Mitsubishi, Peugeot in Talks for Capital Tie-Up

Mitsubishi Motors Corp. and PSA Peugeot-Citroen said Thursday they are in talks over a capital tie-up that could see the French auto maker take a significant stake in the Japanese company as an industry-wide slowdown and the need to invest in green car technology fuel consolidation pressures.

While Mitsubishi Motors said the tie-up was just one of a range of options it is discussing with Peugeot-Citroen, shares in Japan's sixth-biggest auto maker by sales surged as much as 23% during the day as investors relished the prospect of a deal that could help Mitsubishi Motors both develop electric vehicle technology and secure funds it may need to pay dividends for preferred shares.

 

"We have been talking about whether we can have a deeper relationship, and a capital tie-up is one among many options," said a Mitsubishi Motors spokesman, declining to comment on the scale or value of any potential deal.

 

PSA Peugeot Citroen later said separately that "it has started discussions with [Mitsubishi Motors] concerning the possibility of extending their relationship which could lead to a strategic partnership."

 

Analysts say the potential capital alliance would allow Peugeot-Citroen to save time in obtaining future key green technologies by using the Japanese firm's well-developed systems for electric cars. It could also make a foray into the U.S. and some growing Asian markets through Mitsubishi's sales networks in those regions.

 

For Mitsubishi Motors, the potential deal would help it overcome a major challenge. The company is obliged to pay a dividend worth 20 billion yen at the end of March for preferred shares that it began issuing five years ago to Mitsubishi Heavy Industries Ltd., Mitsubishi Corp., Bank of Tokyo-Mitsubishi UFJ and other Mitsubishi group firms as part of its previous restructuring plan.

 

The Japanese car maker would also be able to share the hefty cost of developing advanced electric cars with Peugeot and to reduce the production costs of these vehicles by supplying them to Peugeot.

 

The talks between the two firms could raise expectations that more deals might be coming, following speculation earlier this year that Suzuki Motor Corp. was in talks with Volkswagen AG over a possible tie-up.

 

The two auto makers have already struck partnership deals that include Mitsubishi supplying its i-MiEV electric city car and its Outlander sports utility vehicle to Peugeot-Citroen. They also plan to jointly produce SUVs in Russia.

 

The talks come as global auto makers, only now showing signs of limping out of a bruising slowdown brought on by the economic slowdown, are shifting their marketing focus to emerging markets and ramping up investments to develop fuel-efficient, low-emission cars to meet stricter emission regulations by using the latest technology.

 

However, entering these markets and developing these technologies is proving to be a costly challenge for auto makers as they struggle with losses and sharp drops in profits.

 

Peugeot-Citroen reported an operating loss of €826 million in the first half. It recently raised its full-year guidance. Still, the company only expects to break even on an operating basis for the full year.

 

Mitsubishi Motors suffered an operating loss of 2.9 billion yen in the July-September quarter. While it expects an operating profit of 30 billion yen for the full fiscal year through March, analysts warn it will be hard to meet this projection due to the yen's recent surge to a 14-year high against the dollar. A stronger yen slashes profits earned abroad when translated into yen and makes vehicles built in Japan more expensive overseas.

 

Like many of its peers, the French company already has a range of targeted industrial partnerships with auto producers in various parts of the world. But the projected tie with Mitsubishi Motors could echo the long-standing links with France's Renault SA and Nissan Motor Co. Renault controls Nissan with a 44% stake, while the Japanese company owns 15% of its partner, and Carlos Ghosn is the senior executive at both companies.

 

Analysts say Renault's aggressive push to introduce electric cars with Nissan may be a catalyst prompting Peugeot to look to forge a wider partnership with Mitsubishi Motors, which became the world's first mass-producer of electric cars this year.

 

Renault and Nissan together plan to launch electric cars over the next few years worldwide to take an early lead in the fledgling electric car market by making their vehicles more affordable.

 

"Peugeot is watching Renault ... If more hybrids and electric cars are coming in Peugeot won't be able to compete enough with only diesel-powered models," Koji Endo, independent research firm Advanced Research Japan, said.

 

Peugeot-Citron's Chief Executive Philippe Varin indicated recently that the French company's controlling Peugeot family are being more open-minded about an alliance with another automotive group, provided that it creates value for Peugeot-Citroen shareholders and doesn't impinge on its independence. Any deal would also need the backing of group companies Mitsubishi Corp. and Mitsubishi Heavy Industries which have respective stakes of 14% and 15.6% in the Japanese auto maker.

 

On the Tokyo Stock Exchange, shares of Mitsubishi Motors ended up 13% at 135 yen after a lengthy trading suspension earlier in the day pending comment from the company. At the closing price, the company's market capitalization was just 748 billion yen.

 

News of the talks lifted other car makers. Toyota Motor Corp.'s shares soared 5.6% to 3,760 yen and Mazda Motor Corp. jumped 6.7% to 207 yen.

 

After opening up 2.9%, Peugeot shares lost steam in early trading Thursday. Even if the new alliance benefits the French car maker, it won't "bring game-changing scale, nor industry-leading technology," given the Japanese car maker's relatively small sales volume of about 1.0 million vehicles a year compared with about three million vehicles at Peugeot, Credit Suisse wrote in a report.