By Gilles Guillaume and Laurence Frost
PARIS (Reuters) - PSA Peugeot Citroen's
According to the person, who declined to be identified because the talks were confidential, the supervisory board approved the draft deal terms at a meeting late on Sunday.
"The possibility of a stake sale to the French state and Dongfeng has been agreed," the source said.
Peugeot is one of the carmakers worst hit by a six-year market slump in Europe that is only now beginning to abate, promising a gradual recovery from a two-decade low, with further losses for the industry in the near term.
Peugeot, which on Monday posted a 4.9 percent sales decline to 2.82 million vehicles in 2013, declined to comment on the board meeting or planned capital increase.
The company has said it needs a cash infusion to stay competitive in the medium term. Peugeot is expected to confirm next month that it burned through about 1.5 billion euros (1.2 billion pounds) in cash last year in addition to restructuring costs.
Dongfeng Motor Co. <0489.HK>, Peugeot's partner in an existing Chinese joint venture, is in talks to purchase a significant stake in a 3 billion euro capital increase, with the French state taking a matching holding, sources with knowledge of the matter have said.
But Chairman Thierry Peugeot had resisted a capital increase plan backed by his cousin Robert Peugeot, who heads the family holding company, and outgoing Chief Executive Philippe Varin, another source familiar with the talks said.
According to French press reports, the founding Peugeot family was divided over the extent of its participation in the capital increase and the size of the stake sale to Dongfeng.
But the board agreement now clears the way for Peugeot to finalise a deal in which Dongfeng and the French government would each acquire 14 percent stakes at a price between 7.50 and 8 euros per share, according to French newspaper Les Echos.
The two-stage operation would be evenly split between a rights issue to existing shareholders and a subsequent issue of additional shares on the market, the report said. Dongfeng and the French state would each inject around 750 million euros, diluting the Peugeot family's holding to a matching 14 percent from the current 25 percent.
Peugeot shares closed at 11.48 euros on Friday, valuing the company at 4.1 billion euros.
Peugeot's 2013 vehicle sales were weighed down by a 7.3 percent decline in Europe, where the Paris-based company does more than half of its business by volume.
The overall decline overcame gains in Latin America and China, where sales rose 26 percent to 557,000 vehicles.
Sales also tumbled 22 percent in Russia, and the company lost a further 144,000 deliveries of semi-assembled vehicles as a result of U.S.-led sanctions that have crippled Iranian production by western automakers.
Varin, who is stepping down this year, will be replaced by former Renault second-in-command Carlos Tavares, who joined Peugeot as CEO-in-waiting on January 1.
(Additional reporting by Sophie Sassard and Lionel Laurent; Editing by Mark John and Mark Potter)