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Boards of Fiat Chrysler and Peugeot-owner PSA to meet over merger

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Via Financial Times

The boards of France’s PSA, owner of Peugeot, and Fiat Chrysler Automobiles are set to meet this week to sign off on plans to pursue a full-scale merger between the two European carmakers.

The two sides are expected to release a memorandum of understanding outlining the terms of a discussion that may create a combined group with a market value in excess of €44bn, according to people close to the discussions.

The companies are discussing basing the combined group in the Netherlands, a neutral location, where FCA is already domiciled.

Multiple people familiar with the deal said that a possible iteration would be an all-stock merger in which PSA chief executive Carlos Tavares runs the business and John Elkann — the scion of Italy’s Agnelli family, which controls FCA — becomes chairman.

“John Elkann has been trying to do a deal forever,” said one person close to the talks. Another said discussions between Mr Tavares and Mr Elkann had been on and off throughout this year. They broke off during FCA’s attempted merger with Renault before beginning again more recently.

Shares in FCA have vastly underperformed PSA’s since the start of the year, strengthening the French company’s negotiating position and giving it additional leverage in discussions with Mr Elkann’s family vehicle Exor, the dominant shareholder in FCA.

The two companies are expected to stress the industrial logic of the deal, given the complementary geography of the French and Italian-American businesses.

A combined group would cut administrative and manufacturing costs. There are also hopes that greater savings could be achieved when purchasing supplies and not having to duplicate capital spending to fund upgrades to company capabilities in a transforming car industry.

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However, the people cautioned that auto mergers were among the most difficult deals to pursue, given the emotional attachment to the businesses, the egos of car industry executives and the challenges in aligning various influential shareholders.

The French state, which owns 12 per cent of PSA and which has been blamed for the collapse of the merger attempt with Renault, said on Wednesday morning that it would be “particularly vigilant on the preservation of the industrial footprint” and “the governance of the new entity”.

One person close to the deal suggested it was less likely that the French state would prove a barrier to a deal between PSA and FCA, in part due to the lessons learnt from the Renault attempt and in part because they believe that carmakers need scale to survive in an increasingly challenging environment.

Analysts at UBS have “estimated that a merger could yield annual synergies of €3bn to €6.6bn, equivalent to about 25 to 55 per cent of combined estimated 2020 earnings”.

“It’s obvious that PSA does not offer any synergies in the US, and very little in LatAm. Putting PSA and FCA together in China doesn’t solve much either: two wrongs don’t make a right. A deal does nothing to change Alfa and Maserati’s prospects,” cautioned Max Warburton at Bernstein.

“The focus will be Europe — where subscale product lines, powertrains and future electric vehicle investments could be combined,” he added.

Shares in the two carmakers jumped on Wednesday after they confirmed talks that were first revealed on Tuesday evening.

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PSA’s shares rose 6 per cent to €26.46 by mid-morning, giving it a market value of €24bn. FCA’s shares were up by 9 per cent to €12.89, raising its market value to €20bn.

Additional reporting by Archie Hall in London

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