Peugeot to sell assets including gefco stake in move to cut debt

PSA Peugeot Citroen, Europe’s second-biggest carmaker, plans to sell property and a stake in its Gefco trucking unit as a contraction in the region’s vehicle market hampers the company’s ability to limit debt growth.

The asset-disposal program will total 1.5 billion euros ($1.98 billion), including the sale of a car-rental business completed this month, Paris-based Peugeot said in a statement today. Net debt widened to 3.4 billion euros at the end of 2011 from 1.6 billion euros on June 30.

The manufacturer’s carmaking division missed a target of breaking even in 2011, in contrast to earnings growth of 13 percent at Gefco. Peugeot estimates that the European car market may shrink 5 percent this year, Chief Executive Officer Philippe Varin told journalists in Paris. That would mark the fifth consecutive annual sales drop for the region’s industry.

The French company “is trying to stop the cash burn via asset disposals, which ultimately means selling higher-yielding assets to fund a loss-making business,” David Arnold, a London- based Credit Suisse analyst, said in a note to clients. Peugeot is the first European carmaker to take such a step “to stabilize its balance sheet going into a very tough operating environment in 2012,” which is “not a great strategy.”

Peugeot fell as much as 5 percent to 14.37 euros, the biggest intraday drop since Dec. 8, and was trading down 4.95 percent at 2:48 p.m. in Paris. The shares have fallen 52 percent in the last 12 months, valuing Peugeot at 3.36 billion euros, in the the worst performance on the 14- company Euro Stoxx Automobiles & Parts Index.

Moody’s Review

Moody’s Investors Service placed Peugeot’s Baa3 long-term and Prime 3 short-term debt ratings under review for a possible cut, the credit-reporting company said in a statement today, putting the French manufacturer’s debt at risk of junk status.

Earnings before interest, taxes and one-time gains or costs, which Peugeot calls recurring operating profit, fell 27 percent in 2011 to 1.32 billion euros as the car-manufacturing division posted a 92 million loss compared with 621 million euro profit a year earlier. Gefco’s recurring operating profit rose to 223 million euros.

Asset sales will include about 500 million euros in property and a holding in Gefco of at least that amount, Varin said. Peugeot sold the Citer vehicle-rental division to Enterprise Holdings Inc. on Feb. 1 for 440 million euros.

Gefco Strategy

Peugeot has “made no decision on the size of our continuing stake in Gefco,” though it intends to remain a “long-term strategic partner,” Chief Financial Officer Jean- Baptiste de Chatillon said today said on a conference call with journalists, declining to rule out the manufacturer becoming a minority shareholder.

The divestment of these “non-strategic assets” will allow Peugeot to focus on the long-term priority of increasing its sales outside Europe, Varin said at a Paris press conference.

Peugeot’s deliveries fell 1.5 percent to 3.5 million vehicles in 2011. The decline was led by a drop in Europe, where industrywide sales fell for a fourth consecutive year.

“We expect market conditions to remain difficult in Europe in 2012,” Varin said today.

Cost Reductions

The French company laid out a program in October to eliminate as many as 3,500 jobs in Europe in 2012 to help reduce costs by 800 million euros. Peugeot said today that it increased the savings to 1 billion euros, with reductions in investments and marketing costs contributing. Chatillon told journalists that no jobs were affected by the additional cuts.

“Net debt increased more than expected, so it definitely makes sense to focus on improving liquidity,” Marc-Rene Tonn, a Hamburg-based analyst at Warburg Research with a “hold” recommendation on Peugeot stock, said by phone. “The cost- savings program is also certainly important, but Peugeot tends to jump from program to program, and so far that has not been successful.”

Full-year revenue rose 6.9 percent to 59.9 billion euros. Earnings as a proportion of sales fell to 2.2 percent from a 3.2 percent operating margin in 2010. Net income dropped 48 percent to 588 million euros, missing the 711 million-euro average of 19 analyst estimates compiled by Bloomberg.

Peugeot had predicted in October that its carmaking division would about break even at the recurring operating profit level, versus an earlier forecast of positive earnings, because of growing pressure to cut prices.

Car-Price Cuts

A loss of about 500 million euros in the second half was attributable to “the major market declines in southern Europe, where we are very present, the pressure on prices in the small- vehicles segment and disruption in the logistics chain,” including the effects of the earthquake and nuclear crisis in Japan earlier in the year, Chatillon said.

Peugeot ranks second in Europe’s car industry to Wolfsburg, Germany-based Volkswagen AG. The region’s auto-manufacturers’ association, which reports figures for European Union countries plus Switzerland, Norway and Iceland, said Jan. 17 that Peugeot’s sales in that market fell 8.8 percent in 2011. Peugeot said in January that its deliveries in Europe declined 6.8 percent, including sales in future EU member Croatia.

Operating profit at Peugeot’s publicly traded Faurecia car- parts division rose 43 percent to 651 million euros, the unit said Feb. 8. The carmaker’s bank division posted a 4.9 percent increase in operating profit to 532 million euros as revenue rose 2.7 percent to 1.9 billion euros.

The company is in discussions with the European Central Bank about obtaining three years of refinancing and is offering collateral “above” 1 billion euros, Chatillon told analysts at a conference in Paris.