Dongfeng to spend $1.1b for slice of Peugeot

Dongfeng Motor Group Co Ltd is to pay approximately 800 million euro ($1.1 billion) for a slice of Peugeot SA, the leading French carmaker, while the French government is expected to acquire equal shares, the Chinese company said on Wednesday.

According to an announcement issued by Dongfeng to the Hong Kong Stock Exchange on Wednesday morning, the Chinese carmaker has entered into a memorandum of understanding to subscribe shares to be issued by Peugeot to increase its capital reserve at 7.5 euro per share, for a total subscription price of 524 million euro. Dongfeng also agreed to spend another 276 million euro to buy shares pursuant to Peugeot SA rights issue. The purchase price will be determined according to market conditions and the share price of Peugeot SA.

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The French government is expected to buy the same amount of Peugeot shares on the same terms of Dongfeng's deal pursuant to the French carmaker's capital increase and rights issue, the announcement said.

Meanwhile, Peugeot is to issue warrants to its existing shareholders on the basis of one warrant per share. Every 10 warrants entitles the holder to subscribe for three shares at a price of 7.5 euro each.

As a result, Dongfeng Motor Group, the French government and the Peugeot family will hold the same number of shares in Peugeot SA. A new committee overseeing Asia development will be created in the supervisory board of Peugeot, to be chaired by a representative of Dongfeng. After completion of the PSA reserved capital increase, the rights issue and the distribution of warrants, the three parties - Dongfeng, the French government and the Peugeot family - will have the same voting rights at the company's general meetings.

The memorandum is pending approval from the Chinese authorities. Peugeot is entitled to terminate the deal if it fails to get all the signatures and stamps required before April 30.

In addition to the memo, the announcement also cited further cooperation in Dongfeng Peugeot Citron Automobile Company Ltd, a joint venture owned by the two carmakers in China. The two will "enhance the research and development capabilities of the entire value chain and strengthen overseas cooperation to achieve the objective of selling 1.5 million vehicles under the Dongfeng, Peugeot SA and Citron brands each year starting from 2020," the announcement said.

A legally binding agreement is expected by the end of March for a joint research and development center in China. A new export company is also planned to explore markets in Asia-Pacific especially the ASEAN region.

The deal can help Dongfeng "diversify its brands to ease reliance on Japanese brands as Dongfeng Nissan and Dongfeng Honda account for nearly half of its total vehicle sales," said Yonghuo Liang, an analyst with Haitong International Research. "Dongfeng has a strong financial position with cash of 24.3 billion yuan in the first half 2013. Its net profit is expected to reach around 10 billion for the whole of last year. The carmaker is required to leverage its cash as it will slow its capacity expansion in 2014."

However, Liang also pointed out that the Chinese carmaker is likely to have "limited influence on Peugeot's operations" and the investment will likely to "see weak execution as none of the big three shareholders have absolute decision rights".

Dongfeng Motor Group declined 1.095 percent on Wednesday to HK$10.84 a share. That is in comparison with 0.34 percent pickup of Hang Seng Index, the benchmark index of Hong Kong stock exchange, to 22664.52 at the close.