Dongfeng drives bargain with Peugeot Citroen

French automaker PSA Peugeot Citroen received agreement at its board meeting on Sunday night in Paris that the struggling company will "in principle" accept capital investment from the French government and Chinese partner Dongfeng Motor Corp.

The two investors will put a combined 3 billion euros ($4.11 billion) equally into PSA under terms yet to be defined, AFP cited unnamed sources close to the deal as saying on Monday.

French newspaper Journal du Dimanche also reported that the investment will give French government and Dongfeng Motor a 15 percent stake in PSA, making them major stakeholders.

The company's largest shareholder, the Peugeot family, will also add a 100 million euro investment to maintain its holding in the company.

Analysts said the company is in dire need of investment to weather waning business amid a market slump in Europe since it started to seek a state bailout for its finance arm in 2012.

Furthermore, the spinoff of US shareholder General Motors Co's entire 7 percent stake on Dec 13 through a private placement to institutional investors may accelerate the company's determination to accept the capital boost.

The private placement of almost 25 million shares generated gross proceeds of 250 million euros. However, GM said it still remains in alliance with PSA in Europe.

PSA reportedly hopes to be able to present the outline of a deal with China's second-largest automaker Dongfeng and the French state to investors when it discloses its annual results on Feb 19.

Analysts said the investment will help PSA in new model development as well as market expansion outside Europe, where its automobile market has declined for six years.

Europe's largest automaker, Volkswagen AG, saw its global passenger vehicle sales increase 4.8 percent to 9.5 million in 2013, greatly supported by a 16.2 percent sales surge in China, the world's largest auto market since 2009.

Jia Xinguang, an independent auto analyst based in Beijing, said the capital boost for PSA may help Dongfeng make a foray into European markets.

"The Chinese government will support the State-owned company to acquire the stake, giving it a green light from China's side," said Jia. "Now the focus of the deal is whether Dongfeng can benefit directly from the deal."

Zhang Zhiyong, another auto analyst, said: "The acquisition of a big stake in PSA will help Dongfeng promote its brand globally and reinforce the reputation of China's automobile industry".

However, he suggested Dongfeng should ask PSA to shift its market focus to China during the discussions, "so that Dongfeng may benefit from PSA's technology and product advantages".

Currently, PSA manufactures vehicles in three factories in China, under the joint venture Dongfeng Peugeot Citroen Automobile Co Ltd, which was established in 1992 in Wuhan, Hubei province.

The venture saw a sales boom of 25 percent year-on-year to 550,000 vehicles last year.

In 2013, Dongfeng Motor sold 3.53 million vehicles in China, a 14.8 percent increase from a year earlier.

In addition to a partnership with Japanese automakers Nissan Motor Co Ltd and Honda Motor Co Ltd, Dongfeng signed a $1.3 billion joint venture agreement with Renault SA in December, the first production facility with the French automaker in China.

According to a recent report released by accountants and consultants KPMG, China will not only be the world's largest auto market over the next five years, but 10 out of the top 20 automakers expected to gain a larger market share globally will also come from China.