DONGFENG MOTOR GROUP COMPANY LIMITED 
PARIS/LONDON (Reuters) - French carmaker PSA Peugeot Citroen (>> PEUGEOT) has taken a decisive step towards a tie-up with China's Dongfeng Motor Co. (>> Dongfeng Motor Group Co. Ltd), as the board approved the outlines of a contentious survival plan that divided the founding Peugeot family.
In a blow to Chairman Thierry Peugeot, who had championed an alternative plan, the board agreed in principle to a capital increase that would see the Chinese state-owned carmaker and French government acquire minority stakes and the family cede control, sources familiar with the matter said on Monday.
Peugeot executives declined to comment on the Dongfeng negotiations as they unveiled a further 4.9 percent decline in global vehicle deliveries for 2013.
The company's shares fell as much as 9.8 percent on news of the board decision to press ahead with the planned deal, which includes the issue of 3 billion euros ($4.1 billion) in new stock that would dilute existing shareholders.
"We're sceptical about this kind of plan - a very dilutive capital increase for a weak industrial project," said Florent Couvreur, a Paris-based analyst with CM-CIC Securities.
The operation would leave "three main shareholders with conflicting objectives", Couvreur added in a note to investors. "This is a rejection for Chairman Thierry Peugeot."
Peugeot has said it will need fresh funding to stay competitive and is pursuing talks on a deeper relationship with Dongfeng, its existing partner in a Chinese joint venture.
The two carmakers have been in discussions for months to extend cooperation to other Asian countries, backed by a multibillion-euro share issue in which Dongfeng and the French government would acquire significant stakes.
Peugeot, one of the worst casualties of a six-year European market slump to a two-decade low, is expected to confirm next month that it burned through about 1.5 billion euros in cash last year in addition to restructuring costs.
The plan would see Peugeot raise capital in two stages, according to both sources: a reserved capital increase in which Dongfeng and the French government acquired matching stakes, and a broader sale of new shares on the market.
With market conditions showing signs of improvement, Thierry Peugeot had pushed an alternative deal plan replacing the French government's role with a bigger share sale to the market, one source said, potentially also allowing the family to remain the biggest shareholder.
The Peugeot clan currently controls the carmaker through a 25 percent stake commanding 38 percent of voting rights.
But French ministers rejected that initiative, and the board gave its agreement in principle late on Sunday to a deal in which the family, French government and Dongfeng would end up with equal holdings, the person said.
The government "will do everything and use its influence to ensure PSA remains a major French carmaker," Finance Minister Pierre Moscovici said before the meeting.
The chairman's push for an alternative had also divided the family and management, sources said, because it departed from the framework backed by cousin Robert Peugeot, who heads the FFP (>> FFP) family holding, and outgoing CEO Philippe Varin.
Thierry Peugeot's eventual replacement by a new independent chairman is now a given, according to one, with the French state favouring Louis Gallois, a senior civil servant and industrialist who already sits on the Peugeot board.
The green light clears the way for negotiations to begin in earnest on the deal price, with Dongfeng so far willing to offer about 7 euros and Peugeot holding out for 8 euros per share, another source said.
The size of the matching stakes - likely between 10 percent and 15 percent - will depend on the deal pricing and market conditions, which may also affect the relative size of the reserved share sale and market offering, the sources said.
Dongfeng and the French state would each contribute between 500 million and 800 million euros, according to one, with the Peugeot family also paying 100 million euros for new shares.
Peugeot shares were down 9.6 percent at 10.38 euros as of 1440 GMT, valuing the company at 3.72 billion euros.
The carmaker said its 2013 vehicle sales were weighed down by a 7.3 percent decline in Europe, where the Paris-based company does more than half of its business by volume.
The overall decline overcame gains in Latin America and China, where sales rose 26 percent to 557,000 vehicles.
Sales also tumbled 22 percent in Russia, and the company lost a further 144,000 deliveries of semi-assembled vehicles as a result of U.S.-led sanctions that have crippled Iranian production by Western automakers.
Varin will be replaced later this year by former Renault second-in-command Carlos Tavares, who joined Peugeot as CEO-in-waiting on January 1. ($1 = 0.7376 euros)
(Additional reporting by Gilles Guillaume; Editing by Mark John, Mark Potter and David Evans)
By Laurence Frost and Sophie Sassard
