Traverse City Record-Eagle

Michigan

February 23, 2012

GM in talks with French car maker

Peugeot Citroen lost $578M on car business last year

THE ASSOCIATED PRESS Associated Press

PARIS — General Motors Co. is in talks about a possible alliance with France's leading car maker PSA Peugeot Citroen, a deal that could dwarf PSA's partnerships with BMW, Mitsubishi Motors and Toyota.

Peugeot Citroen shares surged on news of the talks, which were confirmed Wednesday by France's labor minister.

The Paris-based maker of the Peugeot 207 hatchback and Citroen C4 Picasso minivan lost $578 million on its car business last year amid falling sales and concerns over management's strategy among industry analysts. The family controlled company whose roots stretch back over 200 years has been hard hit by the economic downturn in Europe, where it sells more than 50 percent of the 3.5 million cars it sells annually.

Peugeot released scant details about the talks. Its statement said only that it was examining "projects for cooperation and alliances" related to its strategy of "globalization and performance improvement."

On Wednesday, GM said only that it routinely talks with other companies in the industry.

French Labor minister Xavier Bertrand said Peugeot Chief Executive Philippe Varin had informed him Tuesday evening of the talks about a "strategic partnership" with GM.

"He told me that it's good news for the group because it will allow them to cut costs on each vehicle," Bertrand said in an interview of French radio Europe 1. Bertrand said the proposed deal would give Peugeot Citroen the size it lacks to compete on a global scale. Peugeot "is above all a European champion, a national champion. If you have access to a global dimension, it's not a handicap," Bertrand said.

Peugeot shares rose more than 20 percent to a four-month high at one point on the Paris stock exchange as investors applauded the possible tie-up. In late trading. The stock rose 12 percent to close at 16.13 euros per share.

GM shares were down 40 cents, or 1.5 percent, to $26.66 in midday trading.

News of the talks comes just ahead of next month's Geneva Motor Show, and will undoubtedly be one of the main topics of discussion at Europe's biggest annual car industry gathering.

For Detroit-based GM, which makes the Chevrolet Cruze compact and Cadillac CTS luxury car, the talks raise the possibility that it might find a solution for its loss-making Opel and Vauxhall brands in Europe. GM Europe lost $700 million last year. Last week the head of General Motors Europe announced that the company was in talks with unions and employee representatives on ways to cut costs and return Opel and Vauxhall to profitability.

GM CEO Dan Akerson has said it will have to cut its European factory capacity to match lower sales, and the company is looking at the entire business for cost cuts.

Both companies would benefit from a tie-up, which likely would include combined work on engines, transmissions and even car undercarriages, IHS Automotive analyst Ian Fletcher wrote in a note to investors. Both have cost-cutting plans in the works and need to reduce the size of their manufacturing networks, Fletcher wrote.

"It is unlikely that any sort of rationalization will come directly out of this relationship due to political and union factors and as a result will be something far more suitably addressed alone," he wrote.

Peugeot is second by sales only to Wolfsburg, Germany's Volkswagen AG among Europe's carmakers. It already has a partnership with BMW AG to jointly develop a lower-emission engine for some of their most popular models.

Peugeot Citroen has also worked with Mitsubishi Motors on product development with cooperation on SUVs, clean technologies with electric vehicles and a joint venture in Russia.

Two years ago Peugeot and Mitsubishi abandoned talks on a "strategic partnership," saying that circumstances were not right.

Last week Peugeot Citroen forecast a 10 percent drop in car sales in its core French market this year, after booking a loss in 2011, as economic conditions remain tough.

Peugeot Citroen forecast the European car market will shrink about 5 percent this year, after a 0.5 percent drop in 2011.

Last year Peugeot Citroen sold 3.5 million cars, 1.5 percent fewer than in 2010. In the hard-hit European market, Peugeot Citroen car sales slumped 6.1 percent, worse than French rival Renault.

The company is stepping up a cost-cutting plan announced last October, and now aims to achieve €1 billion in savings this year. Last October the company announced plans to cut 6,000 jobs to save €800 million in 2012.

The company also aims to raise €1.5 billion through asset sales, including property and a stake in its Gefco logistics subsidiary.

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