Fiat Chrysler and Peugeot owner PSA plan to join forces through a 50-50 share swap to create the world’s fourth-largest automaker, they said on Thursday, triggering a new wave of consolidation in the car industry.
Fiat Chrysler and PSA said they aimed to reach a binding deal to create a $50 billion (£39 billion) company domiciled in the Netherlands, with listings in Paris, Milan and New York and with PSA’s Carlos Tavares as CEO and FCA’s John Elkann as chairman.
The move comes less than five months after FCA abandoned merger talks with PSA’s French rival Renault and would give both companies the scale to help manage a global downturn in auto markets as well as costly investments in new technologies such as 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.
However, 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% in early trade to hit a one-year high of 14.248 euros. PSA shares fell as much as 13% to touch a two-week low of 22.77 euros.
“PSA shareholders are assuming more market risk than FCA’s,” Houchois said, although he added an FCA-PSA deal was still the most logical and attractive combination in the industry.
Savings
The management teams of FCA and PSA will seek to finalise the discussions in the coming weeks to create a group with 8.7 million in annual vehicle sales, putting it fourth globally behind Volkswagen, Toyota and the Renault-Nissan alliance.
The deal aims to make savings of 3.7 billion euros (£3.19 billion), without plant closures, and achieve around 80% of that within four years, at a one-off cost of 2.8 billion euros.
The multi-brand group will include the Fiat, Jeep, Dodge, Ram, Chrysler, Alfa Romeo, Maserati, Peugeot, DS, Opel and Vauxhall brands, allowing it to serve mass and premium passenger car markets as well as trucks and light commercial vehicles.
The deal is coming together just as the auto industry has entered a downturn. Manufacturers Ford, Daimler and Volkswagen and supplier Continental have in the past months lowered their forecasts citing a steeper-than-expected drop in demand.
During the last downturn in 2009, Chrysler and General Motors filed for bankruptcy protection, and the French state stepped in to support both Renault and PSA with loans.
French blessing
French Finance Minister Bruno Le Maire welcomed the FCA-PSA tie-up, saying it would give them the critical mass needed to thrive in a fast changing industry.
Paris, which has a 12% stake in PSA, was blamed for the collapse of FCA’s merger talks with Renault as it urged the French firm to focus on its existing alliance with Japan’s Nissan. The French government also owns 15% of Renault.
However, the deal could still be subject to close regulatory scrutiny, while Rome, Paris and unions are all likely to be wary about potential job losses.
Italian industry minister Stefano Patuanell said the deal was good news provided it didn’t affect jobs in Italy.
The combined group will have an 11-person board, with six members coming from PSA including Chief Executive Tavares, and five from FCA including Chairman Elkann.
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 are forcing a 37.5% reduction in vehicle C02 emissions between 2021 and 2030, after a 40% cut between 2007 and 2021.
A combination with PSA would give FCA access to the French group’s more modern and more flexible vehicle technologies, including the CMP modular platform, which was launched in 2019 for Peugeot’s e-208 compact city car, and donated the technology which allowed 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 a fine of 700 million euros unless it radically changes its emissions profile to sell more electric and hybrid cars.
PSA has already integrated Opel and Vauxhall, which it bought from General Motors in 2017, shifting them from nine GM platforms to just two, a step which helped Opel to return to profit after more than a decade of losses.
FCA is being advised by Goldman Sachs and D’Angelin, while PSA is working with Morgan Stanley, Mediobanca’s Messier Maris & Associes unit and Perella, sources close to the deal said.
