GM-Peugeot setbacks set scene for Dongfeng deal push

General Motors scaled back cooperation with Peugeot months into their alliance and later turned down a government-backed merger, leaving China's Dongfeng as the French carmaker's last hope, people familiar with the matter said.

GM took a 7 percent stake in PSA Peugeot Citroen after the carmakers announced what was billed as a broad-based alliance in February, 2012.

Yet the pairing hit obstacles within eight months, when GM revealed its Chinese partner SAIC would veto key plans including for larger cars, said the sources, who declined to be identified because the matter was confidential.

"We never found out whether GM had known that all along," one person said.

By June this year, Peugeot had won French government approval for a restructuring tie-up with GM's Opel division, but the US carmaker turned it down, citing CEO Dan Akerson's likely succession by early 2015 and political sensitivities, people said. GM is still 7.3 percent US government-owned.

The series of setbacks with GM has forced Peugeot Chief Executive Philippe Varin to look elsewhere for a cash injection amid mounting concern over the company's finances.

Peugeot shares fell 9.1 percent on Monday after Reuters reported the company was preparing a 3 billion euro ($4 billion) capital increase in which Dongfeng and the French state would buy matching stakes of between 20 and 30 percent.

The move would reduce GM's stake in Peugeot and give the Chinese State-owned carmaker access to its French partner's technology, in return for help in potential new markets, according to people with knowledge of the talks. Peugeot and Dongfeng already have a Chinese joint venture, DPCA.

Financial concerns

But the size and timing of the planned capital increase, and the government's readiness to contribute, are driven by financial concerns that have lately resurfaced despite Peugeot's assurances in July that it would surpass 2013 cash goals, sources said.

"The government is worried about Peugeot's financial state, which is one reason why such a big share issue is imminent," said a person familiar with the matter.