Shares in PSA Peugeot Citroen plunged on Monday after it pushed forward with plans for China's Dongfeng and the French state to invest 3 billion euros into the troubled French auto group.

The shares in the automaker slumped 11.11 percent to 10.21 euros on news of the plan that would reduce the value of current shareholdings.

The supervisory board of PSA Peugeot Citroen agreed in principle to the restructuring late on Sunday following the exit of US giant GM.

Peugeot said in statement Monday that it was continuing "negotiations regarding a strengthening of its industrial and commercial alliance with Dongfeng Motor, as well as a possible capital increase of an amount in the order of 3 billion euros."

At 3 billion euros ($4.0 billion), the capital increase is large relative to the group's market value on Friday of about 4.1 billion euros.

Peugeot said the preferred scenario would be a capital increase reserved to Dongfeng, which is owned by the Chinese state, followed by a rights offering in which Dongfeng would also participate.

"The French state may also participate in these two capital increases on the same terms and conditions as Dongfeng Motor," added the statement.

It said existing shareholders would be offered free warrants that could be converted into shares at the same price of the reserved capital increase.

Reports following Sunday's board meeting indicated that Dongfeng and the government would each acquire about 14.0 percent of the group and would be made at a discount of up to 35.0-percent from Friday's share price of 11.48 euros.

The Peugeot family, the current controlling shareholder with 25.4 percent of capital, would also invest to retain an interest of 14.0 percent, according to sources.

The reports said that the new shares would be issued at 7.5-8.0 euros each, meaning an injection of about 750 million euros from Chinese group Dongfeng and a similar amount from the cash-strapped French state.

Peugeot said it hopes to be able to make an announcement about the terms of the deal when it discloses its 2013 results on February 19.

While long-term the arrival of Dongfeng could help the French carmaker make a turnaround, in the short term it hurts existing investors.

"The share is falling because people are afraid of the size of the dilution implied by the operation," said one Paris trader.

And without the details of the plan "serious investors can't take positions".

2013 sales slump, but China promising

The French group, the second-biggest automaker in Europe after Volkswagen, also announced Monday a 4.9-percent fall in sales to 2.82 million vehicles last year, its third year in a row of dropping sales.

But sales began to recover in the fourth quarter, climbing by 4 percent.

And sales outside Europe rose from 38.0 percent of the total in 2012 to 42.0 percent in line with the "objective of achieving 50 percent of sales outside Europe in 2015".

Sales jumped by 26 percent in China, which is now the group's number two market behind France. It could become the top market for the Peugeot brand this year, an executive said Monday.

The latest figures reflect the recent crisis in the European car market, now showing signs of easing.

Last year, a government-ordered enquiry found that the group had made strategic mistakes for years by not seizing fully the opportunities of globalisation.

Peugeot has already in effect been rescued by 7.0 billion euros in state-guaranteed refinancing for its credit arm.

It suffered a record 5 billion euro loss in 2012 and has been burning through its cash. The group has cut thousands of jobs and closed a factory in France.

At the height of the global financial crisis, General Motors, itself in the throes of radical restructuring from bankruptcy, tied up with Peugeot by taking a stake of 7.0-percent.

But GM is the biggest foreign auto group in China, and with a tie-up between Peugeot and Dongfeng looking almost certain, GM announced in December that it was pulling out of the French group.

French state 'vigilant'

PSA Peugeot Citroen operates three factories in China in cooperation with Dongfeng and has a fourth in partnership with another company.

French Finance Minister Pierre Moscovici said Sunday that "the state is particularly vigilant ... so that Peugeot continues to be a big French manufacturer, and even finds ways to develop".

Sources close to the matter said that the company hoped to outline an agreement when it published its annual results next month and ahead of a visit to Paris this spring by Chinese President Xi Jinping.

Jean-Francois Dufour at DCA Chine-Analyse said Dongfeng's arrival could open access to financing from Chinese banks, as has happened for Volvo after it was bought by China's Geely in 2010.

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