Why GM Won't Buy Peugeot – Yet

Will French cars like this Peugeot RCZ become part of GM's global portfolio? Photo credit: PSA Peugeot Citroën.

Is General Motors (NYSE: GM  ) really thinking about buying distressed French automaker PSA Peugeot Citroën (NASDAQOTH: PEUGY  ) ?

That depends on how you read the tea leaves. And probably on how you define "thinking".

A bombshell report on Thursday suggested that Peugeot's founding family was willing to give up some or all of their controlling stake – if GM, which has a joint-development agreement with Peugeot, would step in with cash to rescue the drowning French carmaker.

That report sparked a variety of reactions, including this one: GM said it has "no current plans" to invest additional funds in Peugeot, in which it took a small stake last year.

But could those plans change? Well, that's an interesting question.

This GM won't buy, at least not yet
It's important to understand that current GM CEO Dan Akerson and his team aren't likely to repeat GM's historic (and unfortunate) tendency to make acquisitions just for the sake of expansion. I expect Akerson and company to stay laser-focused on their prime goal in Europe: turning long-troubled German subsidiary Opel into a fully integrated – and fully profitable – part of GM's global business.

Opel has lost billions, but those losses finally started to narrow last quarter, despite steep recessions that have knocked European new-car sales down to a 20-year low. The improvements came as a result of tough cost-cutting measures and organizational changes put in place last year, GM said. Losses are expected to narrow further over the next several quarters as more cuts take hold and new products get to market. GM now expects to get to breakeven, or close, by the end of 2015.

Put another way, after years of half-hearted measures by prior management teams, GM finally appears to have its money-burning European operation headed in the right direction.

So what does this have to do with Peugeot? This: Don't expect any interest from GM in a deal with Peugeot unless a deal can be structured that furthers the company's overriding goal of making GM Europe profitable.

Is that likely? That depends on how desperate Peugeot – and the French government – get.

Peugeot's situation is dire, and getting worse
Make no mistake, Peugeot is seriously on the ropes. It's burning cash – about 3 billion euros last year – and it only has about 4 billion more to lose before its reserves fall to the point where its operations will be crippled.

Unlike most of its competitors in Europe, Peugeot doesn't have a significant overseas presence or partner to help offset its losses at home, so its survival is dependent on a recovery – or a wrenching transformation – in Europe.

Or a bailout from the French government, which might be the family's real goal here, given that a recovery won't be happening any time soon. One way to interpret the recent reports is that this is Peugeot's way of telling French politicians, "Look, we can't do this. If you want to preserve these French jobs, bail us out. Otherwise, GM will come in and make drastic cuts."

How drastic? Here are the numbers to keep in mind: In 2012, Peugeot's French factories ran at 71% of capacity, according to IHS Automotive. Opel's German factories ran at 66% of capacity. Things haven't improved since, and may actually be worse now. As a general rule of thumb, auto factories break even at about 80% of capacity.

It's not hard to see what would have to happen if the two were combined, and how – under the right circumstances – a deal could be helpful to GM.

When Peugeot and France get truly desperate, GM might deal
It's also not hard to see that France would take a disproportionate share of the cuts. GM has already put one of Opel's four German factories on a path to closure, despite stiff resistance from Opel's powerful union and the German government. Closing a second plant in Germany isn't likely to happen.

In other words, if GM were to absorb Peugeot, it's reasonable to expect that the combined company would quickly make drastic workforce reductions in France. It's also reasonable to assume that GM won't consider moving in unless it's clear that the French government and Peugeot's unions won't stand in the way of those reductions, and won't insist on the massive severance packages that are common in Europe.

As of right now, that's not the case. But as Peugeot continues to drain its cash, and the situation becomes more dire, things might change. Watch this space.

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