UPDATE 1-Peugeot mulls Faurecia sale with Dongfeng tie-up -sources
* Peugeot owns 57 pct stake in Faurecia
* Peugeot-Dongfeng talks appear "stuck" - source
* Peugeot, Faurecia shares extend gains after report
By Sophie Sassard and Norihiko Shirouzu
LONDON/SHANGHAI, Nov 15 (Reuters) - French carmaker PSA Peugeot Citroen is preparing for a possible sale of its Faurecia components division to accompany a tie-up with China's Dongfeng Motor Group, several sources with knowledge of the situation said.
The separately listed parts maker has hired an adviser to explore the sale of Peugeot's 57 percent stake either in the market, or to a private equity fund or industry peer, said the sources, who asked not to be named because the talks are private.
Discussions are at a very preliminary stage, they said, and remain conditional upon the success of complex negotiations on Peugeot's deeper tie-up with its existing Chinese partner.
Talks on a 3 billion euro ($4 billion) capital increase, in which the French government and Dongfeng would each acquire 20-30 percent of Peugeot, are progressing more slowly than the troubled carmaker initially hoped, people with knowledge of the situation said last month.
Little progress has been made since then, they added this week.
"The talks look pretty much stuck in the mud," one of the people said.
Peugeot and Faurecia both declined to comment on Friday.
The French carmaker is "very eager" to sell a significant stake to its Chinese partner, but Chairman Xu Ping is not yet convinced, a source close to Dongfeng said.
Dongfeng would want a stake purchase to yield deeper strategic benefits than Chinese rival SAIC gained from a minority holding in General Motors' South Korean division, formerly Daewoo, the source said.
"Dongfeng doesn't want to be a passive investor," the source said.
Peugeot is reluctant to sell Faurecia because the profitable company, which is based in the western Paris suburb of Nanterre and has a market value of 2.5 billion euros, helps to support the carmaker's credit rating.
PRIVATE EQUITY INTEREST
But the disposal might be necessary to win European Union approval and French political acceptance for another government bailout. France granted 7 billion euros ($9.4 billion) in loan guarantees to prop up Peugeot's financing arm last year.
Private equity funds including Carlyle, KKR, CVC and Bain are looking at Faurecia, two sources said, emboldened by a buoyant debt market and the scarcity of deal opportunities in Europe.
KKR declined to comment. Carlyle, CVC and Bain did not return calls and messages seeking comment.
Shares in Peugeot and Faurecia both extended gains after the Reuters report. Faurecia closed 1.9 percent higher, while Peugeot added 1.7 percent, giving it a market value of 3.6 billion euros.
Peugeot is also still in talks to merge its Banque PSA financial arm with Banco Santander's car loans business in a deal it hopes to sign in the first quarter of 2014, said a source with direct knowledge of the matter.
The transaction is taking time because of legal complexities and Santander's reluctance to take on Banque PSA's existing loan book, according to people familiar with the situation.
The Spanish bank would prefer to limit the combined operations to new lending, one said.
"Santander knows they are the only contender for a deal of that scale, so they have no incentive to compromise," the person said.
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