* Peugeot and Dongfeng to announce tie-up - sources
* Past restructuring was "painful enough" - minister
* Investors awaiting turnaround plans - analysts
(Adds minister's confirmation of state contribution, closing
By Laurence Frost and Gilles Guillaume
PARIS, Feb 18 PSA Peugeot Citroen and
China's Dongfeng have agreed a 3 billion euro ($4.1 billion)
capital tie-up that brings the troubled French carmaker new
leadership, more time to turn its business around and an end to
two centuries of family control.
Peugeot, Dongfeng and the French government have
signed a non-binding outline agreement, two sources with
knowledge of the matter told Reuters before an official
announcement set for Wednesday.
Peugeot Chief Executive Philippe Varin and former Renault
executive Carlos Tavares, who will replace Varin when the deal
is finalised, must now explain how the fresh capital can be used
to improve the bottom line, analysts said.
"Expectations are running high," London-based ISI Group
analyst Erich Hauser said in a note. "PSA (Peugeot) needs to
show a new equity story to keep investors interested."
Both companies declined to comment.
Under the memorandum of understanding signed on Tuesday,
Dongfeng Motor Group and the French state will each pay about
800 million euros for a 14 percent stake in a reserved share
sale and a rights issue, sources have said.
Existing shareholders will get warrants entitling them to
more stock at the same 7.50 euro price as the reserved issue, a
40 percent discount to their market value, raising up to a
further billion euros.
The Peugeot family will see its 25.4 percent stake and 38
percent of voting rights diluted to parity with Dongfeng and the
French state, ceding control of the company it founded in 1810
as a maker of tools and coffee mills.
The rescue deal and a new lending partnership with Banco
Santander will help Peugeot survive the expiry next
year of 7 billion euros in state guarantees keeping its lending
arm afloat, sources say.
It will also reinforce the Peugeot and Dongfeng Chinese
joint venture with increased production, a new research and
development centre and expansion into Southeast Asian markets.
Under Peugeot family control, company insiders say the
carmaker has been slow to adapt to competitive threats and has
missed opportunities to deepen partnerships with BMW,
Toyota and Mitsubishi Motors.
The Dongfeng deal, which has divided the Peugeot clan, will
also see Chairman Thierry Peugeot hand over to an independent
successor who has yet to be chosen, sources said.
Analysts say Dongfeng's cash buys time but does not address
the European problems behind much of Peugeot's 3 billion euro
cash burn and 5 billion net loss in 2012.
The company needs to scrap another plant and freeze
investment to return to profit in the region, Max Warburton of
Bernstein Research said on Feb. 14.
While the remedy would be "risky, disruptive and stressful",
Warburton said, "there's still a chance Peugeot can trade its
way out of its current difficulties".
But the French government, which initially obstructed last
year's closure of the Aulnay factory near Paris, has already
warned it is unlikely to accept any more plant cuts in its new
role as a major shareholder.
Further closures "are not on the agenda", Industry Minister
Arnaud Montebourg told France Inter radio on Tuesday. "The
restructuring has already happened, and it was painful enough."
Peugeot is expected to meet existing commitments to build at
least one new model at each French site and produce 1 million
vehicles domestically by 2016, Montebourg said.
He later confirmed the government's contribution and deal
with Dongfeng, telling Canal+ television it would "prepare
Peugeot's renaissance and the international development of a
company that had become isolated".
Peugeot shares fell 2.2 percent to close at 12.50 euros.
Dongfeng had ended 1.6 percent lower on Monday before trading
was suspended pending the announcements.
Dongfeng is the latest Chinese carmaker to take a
significant stake in a Western peer after Zhejiang Geely Holding
bought Sweden's Volvo Car in 2010 and SAIC Group
acquired South Korea's SSangyong.
Besides putting some of its 24 billion yuan ($3.96 billion)
of cash reserves to work, some sceptics have questioned what the
Chinese carmaker and its own Fengshen line of vehicles stand to
gain from the tie-up.
According to people with knowledge of the agreement, the
carmakers will roll out technology including Peugeot's
fuel-saving HybridAir transmissions - which store recovered
energy in a compressed gas cylinder - under both companies'
The deal, which follows months of talks and remains subject
to a Peugeot shareholder vote, is likely to be signed formally
during Chinese President Xi Jinping's visit to Paris in late
March, sources say.
($1 = 0.7298 euros)
($1 = 6.0641 Chinese yuan)
(Additional reporting by Jean-Baptiste Vey and Chine Labbé in
Paris, Sophie Sassard in London,; Samuel Shen and Kazunori
Takada in Shanghai; and Norihiko Shirouzu in Beijing; Editing by
Louise Ireland and David Evans)