PSA French State Options?

What can the French State do to “support” ailing PSA (UG).  PSA’s recent cash crises took many in the industry by surprise.  When the company and GM announced its recent rights issue, the most surprising comment I heard from my European friends was….”I didn’t know the balance sheet was in that big of trouble.”

While I wait to see the PSA accounts later this month, my general perception is that the debt crises at PSA is a result of the volume crash in Europe in general and France specifically.  this big downfall has hit PSA on the working side with heavy inventory, poor working capital ratios driven by a bloated production base, not the same fundamental drivers as GM and Chryslers’s downfall.  So what can the state do and what will it mean:

Market stimulus: Whether through direct buyer credits, a luxury tax or implementation of the bonus-malus fuel-efficient scale, any measures to stimulate demand will be tepid and short-lived.  The French can only buy so many cars, and when they’re done, PSA still needs to close 2 French factories.

Loans:  Like February 2009, when PSA and Renault received a combined $8 billion in French state loans, the Hollande government could offer another round.  Two issues here are the fact that the French state balance sheet has deteriorated over the past three years and we have multiple other entities trying to draw it down as well.  I am not sure I would expect the new socialist regime to put a billion euros into an enterprise with a market value not even twice that.

Equity stake:  Under the previous French regime, I would have tossed this idea aside, however, the new regime might see this as the most likely way to secure its control over the business.  this presents me with a real dilemma.  Would PSA sell its operations “soul” for cash to keep it afloat in the short-term? Especially when this option would surely tie its hands in doing what it needs to do in closing at least two factories in France?  While from a social viability and political perspective, this option really makes no sense for the long-term prospects of the company. 

In short, PSA needs to tighten operations, and stem the cash bleeding without outside interference.  Its cross-town rival Renault is still dealing with the French state’s 15% stake which gives any given government an out-sized say in issues that would have social impact.  Go back and look at the pressure from Élysée  in Renault’s plan to launch a “French Built” luxury brand, protect the domestic production for B-segment and the commitment to keep the Flins plant running full, not to mention the pressure for management sacrifices in the wake of the “spy scandal” drama.

PSA has strong brand, it has competitive technology and good products….it just has too much of everything.  Right-sizing and preparing for the future with its new friend in GM should be the focus.  It can’t hope for a GM/Government style bailout.

Now, what will become of GM’s Opel unit, now under new management, that’s another story.  Clearly GM is serious about not just papering over this problem.  From what I can tell, today there are no longer any sacred cows, regardless of what promises were made last week, last month or last year.  more to come….