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Shares in French carmaker PSA Peugeot Citroen plummeted over 10 percent on Monday, on reports the company was planning a 3 billion euro ($4.1 billion) rights issue, with equal stakes to go to the French state and China's Dongfeng Motor Group.
Peugeot refused to confirm the rumors, but said it was examining "industrial and commercial developments with different partners, including the financial implications that would results from them".
The possible deal would leave state-owned Dongfeng and the French government each with control of around 20-30 percent of Peugeot, and would increase Peugeot's capital stock by roughly 70 percent.
On Monday, Citi warned that Peugeot risked losing its technological advantages should it strike a deal with Dongfeng.
"PSA's strengths reside in its technology, which is at risk of being more widely dispersed should Dongfeng become a major shareholder. This could weaken its long-term competitive position, in our view," said Philip Watkins, autos equity analyst at Citi, in a research note.
He added that said such a hefty capital hike would likely prove negative for existing shareholders, due to stock dilution, and could raise questions about Peugeot's cash flow forecasts.
"Such a large capital raise, if that is what is planned, could even potentially give the signal that PSA is uncomfortable with its current guidance on cash burn, which is to reduce at least in half in 2013, with a very significant reduction throughout 2014," Watkins said.
Peugeot, which has market capitalization of around 4.4 billion euros, has suffered deeply from the downturn in the European car industry since the financial crisis. For the first half of the year, the automaker reported a negative free cash flow of 51 million euros — meaning, in theory, it will have to sell equity to raise cash – and a net loss of 426 million euros.
(Read more: Peugeot loses ground as Europe car slump continues)
Despite his concerns, Watkins said that using the extra capital to finance ex-European expansion could be a boon for Peugeot.
"We believe that PSA already has a healthy position in China, with weaknesses centered on Latin America and Eurasia. Investment here would be welcome, though we also think that any potential stock dilution would likely outweigh the positives from uncertain expansion outside of Europe," he said.
Peugeot was the worst performer on the pan-European Euro Stoxx 600 index, which traded flat on Monday.