China's Dongfeng and Peugeot agree tie-up

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China's Dongfeng and Peugeot agree tie-up

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China’s Dongfeng is taking a major stake in PSA Peugeot Citroen as part of a rescue deal for the struggling French carmaker.

Dongfeng, the second-biggest Chinese vehicle manufacturer, is to inject 800 million euros into Peugeot, as will the French government.

Badly hit by Europe’s car sales slump, Peugeot is being kept afloat by seven billion euros in state guarantees which have to be withdrawn next year.

Peugeot’s board approved the deal on Tuesday with a formal announcement due on Wednesday.

In return for their investment Dongfeng and the French state each get 14 percent of the company.

The Peugeot family’s holding will fall to the same amount from the current 25 percent stake. The family also had 38 percent voting rights.

In addition new shares will be sold to existing investors, bringing the total fundraising effort to three billion euros.

The deal has divided the Peugeot family with Chairman Thierry Peugeot against his cousin Robert.

In a letter to Robert, leaked to French media, Thierry pushed an alternative plan to raise cash on the market and inject more family money. But he failed to win board support and abstained from votes to pursue the talks.

The French government is talking it up as a perfect marriage.

Industry Minister Arnaud Montebourg said: “PSA has the technology, but sells mostly in Europe without enough access to the fast growing Asian market. Dongfeng lacks technology and an international brand presence, but does have growth in Asia, so this is a good way of pooling their resources.”

This is the latest example of a big Chinese firm expanding through investment in a struggling Western brand – as happened with Zhejiang Geely Holding and Sweden’s Volvo, or just last month with Lenovo’s plan to buy Motorola Mobility from Google.

But analysts have cast doubt on the logic behind the PSA Peugeot Citroen Dongfeng deal.

Some have argued that it would have been better for Peugeot instead to sell its financing arm – which lends money to new car buyers – or its parts division, Faurecia.

This way Peugeot does get some badly needed cash and time to turn its business around, but it also gains a much more complicated ownership arrangement which could see it being pulled in three different directions, by the Chinese, the French state and the family.