minister Eric Besson said Wednesday. Peugeot Chief Executive Philippe Varin pledged that the alliance would be favorable for jobs, Besson said.
GM and Peugeot said key agreements in the deal were expected to be completed and operational in the second half of the year. The steering committee for the alliance will include four senior representatives from each company.
'YOU CAN'T EXPECT MAGIC'
Auto alliances have been an uncertain bet.
"Peugeot's struggling; Opel's struggling," said Mirko Mikelic, who manages investments including GM shares for Fifth Third Asset Management. "You can't just put two struggling entities together and expect magic."
In 2000, when GM was still riding high from the SUV boom in the U.S. market, it acquired a 20 percent stake in Italy's Fiat with a "put option" that gave Fiat the right to sell the remainder of the company to GM after four years. It was sold as a way to cut purchasing costs much like the Peugeot deal.
But by 2005, the Fiat-GM alliance was in tatters. Fiat, under CEO Sergio Marchionne, forced GM into a $2 billion settlement to walk away from a court battle over the costly "put option."
However, there is nothing binding in this alliance with Peugeot that can leave GM vulnerable to potential losses at the French partner or force it to provide capital, a source familiar with the situation said. GM is also taking a stake at an attractive valuation as part of a rights offering, which is typically priced at a discount to market prices, the source added.
GM executives said the deal does not require either company to buy or sell additional shares in the other company, and is more balanced than the Fiat deal. GM declined to comment on terms of the rights offering.
On Peugeot's part, GM's involvement could support its capital raising plans and potentially attract interest from U.S. investors, the source and other people familiar with the matter said.
The Peugeot family, which owns just over 30 percent of the car maker, has signaled that it would not be opposed to some dilution providing it remained the principal shareholder.
The U.S. government, which still owns about a quarter of GM's shares after its $50 billion bailout of the automaker in 2009, was not involved in the GM-Peugeot talks, sources familiar with the matter said. But the government sees an alliance with Peugeot as a step in helping cut costs at GM's European operations, one source added. The U.S. Treasury declined to comment.
Despite the tie-up discussions, Peugeot remains a favorite for short sellers with 8.6 percent of outstanding shares on loan, according to London-based Data Explorers, making it the third most shorted stock on France's benchmark index.
Ford Motor Co expects its diesel engine alliance with Peugeot to continue, but will study the GM deal's implications, Ford Chief Financial Officer Lewis Booth told reporters.
(Additional reporting by Philipp Halstrick in Frankfurt, Christian Plumb,Julien Ponthus,and Blaise Robinson in Paris, Rachelle Younglai in Washington, Soyoung Kim in New York and Deepa Seetharaman in Detroit; Editing by Chris Wickham, Elaine Hardcastle and Carol Bishopric)
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