DBRS Places PSA Peugeot Citroën Under Review with Developing Implications Following the Announced Acquisition of the European Operations of General Motors Company

DBRS Limited (DBRS) has today placed the ratings of PSA Peugeot Citroën (PSA or the Company) Under Review with Developing Implications. Previously, PSA’s Issuer Rating of BB and Senior Unsecured Debt rating of BB with an associated Recovery Rating of RR4 both carried Positive trends. The rating action follows the recent announcement that the Company had reached an agreement with General Motors Company (GM) regarding the acquisition of GM’s Opel/Vauxhall subsidiary in addition to that of the European operations of General Motors Financial Company, Inc. (GM Financial; collectively, the Acquisition) in transactions in the respective amounts of EUR 1.3 billion and EUR 0.9 billion. The Acquisition remains subject to various regulatory approvals, with closing not anticipated before year-end 2017.

Regarding additional details of the Acquisition, PSA is to pay a total consideration of EUR 1.3 billion for GM’s Opel/Vauxhall subsidiary, which is to consist of EUR 0.67 billion in cash and EUR 0.65 billion in the form of warrants (pending shareholder approval), that will be exercisable from the fifth anniversary date of issuance with a maturity of nine years. With respect to the purchase of the European operations of GM Financial, these are to be acquired by PSA and BNP Paribas SA (BNP Paribas) on a 50/50 ownership basis for EUR 0.9 billion, with BNP Paribas to consolidate the entity. DBRS notes further that GM has retained the majority of pension and retiree obligations, apart from the German Actives Plan and various other small plans, which will be transferred to PSA, with GM to pay the Company EUR 3 billion for the full settlement thereof.

DBRS notes that the Acquisition represents a meaningful increase for PSA in terms of scale, (which remains critical in efficiently absorbing the high costs associated with the automotive industry), with total global unit sales increasing to 4.3 million units on a pro forma basis from 3.1 million units on a stand-alone basis (both as at year-end 2016). The Acquisition would also render the combined entity a strong number-two position in its core European market, behind only Volkswagen AG. Moreover, the Acquisition stands to result in sizable synergies that are currently targeted by the Company to result in annual savings of EUR 1.1 billion and EUR 1.7 billion by 2020 and 2026, respectively.

However, while DBRS acknowledges the rapid and considerable turnaround of PSA, (which has been achieved significantly through cost-reduction activities bolstered by a meaningful improvement in European market conditions), DBRS notes that the Company’s planned turnaround of Opel/Vauxhall remains subject to significant execution risk that is further exacerbated by the economic and political uncertainties currently prevailing in the region, with the automotive industry potentially being adversely affected by last year’s Brexit vote. DBRS also notes that the Acquisition would serve to increase PSA’s already high dependence on Western European sales.

DBRS expects to resolve the Under Review with Developing Implications status of the ratings by the anticipated closing of the transaction. DBRS’s review will consist of a detailed assessment of the anticipated prospects of the combined Company amid projected market developments and conditions. Moreover, DBRS will undertake discussions with Company management as part of its review.

Notes:
All figures are in euros unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The principal methodology is Rating Companies in the Automotive Manufacturing Industry, which can be found on dbrs.com under Methodologies.