DBRS Comments on the Announced Alliance between General Motors and PSA Peugeot Citroën

DBRS notes that General Motors Company (GM) and PSA Peugeot Citroën (PSA) today announced a long-term global strategic alliance (the Alliance). Objectives of the Alliance include (among other items) efficiencies in capital expenditures and research and development expenses through the sharing of platforms, components and modules with respect to future vehicle development. Additionally, GM and PSA will form a global purchasing joint venture to derive further scale efficiencies. While projected synergies resulting from the Alliance could amount to $2 billion annually within five years, synergies over the near term are likely to be quite limited. Both GM and PSA also indicated that the Alliance would have no direct impact on the companies’ respective restructuring efforts in Europe, with GM and PSA addressing their overcapacity issues in the continent on an independent basis. In line with the above, while DBRS considers the announced Alliance to be mildly positive to the business profiles of both companies, the Alliance, in isolation, has no impact on the ratings of either GM or PSA, which remain unchanged.

Concurrent with the Alliance (which remains subject to requisite regulatory approvals), PSA announced that it plans to raise EUR 1 billion through a rights issue in which GM is expected to participate and become a 7% shareholder in PSA. GM would thus become the second largest shareholder in PSA behind the Peugeot family, which is demonstrating its support of the Alliance through its own participation in the rights issue. PSA indicated that the proceeds of the rights issue would be allocated toward future joint projects that are core to the Alliance. This would then be separate from PSA’s previously announced cash management program that targeted EUR 1 billion in cost reduction measures as well as asset disposals aimed at bolstering PSA’s net debt position, which was materially adversely impacted by its 2011 results (that were considerably weaker vis-à-vis 2010).

DBRS will continue to monitor GM and PSA. DBRS notes, however, that while both companies are faced with overcapacity in Europe, PSA is significantly more impacted by this issue, with Europe still accounting for close to 60% of its total car and light vehicle sales (notwithstanding ongoing efforts by PSA to further diversify its sales geographically). In contrast, while GM has incurred repeated losses in Europe, its total profitability remains predominantly represented by its performance in North America, which generated very solid earnings for the company in 2010 and 2011.

Notes:
The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.