Europe’s economic slowdown has slammed Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) over the last couple of years. When this is coupled with the fact that few outside of France have much desire in purchasing a French car, Peugeot’s sales have plunged to a sales level not seen in 20 years. Now, it’s believed that the board will discuss a capital increase at its scheduled meeting on Oct. 22. Bloomberg is presently citing confidential sources on or close to the board for reports that saw the stock drop nearly 10 percent.

Peugeot

The French government is believed to be interested in joining the sale if, and only if, the Chinese automaker Dongfeng Motor Group Co. Ltd (HKG:0489) (OTCMKTS:DNFGF) buys a stake in the troubled automaker. Talks are believed to be in the very early stages and are expected to continue for several weeks.

Peugeot’s capital increase

The European auto market to contract for the sixth consecutive year and the capital increase would give Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) the cash it needs to expand outside its home continent.

Peugeot announced a massive first half loss in its automotive unit of 510 million euros ($692 million), is cutting 11,200 French jobs and closing a factory outside Paris. The automaker has pledged to reduce its cash-consumption rate by 50 percent in 2013 after plowing through 3 billion euros last year.

Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) is “examining industrial and commercial developments with different partners, including the financial implications that would result from them,” the Paris-based automaker said in a statement today, providing little in the way of details. “None of these projects has reached maturity yet.”

Dongfeng to purchase stakes in Peugeot

China Business News reported last week that Dongfeng wishes to purchase a 30 percent stake in the company for $1.63 billion according to an official for Dongfeng Motor Group Co. Ltd (HKG:0489) (OTCMKTS:DNFGF). Reuters added to that report on Friday suggesting that the French government is interested in a matching stake.

“Shareholders wouldn’t like to see the state involved as it would limit the scope of possible layoffs or restructuring quite a bit,” said Sascha Gommel, an analyst at Commerzbank AG who has an “add” recommendation on the shares. “The market wouldn’t like that.”

Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) shares have more than doubled this year but the stock was seriously affected negatively when it was announced that the French government was looking at such a large stake in the company.

France’s interest in the company might allow the government to gain another seat on the board and increase its ability to protect French jobs.

Pierre Moscovici on state’s interests in Peugeot

“The state remains interested in Peugeot SA (EPA:UG) (OTCMKTS:PEUGY),” Finance Minister Pierre Moscovici said today on France Inter Radio, without providing details. “What has to come before everything else is the industrial strategy.”

The Peugeot family owns 25.5 percent of the company and are bitterly divided over the capital increase according to a source close to the family. It appears as though some of the family are not interested in investing additional funds in the company while others are interested in maintaining more control.

General Motors, which owns the Vauxhall and Opel brands, each struggling to reach profitability in Europe, snatched up a 7 percent stake in Peugeot in 2012 in order to form an alliance to jointly purchase parts with Peugeot for the aforementioned brands. General Motors Company (NYSE:GM) has an option to get out of the deal if the French and Dongfeng Motor Group Co. Ltd (HKG:0489) (OTCMKTS:DNFGF) purchase the stakes that are being reported.

“The situation is dire,” David Arnold, a London-based industry specialist at Barclays Capital, said in an e-mail to clients today. “It’s clear that cash is now much more of a drag and the company realizes that it cannot starve the business of investment or it will lose out long term.”