Will GM Buy This French Automaker?

GM CEO Dan Akerson (left) and PSA Peugeot Citroën Chairman Philippe Varin announced a joint-development alliance last year. Peugeot's controlling family is now hoping GM will take control. Photo credit: General Motors Co.

What is this madness? Reuters reported on Thursday that France's Peugeot family is ready to give up its controlling stake in PSA Peugeot Citroën (NASDAQOTH: PUGOY  ) , the deeply troubled French automaker – but only if General Motors (NYSE: GM  ) is willing to take over.

Peugeot (the company) is in dire straits, battered by declining car sales in its recession-ravaged home market and without significant overseas operations to help it bootstrap a turnaround.

It's clear why the founding family is desperate to find a well-heeled suitor, and last year's joint-development tie-up between GM and Peugeot makes the General a natural choice.

But this has "huge steaming bucket of Not Good" written all over it for GM. Here's why.

Signs that GM has finally begun to turn around Europe
GM's troubles here in the U.S. in the last decade are well known, but GM has also been dealing with a mess in Europe, where it has lost over $17 billion since 1999, $1.8 billion in 2012 alone. Its German subsidiary, Opel, has long been plagued by exactly the kinds of problems GM had here: Too many factories, too-rich union deals, and products that just weren't finding enough buyers.

Those problems have been made a lot worse in the last couple of years by the stiff recessions facing much of Europe, recessions that have driven new-car sales in the region to a 20-year low. But as it has been in other parts of the world, GM's new management team has been making progress in Europe.

About a year and a half ago, GM CEO Dan Akerson began a major overhaul of GM's European operations, putting his right-hand man, GM vice chairman Steve Girsky, in charge of an ambitious turnaround effort. That effort has included major cuts, new management for Opel, and several new products – as well as a deal with Peugeot to share parts and costs on a few upcoming new models. As part of that deal, GM took a small stake in Peugeot.

GM is still losing money in Europe, but already those losses have narrowed: GM lost just $175 million in the first quarter, much less than expected. As of now, GM expects to be breaking even in Europe, or close, by the end of 2015.

And now, just as Opel is starting to show signs of recovery, along comes Peugeot – with its own money-torching mess.

What would GM get out of this deal?
Like I said, it's clear what Peugeot would get out of a deal in which GM essentially bought control from the Peugeot family: survival. The company lost 5 billion euros last year and is in increasingly desperate need of cash. Sales have fallen off a cliff and it's likely to be several years (at least) before the European new-car market recovers.

Large European competitors like Volkswagen (NASDAQOTH: VLKAY  ) and Ford (NYSE: F  ) – and yes, GM – have the global scale to weather the European storm, as does Peugeot archrival Renault, which has a global tie-up with Japanese giant Nissan (NASDAQOTH: NSANY  ) . All can share development costs and tap profits elsewhere to offset European losses. That's what the Peugeot family would dearly like to get from GM.

But what would such a deal give GM? Well, it would give GM more scale to work with in Europe – more sales and more production, but also more brands to support, and more union contracts to wrangle. It only makes sense if the French government will let GM consolidate production by closing some or all of Peugeot's factories.

That's not a given: Peugeot has five factories in France, and the French government really, really doesn't want to see those jobs lost. IHS Automotive estimates that those factories ran at 71% of capacity last year; a rule of thumb is that auto factories break even at about 80% of capacity.

And the last thing GM needs in Europe is more underutilized, money-losing factories.

Will GM really consider this?
Reuters, citing inside sources, reported that GM has been willing to discuss the idea – but only if it receives assurances that it will be able to make the necessary drastic cuts without huge costs, like the $750 million in lavish separation payments that Ford will make to workers to close a factory in Belgium.

That's probably the smart answer, but it seems unlikely to work out that way. Reuters says that while French officials understand that Peugeot needs a deal with a global automaker, they "remain determined to preserve Peugeot's French sites and jobs".

Meanwhile, GM, which has already moved to close one of Opel's four German factories, is under pressure to preserve that company's remaining jobs as well. In both cases, the government pressure is probably unrealistic given the harsh market realities – but that doesn't make it easier for GM to find a cost-effective way forward.

Long story short, it seems unlikely that GM will take over Peugeot as of this moment – but it's not impossible that something could come of this. Stay tuned.

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Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 28, 2013, at 6:36 AM, mjcdog2772 wrote:

    Isnt this what GM got in trouble for in the first place?... I see they haven't learned anything! PAY BACK WHAT YOU OWE US FIRST BEFORE YOU GO OUT AND SPEND! WE ARENT BAILING YOU OUT A SECOND TIME!

  • Report this Comment On June 28, 2013, at 8:27 AM, hunter3203 wrote:

    Don't underestimate Dan Ackerson's ability to snatch defeat from the jaws of victory. He and GM's board overrode the plan to jettison Opel when they had the chance during bankruptcy. Imagine how much better off GM would be now if that had happened.

  • Report this Comment On June 28, 2013, at 8:46 AM, TMFMarlowe wrote:

    @mjcdog2772: It's a very dead horse. Time to stop the flogging and move on.

    @hunter3203: I don't think they would be any better off at all. Dig through the archives... I argued against the idea of the Opel sale at the time, and I still think that keeping it and fixing it was the right course.

    The stock has run from $19 to $33 while people have been telling me that Akerson is incompetent and GM is doomed. I expect both the din and the stock's gains to continue for a while.

    John Rosevear

  • Report this Comment On June 28, 2013, at 9:11 AM, frank600 wrote:

    The Peugeot Family should take a long hard look at GM record of buying companies like Saab and Lotus etc and then systematically destroying those marques. It was a total shock when Peugeot bought an innovative Citroen as that seemed like a marriage made in hell. No good can come out of this and it would be far more desirable for the Germans or maybe the Italian to buy Citroen Peugeot not GM. GM has the worse track record when it come to joint projects.

  • Report this Comment On June 28, 2013, at 10:01 AM, TMFMarlowe wrote:

    @frank600: Two responses come to mind. First, this isn't that GM -- the crew running GM now has a lot more global business savvy than their predecessors. Second, it appears that nobody else is even remotely interested in Peugeot... it's a fast-sinking ship. The family's options are very very limited. They already got turned down by their Chinese partner, Dongfeng. Really, the best-case here from the family's perspective would be if they could somehow push the French government into throwing them another bailout. That may be one of the reasons they went public with this news.

    Meanwhile, I think GM is going to wait and watch Peugeot circle the drain and make a move if -- and only if -- they are offered one heck of a deal as the family (and the French government) get more and more desperate. We shall see.

    John Rosevear

  • Report this Comment On August 23, 2013, at 12:34 PM, goldpage wrote:

    Peugeot used to be the most admired and desirable car to drive and own in the mid 1980's and 1990's in Ghana. Now it feels like driving a defunct car made from the pre-historic era. I am looking forward to a time when the brand Peugeot will bounce back like the Toyotas and Nissans. Meanwhile, folks in the late 50s and above still give a lot of respect to the car. Even the younger ones who saw the amazing performance of brands like 505 still admire this ageless machine. I will be the first to promote and rejuvenate this invaluable Peugeot brand in Ghana if the company is serious about hitting back on the African market. If Peugeot does not get back its image in Africa then it is almost impossible to expand its global market shares. Trust me.

    I am waiting for your green light good old Peugeot! Release the African LION. Let him strike once again. I drive the 505 GTi and I can't compare this sweet machine to any of the Hondas,Toyotas and Nissans. They feel like paper on the highway.

    Kweku Yeboah

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