Proposed Fiat Chrysler-Peugeot tie-up comes with risks, rewards

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DETROIT – From Daimler-Chrysler to Fiat Chrysler, the former American automaker Chrysler Corp. has gallivanted around the world to find partners to assist in its growth or help keep it afloat.

It now has its sights set on Peugeot maker PSA Group. Both the French carmaker and Fiat Chrysler on Wednesday confirmed they are in talks that could to create the world's fourth-largest automaker with a roughly $50 billion valuation.

Reports of the talks, including a potential "all-share merger of equals," as the Wall Street Journal first reported, sent shares of Fiat Chrysler surging as much as 8% on Tuesday. The stock is trading slightly higher Wednesday after opening at $14.34 a share.

The confirmation of the talks comes about five months after Fiat Chrysler ended merger discussions with PSA's French rival, Renault. Fiat Chrysler, the world's seventh-largest automaker, has been on a quest for a tie-up to grow scale and consolidate costs for several years.

Boards for both Fiat Chrysler and PSA are reportedly in Europe on Wednesday to discuss the talks, however a successful deal is far from guaranteed.

'Litany of obstacles'

Challenges include consolidation, clashing corporate cultures and government and regulatory approval, among other issues.

Talks of a potential tie-up between Fiat Chrysler and Renault ended earlier this year largely due to the French government, which owns a roughly 12.2% stake in Renault. The French government currently owns a 13.7% stake in PSA.

Bank of America Merrill Lynch analyst John Murphy cited the French government's ownership as one of a "litany of obstacles" facing such a deal. Murphy said similar to Fiat Chrysler's potential tie-up with Renault, the "industrial logic" is "unclear unless there is massive headcount reduction."

Such a deal, according to Murphy, also could alienate U.S. buyers, lowering the potential benefit of the two automakers combining.

Even if the merger goes through, "there is a material risk American consumers may shift to Ford and GM products due to FCA possibly no longer being perceived as an 'American' identity, not to mention the potential political implications of this potential deal."

One possibility PSA and Fiat Chrysler are discussing, according to the Wall Street Journal, which cited unnamed sources, is for Peugeot CEO Carlos Tavares to lead the combined automaker as its CEO, while John Elkann, Fiat Chrysler chairman and heir of the Agnelli family dynasty that founded Fiat, would continue his role with the combined company.

Bernstein analyst Max Warburton said a merger between Fiat Chrysler and Peugeot "has more logic" than one with Renault. He specifically cites the potential for Tavares to create "long-term value."

"We ultimately think a deal could be made to work — this would be as much about raising performance as it would be about synergies," he wrote in a Tuesday note to investors.

However, Warburton noted a deal between the two does little to increase business in China, the world's largest auto market, and the timing is "sub-optimal" given FCA's earnings are at all-time high.

Rewards

Analysts see the merger as a quick way for Peugeot to re-enter the U.S. market after a decades-long hiatus, while continuing to grow its European operations following the company's acquisition of GM's European business in 2017.

"This news is not unexpected, given that both companies have been actively exploring tie-ups with others to yield cost savings and other synergistic benefits," said David Leggett, automotive editor at data analytics firm GlobalData.

For Fiat Chrysler, it would finally cement former CEO Sergio Marchionne's vision of creating a global automaker with the resources to successfully compete in the ever-changing auto industry.

In 2015, Marchionne, who unexpectedly died in July 2018, called for industry consolidation in a presentation called "Confessions of a Capital Junkie." Consolidation would save capital that was being wasted by automakers developing redundant technologies, he said.

"These were not hallucinations of somebody looking to grandstand in the industry," Marchionne said at the time. "We have spent a lot of time trying to understand what makes this machine tick. And the machine can tick a lot better if certain things happened."

Marchionne believed only a handful of the world's largest automakers would survive and have the capital to compete as automakers push for autonomous and all-electric vehicles.

The deal with PSA would give Fiat Chrysler access to PSA's newer vehicle platforms in Europe as well as emerging technologies.

Marchionne's methodical combination of Fiat and Chrysler a decade ago is considered one of the more successful tie-ups for the auto industry in the recent years.

Chrysler's previous "merger of equals" with German automaker Daimler-Benz in 1998 was a culture clash and failure that led to a divorce less than a decade later, followed by Chrysler spiraling into bankruptcy in 2009.

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