PSA, an existential outlook. UG or not UG

psa

Will PSA be here as a company in 5 years.  Sure it will, as a brand, company and equity.  But in what way shape or form seems to shift each day.  Six months ago the market was pretty hedged on that question, a couple of weeks ago they seemed to have a plan.  After Philippe Varin’s comments this week on “alliances” fear is creeping back.  So, is there an existential threat to PSA at least as an invest-able vehicle?

Worries over the partnership with GM dying out are overblown.  The real cost savings PSA-RADD2012-EN_01_img_58have always been closer to 2017-2018.  At the same time, Opel and PSA do have a number of areas where they can cooperate. Mr. Varin made it clear that while the B platform is “under review” the B- and C-MPV projects are moving ahead full-steam.  Purchasing and other transnational cooperation is also moving forward.  It does beg a question as the what’s the future for GM/Opel B platform plans?gmpsainvestordeckfinal02004

Ironically PSA has a good history of tactical partnerships with engines and products  The company has successfully worked with partners as diverse as BMW (for small diesel engines where they have an internal infrastructure and culture to supply) and Fiat (for small LCV products where volume is critical.)  It’s been PSA misfortune that the shifting partnership dynamics and tech developments that have ended these two projects. 

I also find it ironic that the GM equity stake in PSA actually makes their relationship more difficult as PSA looks for additional opportunities like the one with Dong Feng.  I am not convinces Dong Feng will take a full €3 billion stake in PSA, but if it would, it would be awkward for Mr. Girsky and his plan.  And it probably shouldn’t.  Don’t forget, the GM culture does not have a good record on partnerships.

As for Dong Feng, what’s in it for them?  Dong Feng is a complicated corporate animal with various partnerships and a young standalone product line.  While at Nissan, I spend the early 2000’s trying to convince you Dong Feng Motor Co., Ltd wasn’t interested in a name brand, they were building an empire of partnerships.  Today, the best I can say is that things have changed.  They clearly are looking to grow their brand and have global ambitions.  PSA has a weakness in value products on emerging markets.  On paper I can see a mutually beneficial relationship.  They could build a plan to rival the Renault-Nissan Dacia/Datsun strategy using assets and technology from both.

One concern I have is the prospect of the French state taking part in a rights offering.  Peugeot-Citroen_1If the state takes a stake of 15-25% that would provide further discount to any value.  Under the current government, the state has begrudgingly allowed PSA to move ahead with restructuring, but it has slowed the confused the process.  The state already has appointed a board director and demanded the nomination of a staff representative after constructing a €18.5 billion debt rescue including a potential €7 billion loan facility.  With equity position, the state would have more direct input on any future strategic restructuring and the ability to block and slow change from within.

Restructuring continues with the unions coming to terms with headcount reductions.  Remember this is not PSA’s first foray into headcount reduction.  They eliminated 3,500 positions in France five years ago as the global economic crisis kicked in.  Cross-town rival Renault had announced 5,000 headcount cut in France, but those plans were hamstrung when then President Sarkozy balked at allowing a company 15% state-owned and needing a state cash infusion to close a French plant.

In 2009, PSA had €48 billion in revenue and less than €2 billion in debt

Some other positive things to think about PSA:

  • Improved Western European capacity utilization from less the 65% in 2012 to better at least  75% at the end of this year. 80% is where they really want to be.
  • Despite tight capex controls, PSA continues to invest in new product and technology.  It’s a good sign that we haven’t seen repeated project delays as in some competitors.  While it’s true that recent new product has not brought the market share gains PSA had hoped for, it’s important to look into the reason for that.  Is it the quality of the product?  The market dynamics? Or a little of both?
  • PSA has fairly tight inventory levels. With the market apparently bottomed out for the “Latin players” this bodes well for cash preservation in Q4 and into 2014.
  • Assets of value. I’m not going to speculate on what would be sold off to generate cash, but the company has shown it is willing to part with non-core assets like its GEFCO stake.  It still holds assets that could generate emergency cash:  Faurecia,  Bank PSA.  I don’t see this as imminent.

Summary:  PSA will be here, and it will have a new shareholder base.  Don’t worry about who, I believe the market has already accepted a dilution of €2-3 billion.  They have a strong brand, solid products and are looking at the bottom of their situation.  They have an opportunity to make some transformational changes that would allow them to regain sustainable profitable growth.  Whether they take advantage of them and actually execute remains to be seen.  But they will be here.

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