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Driving the deal

6 Mar 2012 By Chris Hughes

PSA Peugeot Citroën has squared two circles with the 1 billion euro ($1.3 billion) cash call backing its alliance with U.S. peer General Motors. The French carmaker has welcomed a major new shareholder without taking control away from the founding Peugeot family. Plus it has got a firm commitment to fund capital spending on a speculative venture in a challenged industry.

The fundraising, unveiled on March 6, sees Peugeot raise 30 percent of its pre-deal market value. The family has rights to subscribe for about one-third of the new shares, but will only take half its entitlement. At the rights issue price of 8.27 euros per share – a 32 percent discount to the shares’ theoretical ex-rights price (TERP) – the family will fork out over 140 million euros. Because some of its existing shares carry double votes, this reduces its voting stake from just under 50 percent to 38 percent – sufficient to keep the family in the driving seat.

GM then takes up Peugeot’s remaining rights at a cost of 170 million euros, giving it a 5.8 percent shareholding. But GM wanted more, so it is also spending an additional 135 million euros on some Peugeot shares held in treasury, lifting its stake to 7 percent. GM will pay the TERP for the stock so it doesn’t get a special deal. These rather ugly contortions get GM to its desired holding, while the Peugeot family stomachs as much dilution as it can while maintaining control.

That leaves the public markets. Even with GM and the Peugeot family committed to buying one-third of the issue, the underwriters still have 690 million euros of especially volatile shares to shift. Worse, the fundraising is for capex in an industry plagued by overcapacity: hardly a compelling investment case, notwithstanding the promise of synergies from the GM alliance.

Against that backdrop, the 32 percent discount to TERP looks tolerable. Before Peugeot unveiled its cash call, the shares were only 2 percent lower than when news of the possible alliance and fundraising first leaked. By mid-morning on March 6, they were down a further 4 percent. Given the volume of new shares on offer, and the rationale for the rights issue, other companies considering cash calls can take some comfort.


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