Updated: 02/19/2014 00:26 | By Agence France-Presse

Peugeot dynasty ends reign with Dongfeng tie-up

PSA Peugeot Citroen agreed to a capital tie-up with China's Dongfeng and the French state on Tuesday, a source said, ending the reign of one of France's oldest industrial dynasties.

Peugeot dynasty ends reign with Dongfeng tie-up

An assembly line on PSA Peugeot Citroen's plant in Sochaux, western France - by Jeff Pachoud

In the latest buy-in of a Chinese giant to a struggling Western firm, the source close to the deal said Peugeot's board approved an agreement for Dongfeng and the French government to each inject 800 million euros ($1.1 billion) for 14 percent stakes in the company.

The total fundraising effort could bring in at least 3 billion euros through the sales of additional shares. 

Full details of the deal are to be released early on Wednesday along with Peugeot's 2013 results.

The Peugeot family -- which has controlled the firm since its founding in 1810 as a maker of coffee mills and bicycles -- will see its 25 percent stake and 38 percent voting rights diluted to the same amount as the stakes for the government and Chinese state-controlled Dongfeng.

The deal will come to Peugeot's rescue after the group, Europe's second-largest carmaker, suffered the indignity of needing 7 billion euros in state-guaranteed refinancing to rescue its credit arm.

Peugeot has been among the hardest hit by a European slump in car sales, suffering a 5 billion euro loss in 2012 and cutting thousands of jobs.

For China, where Dongfeng is the second-biggest automaker, the agreement marks the latest high-profile acquisition by the economic powerhouse of a Western company. 

Last month, Chinese tech giant Lenovo bought Motorola from Google in $2.9 billion deal.

Under the Peugeot deal, the family will see its number of board seats reduced from four to two, with Thierry Peugeot expected to lose his post as chairman.

- Results due Wednesday -

None of the three main shareholders would be allowed to increase its stake for 10 years -- seen as an effort to limit Dongfeng's influence at Peugeot, which employs nearly 90,000 people in France.

The final deal is expected to be signed at the end of next month during a visit by Chinese President Xi Jinping to Paris.

The source said the Peugeot board also agreed a tie-up between its financing arm and Spanish bank Santander to begin at the end of 2016 when state-guaranteed funding expires.

It as well approved the appointment of former Renault executive Carlos Tavares as the new CEO to replace Philippe Varin, the man often blamed for guiding the company into its current turmoil, the source said.

Last year, a government-ordered enquiry found that Peugeot had made strategic mistakes for years by not seizing fully the opportunities of globalisation.

Peugeot is set to release its results for 2013 early on Wednesday, after it took a series of cost-cutting measures aimed at saving 1.5 billion euros, including closing its iconic Aulnay-sous-Bois factory near Paris.

The company is hoping the link with Dongfeng will give it a boost in China, which is now the group's number two market behind France and where it operates three joint factories.

State-owned Dongfeng Motor Corp., founded in 1969 and whose name means "East Wind", sold 3.53 million vehicles in China in 2013, giving it a 16 percent market share.

Industrial Renewal Minister Arnaud Montebourg said the state's decision to buy in to Peugeot was important to France's economic future.

"We have taken a decision of economic and industrial patriotism, with commitments taken by management," Montebourg said.

He said Peugeot had committed to producing a million vehicles a year in France by 2016 and investing 1.5 billion euros in French factories.

- 'It saves our bacon' -

At Peugeot's historic Sochaux plant in the eastern Franche-Comte region, workers welcomed the reorganisation but expressed fears the deal would eventually see their jobs relocated to China.

"In the workshops people are saying we are going to be gobbled up by the Chinese," said Christian, 57, one of the factory's 11,500 workers.

"But we don't have any choice, all of the automakers are relying on foreign groups. If it saves our bacon, that's a good thing."

The Peugeot family jumped into car manufacturing in 1889 and, though no longer directly managing Peugeot, continued to play a key role on its board even after the 1976 takeover of Citroen.

Trading in Dongfeng shares was suspended in Hong Kong on Tuesday, while Peugeot shares were down 1.64 percent at 12.58 euros in mid-afternoon trading in Paris.

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