Fiat Chrysler and Peugeot aim to become the world's No. 4 carmaker

Fiat Chrysler and Peugeot owner PSA plan to join forces in a 50-50 share merger to create the world’s fourth-largest automaker, seeking scale to cope with costly new technologies and slowing global demand.

Fiat Chrysler (FCA) and PSA said on Thursday they aimed to reach a binding deal in the coming weeks to create a $50 billion group with listings in Paris, Milan and New York, and with PSA’s Carlos Tavares as chief executive and FCA’s John Elkann as chairman. It was less than five months ago that FCA abandoned merger talks with PSA’s French rival Renault and the move comes as carmakers grapple with a downturn in their markets as well as hefty investments in electric and self-driving vehicles. FCA would get access to PSA’s more modern vehicle platforms, helping it to meet tough new emissions rules, while Europe-focused PSA would benefit from FCA’s profitable U.S. business featuring brands such as Ram and Jeep.

However, the PSA-FCA deal could still face close regulatory scrutiny, while governments in Rome, Paris and unions are all likely to be wary about potential job losses from a combined workforce of around 400,000. Jefferies analyst Philippe Houchois said that, adjusting for the differences in market value and planned dividend payments, achieving the 50-50 split would effectively see PSA paying a 32% premium to take control of FCA. FCA shares jumped as much as 11% to a one-year high of 14.248 euros. PSA shares fell as much as 14% to a two-week low of 22.33 euros. “PSA shareholders are assuming more market risk than FCA’s,” Houchois said, adding a PSA-FCA deal was still the most logical and attractive combination in the industry.

SAVINGS

The companies said they would seek to finalize a deal to create a group with 8.7 million in annual vehicle sales, putting it fourth globally behind Volkswagen, Toyota and the Renault-Nissan alliance. They aim to make 3.7 billion euros ($4.1 billion) of savings without plant closures, and achieve around 80% within four years, at a one-off cost of 2.8 billion euros. The group will include the Fiat, Jeep, Dodge, Ram, Chrysler, Alfa Romeo, Maserati, Peugeot, DS, Opel and Vauxhall brands, serving mass and premium passenger car markets as well as trucks and light commercial vehicles markets.

The plan comes at a difficult time for automakers. Manufacturers Ford, Daimler and Volkswagen and supplier Continental have in the past months lowered their forecasts citing a steeper-than-expected drop in demand. However, FCA bucked the trend on Thursday, beating third-quarter earnings forecasts thanks to record profitability in its North American business.

JOB FEARS

French Finance Minister Bruno Le Maire welcomed tie-up plan, which would give Paris a say in two of the world’s top four carmakers. That contrasts with a FCA-Renault merger, which risked leaving PSA behind. “It gives us critical size to face the dual challenges of autonomous vehicles and electric cars,” Le Maire told reporters. Paris, which has a 12% stake in PSA, was blamed for the collapse of the FCA-Renault talks by urging Renault to focus on its existing alliance with Japan’s Nissan. The French government also owns 15% of Renault. Italian industry minister Stefano Patuanelli said the deal was good news provided it didn’t affect jobs in Italy.

The combined group will be domiciled in the Netherlands, but have operating centres in France, Italy and the United States, and will have an 11-person board, with six members coming from PSA including Tavares, and five from FCA including Elkann. Analysts, who questioned whether FCA and Renault had the management expertise to deliver a mega-merger, said Tavares was the right man for the job, having returned Opel to profit after buying it from General Motors (GM) in 2017. The former Renault executive has emerged as one of the leading figures in the auto industry following the death last year of FCA’s former CEO Sergio Marchionne and the arrest of former Renault-Nissan boss Carlos Ghosn.

Marchionne long championed a merger for FCA, a cause that has been taken up by Elkann, ascion of the Agnelli family that owns a 29.2% stake in FCA and will be the largest shareholder in a combined PSA-FCA, with a 14.5% stake. One industry source said Tavares had made savings at Opel by cutting engineering centres in Germany and consolidating activity in France. A similar move with FCA could fuel opposition in Italy. As part of the deal, FCA will pay its shareholders a 5.5 billion euro special dividend and hand them shares in its robot-making unit Comau. PSA, meanwhile, will distribute to its investors its 46% stake in supplier Faurecia. Citi analysts said the cash payout for FCA shareholders contrasted with the Faurecia shares, worth about 2.7 billion euros at Wednesday’s close, being offered to PSA shareholders, saying the latter were “being asked to remain patient.”

China’s Dongfeng Motor has a 12.2% equity stake and 19.5% voting stake in PSA, and there has been speculation it might use the tie-up to sell its holdings. One banking source told Reuters Dongfeng would be able to sell its stakes, which could help ease the deal’s passage through U.S. regulators, given U.S.-Chinese trade tensions.

BENEFITS

Stricter anti-pollution rules from 2021 have triggered heavy investments into electric and hybrid vehicles as European lawmakers force a further reduction in vehicle C02 emissions. A combination with PSA would give FCA access to the French group’s CMP modular platform, which was launched in 2019 for Peugeot’s e-208 compact city car, and donated for Opel to build the Corsa-e mini. The CMP platform was jointly developed by Dongfeng and PSA. Strategy firm PA Consulting has forecast FCA faces 700 million euros ($777 million) in emissions fines unless it radically shifts to selling more electric and hybrid cars. PSA has moved Opel and Vauxhall from nine GM platforms to just two, helping Opel to return to profit after more than a decade of losses.

FCA is being advised by Goldman Sachs and D’Angelin; PSA is working with Morgan Stanley, Mediobanca’s Messier Maris & Associes unit and Perella; and Lazard is advising Exor, the Agnelli’s holding company, sources close to the deal said.