Fiat SpA chief executive officer Sergio Marchionne approached PSA Peugeot Citroen and General Motors Co. earlier this month about creating a pan-European combination to leapfrog Volkswagen AG as the region’s largest automaker, three people familiar with the matter said.

Marchionne proposed that Peugeot commit to a combination between Fiat, the French carmaker and GM’s German Opel unit in exchange for stock in the new entity, said the people, who asked not to be named as the proposal was private. The CEO also offered to take Opel as part of the deal if he got $5 billion to $7 billion to restructure the unit, two of the people said.

The Fiat CEO is looking for a European partner to break the Italian carmaker out of its isolation in the region after GM and Peugeot announced an alliance earlier this year. Complicating any deal with Peugeot is the automaker’s acceptance last week of 7 billion euros ($9.1 billion) in bond guarantees from the French government, which will require the company to put labor and government representatives on its board.

“It’s an indication that it’s getting increasingly difficult, especially for the southern European carmakers,” said Frank Schwope, an analyst with Hanover-based Norddeutsche Landesbank Girozentrale. “Marchionne seems to be afraid to go under in the wave of joint ventures in Europe.”

A combination would have given the new entity more heft to compete with Volkswagen as the industry weathers the sovereign- debt crisis. Together, Fiat, Peugeot and Opel account for 25 percent of the region’s auto sales, topping VW’s 24.8 percent share. The three have struggled to reverse shrinking European sales as the crisis pummels consumer confidence. Vehicle deliveries in the region in 2012 may plunge by the most in 19 years, according to the ACEA manufacturers’ trade group.

Marchionne’s proposals never got to the negotiating stage because Peugeot favors its plan to ally with GM on purchasing and development projects, the people said. Peugeot also wants to restructure its workforce before engaging in talks for a broader alliance, one of the people said.

Marchionne, who unsuccessfully bid to buy Opel when GM considered selling the unit in 2009, said today during an earnings call that he has not spoken to GM about Opel since that time. The CEO also said he meets regularly with Peugeot executives and family members because of historical ties.

“Don’t read anything into having a coffee at the bar,” Marchionne said. “There are other things than combinations and mergers that people talk about from time to time.” GM and Peugeot representatives declined to comment.

Marchionne approached GM CEO Dan Akerson, GM Vice Chairman Steve Girsky, Peugeot management and members of the Peugeot family, which owns about 25 percent of the company, the people said. In conversations with Peugeot, Marchionne has argued that the parties can create a Europe-focused company without any interference from American managers, one of the people said.

Peugeot, based in Paris, is hesitant to partner with Fiat, which would increase exposure to Italy, Spain and France, while providing little advanced technology, two of the people said. The GM deal is preferable for Peugeot because of the U.S. automaker’s large global presence, the people said. 

Europe Losses 

GM has racked up $16.8 billion in losses since 1999 in Europe, including $361 million in the second quarter. The Detroit-based company reports third-quarter results tomorrow. Peugeot also has struggled, reporting an 819 million-euro net loss in the first half. The carmaker said in July that it planned to cut 8,000 jobs and close a factory near Paris.

Marchionne has sought talks with Peugeot and GM for months, two of the people said. The 60-year-old executive, who has run the Italian automaker since 2004, is pursuing consolidation to help shield Turin-based Fiat from Europe’s declining fortunes, the people said.

Fiat today forecast a prolonged downturn in the European market after reporting a wider loss in the region. The third- quarter operating loss in Europe grew 61 percent to 219 million euros.

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