PARIS - A costly tie-up between PSA Peugeot Citroen (PEUP.PA) and Japan's Mitsubishi (7211.T) risks landing Europe's number-two carmaker with a partner too small to exploit Asia's booming markets.

Analysts want answers on financing for any deal and feel it could be a poor imitation of Renault-Nissan's 10-year alliance, often held up as a rare example of a successful sector tie-up.

The French carmaker, hit hard by the industry crisis and set on an ambitious drive to boost profitability, partly through upping its presence in fast-growing emerging markets like China, confirmed on Thursday that it was in talks to strengthen its existing relationship with Mitsubishi.

Peugeot wants to escape its European focus as sales in emerging markets explode and economic uncertainty and waning scrapping incentives crimp opportunities in its home region.

The deal is a step in the right direction, giving Peugeot access -- albeit on a tiny scale -- to key markets like China.

But analysts are not convinced it is the answer to all its problems and want detail on the deal's structure, management control, financing and most importantly the price before they pass judgment.

Peugeot's issues aren't easy ones to fix -- it's not just a matter of a cost-cutting program here and there, said Credit Suisse analyst Stuart Pearson.

It lacks scale and it's too Euro-centric. That can be painful and expensive to fix, he added, warning that buying into Mitsubishi could be an expensive way to fix it.

In an industry burdened with overcapacity and crying out for consolidation, any M&A moves are seen as good news overall.

But for Peugeot, the world's eighth largest carmaker by 2008 sales volume, it's kind of underwhelming, said Pearson, describing Mitsubishi as a struggling sub-scale car company.

Mitsubishi sold 431,000 vehicles in the first half of the year, compared with 1.59 million for the Peugeot group, which incorporates the Peugeot and Citroen brands.

The alliance between PSA's smaller French rival Renault (RENA.PA) and Nissan Motor Co (7201.T) is much further advanced strategically.

Renault and Nissan are seeking to beef up their synergies and plan to lead the industry in the unproven electric car segment, in which Mitsubishi is among the few players to have a car on sale.

Nissan is in a much better strategic and financial position than Mitsubishi, said Morgan Stanley analyst Adam Jonas. Mitsubishi is a shadow of what Nissan is, or even what Nissan was, in terms of market position.
Mitsubishi makes fewer than a million cars a year. It's a well-managed company but its market positions in every single market from Japan to the U.S. to Latin America, everywhere, are very, very weak, said Jonas.

Mitsubishi is ranked seventh out of Japan's eight carmakers, based on production for the first ten months of the year.


While analysts fear the deal may not deliver enough synergies and give Peugeot significantly greater market access, their most pressing concern is cash.

Business daily Nikkei reported the companies were in the final stages of negotiations, with Peugeot seeking a stake of 30-50 percent in Mitsubishi for upto 300 billion yen ($3.42 billion).

Is this a targeted capital increase or is it a private placement and a cross-shareholding to the partners? Morgan Stanley's Jonas asked.

Pearson added: They have to be careful on the multiple they pay to Mitsubishi shareholders and how they're going to fund that.

CM-CIC analyst Guillaume Angue said in a note that Mitsubishi was expensive, with an enterprise value to sales ratio of 0.64 against 0.2 at Peugeot.

A divestment of Peugeot's stake in parts supplier Faurecia (EPED.PA) could contribute, along with a capital increase, if Peugeot did end up buying part of Mitsubishi as part of the deal, Credit Suisse's Pearson added.

No one knows what's going to happen on the economy next year, let alone on scrapping incentives in this sector. You want to be very prudent and not to be gearing up now to buy assets that need a lot of work.

(Additional Reporting by Chang-Ran Kim and Gilles Guillaume; Editing by David Cowell)