By Laurence Frost and Sophie Sassard
PARIS/LONDON (Reuters) - French carmaker PSA Peugeot Citroen <PEUP.PA> unveiled a 1.1 billion euro ($1.52 billion) writedown at its ailing overseas operations and won General Motors <GM.N> backing for a tie-up with China's Dongfeng.
Peugeot and GM also lowered savings goals for their scaled-down alliance on Thursday, as the Paris-based carmaker acknowledged it was pursuing a deal with Dongfeng Motor Group <0489.HK> underpinned by a capital increase.
Peugeot, one of the carmakers worst hit by the Europe's economic slump, is cutting jobs and plant capacity to try to halt losses within two years.
Peugeot shares fell as much as 8.4 percent on the writedown and after a source told Reuters the company's board had approved a draft deal including a 3.5 billion euro capital increase at a 40 percent discount.
The impairment, following a similar 4.7 billion euro hit on 2012 earnings, reflects weaker currencies and sales outlooks in Russia and Latin America, Chief Financial Officer Jean-Baptiste de Chatillon told reporters.
Peugeot's plant in Kaluga, Russia is among production investments "whose book value is no longer covered by future cash flows", Chatillon said on a conference call. "This will impact group operating income."
Peugeot's manufacturing division recorded a 510 million euro operating loss in the first half, before one-off adjustments. The company nonetheless reiterated its 2013 goal of halving last year's negative 3 billion euro operating cash flow.
Philippe Varin, Peugeot's outgoing chief executive, has said the French carmaker is exploring a deeper relationship with Dongfeng, its existing partner in a Chinese joint venture.
Discussions with Dongfeng are at "preliminary stage", with no guarantee that they will conclude successfully, Peugeot said in a separate statement on Thursday. "There is no agreement on the terms of a potential operation."
But according to a source familiar with the matter, the carmaker's board agreed on Tuesday to enter final negotiations on an outline deal that would see the French state and Dongfeng take matching 20 percent Peugeot stakes, in a capital hike priced below 7 euros per share.
Peugeot shares were down 7.7 percent at 10.62 euros as of 0914 GMT (4.14 a.m. ET), after dipping as low as 10.53 euros earlier in Thursday's session.
Dongfeng declined to comment on the tie-up talks but acknowledged that "feasibility studies" were underway with Peugeot.
"Any fresh signs of a worsening financial situation at PSA would add to our prudence," investor relations official Song Hefeng said.
Peugeot and Dongfeng have been in talks for months to extend cooperation to other Asian countries, backed by a multibillion-euro share issue.
Paris-based Peugeot and GM also trimmed their 2018 savings goal on Thursday from a troubled European alliance plan announced early last year.
Both companies said they now expected an evenly split $1.2 billion in annual cost savings by 2018, a 40 percent reduction from the $2 billion initially promised.
That reflects the decision announced in October to cancel production plans for a common small car family, Chatillon said.
But joint development and production of compact and small minivans will continue, the companies said. GM, which holds 7 percent of Peugeot, confirmed it would back a Peugeot stake purchase by a third party and vote in favour of any such deal as a shareholder.
The hefty discount on the outline capital increase presented to Peugeot's board reflects worsening conditions and currency headwinds for the carmaker, the source said.
Under its outline terms, Dongfeng and the French state would each hold about 20 percent of Peugeot after a reserved share sale to the French state and Dongfeng and accompanying rights issue for existing shareholders.
The founding Peugeot family would lose control as its stake was diluted from 25 percent to 15 percent even after acquiring some new stock in the rights issue, the source said.
The effect would be even more dilutive for 7 percent-shareholder GM or any other existing investors that turn down the chance to buy new shares. Peugeot hopes to conclude the deal in January or February, according to the source.
In a move that may help secure the new funding from Dongfeng, Peugeot last week named former Renault No.2 Carlos Tavares as its next chief executive.
(Additional reporting by Gilles Guillaume in Paris, Sam Shen in Shanghai and Edward Taylor in Frankfurt; Editing by Astrid Wendlandt and Anna Willard)