Shares in PSA Peugeot Citroen fell 7.8 per cent yesterday for a 20 per cent four-day drop after General Motors sold its seven per cent stake in the struggling French carmaker in a private placement to institutional investors.

Peugeot shares already lost 7.6 per cent on Thursday after the group announced a writedown and confirmed it was mulling a capital increase.

Asked on if the state would take part in the capital increase, French Industry Minister Arnaud Montebourg told RMC radio: “I cannot answer your question. Will the question arise? Without doubt. But for now, let the companies discuss between themselves.”

He added: “The red line is that PSA will remain French. That is our position.”

PSA Peugeot Citroen took a €1.1 billion writedown at its ailing overseas operations and is pursuing a tie-up with China’s Dongfeng Motor Group that would give the French carmaker the time and cash to pull out of its downward spiral.

General Motors Co said it would not stand in the way of a deal with Dongfeng, insisting that industrial cooperation with Peugeot remains strong.

Peugeot and GM also lowered savings goals for their scaled-down alliance on Thursday, as the Paris-based carmaker acknowledged it was seeking a deal with Dongfeng underpinned by a capital increase.

One of the worst casualties of Europe’s economic slump and six-year car sales decline, Peugeot is cutting jobs and plant capacity in an attempt to halt losses within two years.

A source told Reuters the board had approved the outlines of the Dongfeng deal with a €3.5 billion capital increase at a discount of as much as 40 per cent.

“No matter how the deal is structured, we cannot see anything positive in today’s news on Peugeot,” London-based Barclays analyst Kristina Church said.

The stock could eventually begin to recover after a capital increase, Church added in an investor note.

“But this assumes Peugeot is able to use the €3.5 billion potentially raised for future growth ... whereas in reality we worry it will be subsumed purely by operational cash burn.”

Peugeot and Dongfeng have been in negotiations to extend their existing Chinese partnership to other Asian markets, backed by a share issue in which the French state and Dongfeng would take matching Peugeot stakes.

Discussions are at “preliminary stage”, with no guarantee of a successful outcome, Peugeot said.

“There is no agreement on the terms of a potential operation.”

According to a source familiar with the matter, Peugeot’s board agreed on Tuesday to enter final talks to sell 20 per cent stakes to France and Dongfeng in a capital hike likely to be priced below €7 per share after the Chinese carmaker made an indicative offer of €6.85.

However, the manufacturer and its founding Peugeot family still hope to negotiate a higher price from Dongfeng, two sources with knowledge of the matter said.

“A price of €7 or below is out of the question,” said a person close to one of three Peugeot cousins who head the family’s business interests.

Dongfeng, based in the central Chinese city of Wuhan, declined to comment on the tie-up talks. (Reuters)

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