PSA Peugeot Citroën has announced plans to divest part of its ownership in Gefco, its logistics and transport subsidiary, in an effort to raise cash and support on-going investment in its automotive division, which today reported a loss in its 2011 financial results amidst a difficult second half dragged down in particular by the European economy.
At a press conference discussing the financial results, Philippe Varin, chairman of the managing board, along with PSA’s chief financial officer, Jean-Baptiste de Chatillon, said that the company planned to “open the capital” of Gefco, but did not provide details about how much of a stake it intended to sell, except that it would be part of asset disposals worth €1.5 billion. A PSA spokesperson also declined to elaborate whether PSA intended to put Gefco assets to the financial markets or to an investor. “There are several options,” the spokesperson said.
Varin said that Gefco was a “strategic partner” for the group and that PSA would remain a long-term shareholder. He added that Gefco had recently signed long-term contracts that would remain in place. “But we no longer feel that we need to own 100% of Gefco,” he said.
The announcement comes at a time when Gefco’s results are strong. Earnings grew more than 12.5% in 2011 to €223m with a margin of 5.9%. Gefco also continues to expand in emerging markets–in some cases, well ahead of the automotive division–such as India, South America, Russia and China.
Last year, Gefco acquired a 70% stake in the Italy-based Mercurio Group, which has significant operations in India and South America. This week it also announced a brand tie-up with Uniworld Logistics to provide inbound logistics to manufacturers in India (read more here).
PSA under pressure
PSA’s automotive division, by contrast, has been hurt by its overexposure to Europe. The division lost €92m last year compared to a €621m profit in 2010. Varin said that earnings were hurt by price pressures for PSA’s small car segments, rising material costs rose and supply chain disruptions, including the earthquake in Japan. Sales in Europe, which represent 58% of PSA’s sales, declined 6% in 2011 and are expected to fall further this year. Other regions, including Russia, South America and China, showed strong growth. Overall sales fell by 1.5% in the year.
Losses at the automotive division were offset by gains at tier supplier Faurecia and at Gefco. Overall Group profits were €588m, a decline of almost 50% compared to 2010.
Varin outlined a five point action plan for how PSA would respond to challenging business climate. The carmaker’s cost reduction plan has been raised to €1 billion from the €800m announced in November, when PSA also announced that it would cut 6,000 jobs. The company also said that it was putting in place a new commercial organisation, that it would “drastically” reduce inventories, review investment priorities and dispose of assets.
“We need to focus on cash,” said Varin.
Varin said that the extra cost reductions would not result in further job losses. However, PSA is likely to pull back production plans in an effort to reduce vehicle inventory. Chatillon said that inventories at the end of 2011 represented 69 days worth of vehicles, 8 days higher than at the end of 2010. Chatillon said the company would bring inventory back to this level.
A valuable asset
The sale of part of Gefco is a cash-raising opportunity for PSA, and the LSP’s strong results should help increase its current value. However, some analysts say that Gefco’s strategic relationship to PSA might actually make a sale more difficult.
I would say that this is not unexpected. PSA is under pressure and Gefco is a reasonably valuable property,” said Thomas Cullen, from the logistics consultancy, Transport Intelligence. “There are problems however. PSA Peugeot-Citroen is the dominant customer for Gefco and its most important LSP. This explains PSA’s wish to remain a ‘strategic shareholder’. This might have implications for any sale in terms of the price and the ease of finding an acceptable buyer. Also the market for LSPs is not a sellers market at the moment.”
However, the sale could potentially benefit Gefco by allowing it to invest further in its profitable operations with some distance from PSA's current troubles and cost-cutting operations, particularly as the group slows its investment in places such as India, where Gefco now has a strong foothold. An increase in Gefco's independence from PSA might also help the company expand its business beyond the French carmaker; third-party customers represented 38% of Gefco's revenue in 2011.
But PSA is and will remain Gefco’s most important customer for the foreseeable future, both in revenue and in terms of value-added services. In some areas, such as outbound logistics, Gefco is effectively the purchasing and controlling arm of the carmaker, for example. A close, strategic relationship with the carmaker will be essential under the direction of any new shareholders.
