PSA warns of EUR3.9-bil. asset write-down

Embattled PSA Peugeot-Citroën has announced that financial results to be published next week will include a EUR3.88 billion (USD5.23 billion) write down of assets related to its Automotive division. According to a statement published by the French automaker, the charge will include a EUR3.009-billion impairment charge on the Automotive divisions assets in respect of 2012, and a further EUR879 million is an adjustment related to the net value of deferred taxes. The company explained that the move was made in line with the latest accounting standards guidelines issued by France's securities regulator, the Autorité des Marchés Financiers (AMF). It said that it had undertaken "an analysis of the difference between the value of its consolidated equity in the balance sheet and its economic value based on future discounted cash flows". It went on to say that the discount rate – known as the "Weighted Average Cost of Capital" (WACC) – had been revised in relation to the outlook for the Group "in the context of the deterioration of the European market, which is likely to remain at 2012 levels for the foreseeable future". However, it added that this would not involve any cash out of the business, and said that the write-down is reversible and not related to goodwill.

The automaker also warned that its net income for fiscal year (FY) 2012 would also be affected "by impairments relating to specific assets and provisions for onerous contracts of the Automotive division, booked in the non-recurring operating result." These would amount to EUR855 million before tax, although EUR612 million had already been accounted for during H1 2012.

Talking to journalists following the announcement, PSA's chief financial officer (CFO) Jean-Baptiste de Chatillon was quoted by The Wall Street Journal (WSJ) as saying that he did not expect a significant recovery from the European market until 2014 at the earliest resulting in this decision. He also believed that the company could see an up to 5% further contraction during the current year. The senior executive also said that the write-down "won't have any impact on our liquidity or the solidity of the group… It's purely an accounting measure".

The news coincided with a report in the French media suggesting that the government was considering the prospect of taking a stake in PSA, reports Reuters. The Liberation newspaper was told by an unnamed government source that the measures would be treated as a "last resort" in case PSA found that it was unable to stem its losses. This was followed by Budget Minister Jerome Cahuzac telling BFM Television this morning (8 February): "It's possible... This company must not and cannot disappear and we must do what it takes for this company to survive." He went on to say that it would possible "if only because the FSI [Fonds Stratégique d'Investissement national sovereign wealth] fund exists"

Outlook and implications

PSA was already expected to release less-than-positive financial results for 2012, after a poor performance during the first half of the year when it lost EUR819 million (see France: 25 July 2012: PSA Announces Loss of EUR819 Mil., Details Benefits of Restructuring). Little benefit is anticipated to have come from the second half either. Although PSA has sold a stake in its Gefco logistics division helping to build up a cash buffer, it is still working through the terms of its planned restructuring with unions, the delay in this process expected to have resulted in further heavy losses. This will also not have been helped by the further deterioration of demand during the year as whole, as sales fell by 8.8% year-on-year (y/y) globally in this time, with a 14.8% y/y decline in Europe alone (see France: 9 January 2013: PSA's global sales fall 8.8% in 2012; French government keen on PSA takeover of Opel – report). This fall has been one of the main reasons for this write-down as European regulators have pushed companies in various sectors to reassess the value of their assets to reflect the current and future business climate more realistically. In doing this, PSA appears to be taking a bearish outlook on the European market, perhaps more so than others. Nevertheless, it does not see these issues as insurmountable, particularly when suggesting that as this is related to the downturn in demand that this valuation could go up in due course once the environment improves. The non-cash-related impairment is not expected to have a direct bearing on the automaker's financials, the company saying that this will not affect its operational free cash flow targets, and that its net debt as of 31 December 2012 should amount to around EUR3 billion.