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Jaglion

09 May 2019 by jbchevrel

Earlier this year, Peugeot SA (PEUGOT) had been rumoured to have appetite for M&A. The CEO Carlos Tavares had reportedly the backing of the Peugeot family for it (19 Mar – Les Echos). Back then it was reported that Tavares was seeking a deal that to the company's footprint with Fiat Chrysler Automobiles (FCAIM) or Jaguar Land Rover Automotive PLC (TTMTIN) seen as potential candidates. “We supported the Opel project from the start. If another opportunity comes up, we will not be braking, Carlos knows that”.”The Opel operation is an exceptional success, we didn't think that the recovery could be as fast" said Robert Peugeot. PEUGOT had acquired Opel-Vauxhall from GM in 2017 and has boosted its profitability. The reason that matters is that the Peugeot family is big shareholder (12.2%), along with Bpi France (12.2%) and Dongfeng Motor (12.2%). At the time, FCAIM was seen as the strongest candidate, following the remarks of Manley at the Geneva Auto Show. PEUGOT had effectively approached FCAIM about combining the two companies (22 March – WSJ). Talks had broken down after the Agnelli family rejected any transaction financed with PEUGOT stock and FCAIM was concerned over any greater mature European market exposure. No longer talking. Today, conflicting headlines about a purchase of TTMTIN were a new episode in this M&A saga, pushing PEUGOT 5y CDS +14 and TTMTIN -50 @ close, after -100 intraday. Press Association reported a sale could be imminent, citing unidentified people at the company. PEUGOT spokesman then said the firm is in “no hurry” to make acquisition and could “stand alone,” adding that if an opportunity comes, co. will consider it. Tata Motors, which owns JLR, denied it was looking to sell its stake. A "post-sale integration document" is reportedly in circulation, with companies looking at potential synergies. PEUGOT is currently in appearance insulated from current issues facing the broader autos sector (US tariff threat + Chinese market concerns), as Europe is ~80% of PEUGOT sales. Good news for anyone bullish Europe. Regardless, it leaves PEUGOT as one of the most exposed to upcoming EER (European Emission Regulation). It seems far from its 2021 fleet target of 93g/km. And getting further away. Indeed, its fleet average was 114g/km in 2018. PEUGOT’s reported plans to electrify up to half of its fleet in the next two years (with up to 7 electric model launches this year) and fading SUV success can also pressure margins. As far as TTMTIN is concerned, looking from here, it looks like the market had been to quick to price in defaults, following FQ3 earnings (08 Feb) even as the co was still sitting on £4.4b liquidity incl £2.5b cash. Indeed, at that point, accounts dumped cash in the belly of the curve, in the light of the >£1b of bonds maturing in 2019-2021. Alternative financing options (sale-leaseback agreements, securitization of receivables) were reportedly explored. A posteriori, things didn’t turn that way, and the belly rallied aggressively (5 5/8 23s -380bp), thus outperforming the short (3 ½ 20s in 4%-6%). Still early days for TTMTIN-PEUGOT prospects, Tata Motors (JLR owner since 08, after F) denied for now, looking to extract the most from a deal.