October 16, 2012 / 2:05 PM / 5 years ago

TEXT-Fitch: rumoured Opel merger not near-term solution for Peugeot

Oct 16 - A potential merger between Peugeot SA's (PSA) automotive
operations and General Motors' Opel subsidiary would not immediately
solve PSA's biggest problems, Fitch Ratings says.

Recent press reports point to different options, but we believe these scenarios
are too uncertain and lack the detail needed at this stage to assess any
potential impact on PSA's ('BB-'/Negative) and GM's ('BB+'/Stable) ratings.
Scenarios mooted in the press include combining the companies' automotive
operations in a 50/50 joint venture or the creation of a new structure, owned
70/30 by PSA/GM, to which GM would also bring USD10bn.

We believe the two companies are bound to accelerate and increase their
cooperation, as they both need to bolster their profitability and stem cash
burn. In particular, PSA needs to urgently streamline its cost structure,
reinvigorate its product offering and combat fierce competition and aggressive
price pressure in Europe. However, we believe that a combination - according to
the terms reported in the media - is unlikely to help PSA and Opel address the
pressing issue of overcapacity or overcome political and social resistance to
restructuring.

Lengthy anti-competition reviews could also be triggered. At any rate, any
potential benefit would be gradual and could take several years to accrue to PSA
and Opel. In the meantime, pressure remains high on PSA's ratings as we expect
the company to burn further cash at least through 2014.

Further analysis on PSA and GM can be found in a report published on 25
September (Fiat and PSA Compared With Ford and GM in 2005-2008). We identified
several similarities between PSA since 2006-2007 and the US manufacturers when
they were downgraded gradually to the 'B' category from 'BB+' in 2005-2006 and
then to 'CCC' in 2008.

In the report we also assessed some key differences between PSA and Ford/GM a
few years ago - notably in the magnitude of the deterioration - which currently
support PSA's ratings in the 'BB' category. However, a lack of improvement in
profitability and cash generation in 2013 and 2014 leading to further
significant negative free cash flow in 2014 could increase the similarity with
Ford's and GM's cash burn in 2005-2008. This could trigger further downgrades to
the 'B' rating category.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research:
Fiat and PSA Compared With Ford and GM

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