PSA, Fiat Chrysler unveil merger of equals

Agence France-Presse
PSA, Fiat Chrysler unveil merger of equals
The PSA-Fiat Chrysler merger will be achieved via the creation of a parent company in the Netherlands, which would be the world's 4th largest automaker in terms of sales

PARIS, France – Peugeot-maker PSA and Fiat Chrysler unveiled Thursday, October 31, a plan for a 50-50 merger of their operations they said would generate billions in savings without factory closures as it creates the world’s 4th largest car manufacturer.

In a joint statement the French and US-Italian carmakers said their boards of directors “have each unanimously agreed to work towards a full combination of their respective businesses by way of a 50/50 merger.”

The merger, which the firms said will result in a company with combined sales of nearly 170 billion euros ($190 billion) per year and 11 billion euros of operating profits, would help produce the scale needed in an industry facing slowing demand and which must invest billions to develop electric vehicles.

The merger would be achieved via the creation of a parent company in the Netherlands in which the shareholders of each current group would own half.

The Dutch-based parent company would have balanced representation and a majority of independent directors with FCA’s John Elkann as chairman and PSA’s Carlos Tavares as chief executive officer and member of the board.

‘Compelling logic,’ cost sharing

The boards of both carmakers “both share the conviction that there is compelling logic for a bold and decisive move that would create an industry leader with the scale, capabilities, and resources to capture successfully the opportunities and manage effectively the challenges of the new era in mobility,” said the statement.

A merger would create significant savings as both firms share the costs of developing electric vehicles that are expected to dominate personal transportation in the future as the world strives to reduce carbon emissions to limit climate change.

“The significant value accretion resulting from the transaction is estimated to be approximately 3.7 billion euros in annual run-rate synergies derived principally from a more efficient allocation of resources for large-scale investments in vehicle platforms, powertrain, and technology and from the enhanced purchasing capability inherent in the combined group’s new scale,” it said.

“These synergy estimates are not based on any plant closures,” it added.

France, which owns a stake in PSA and earlier this year opposed a mooted tie-up between Renault and Fiat Chrysler, signaled it favors the project.

French Economy Minister Bruno Le Maire “favorably greets the entry into negotiations” of the two carmakers, said a statement from his office.

However, it warned the French government “will remain particularly vigilant on the industrial footprint in France, where decision making will be located, and promises by the new group to create in Europe the infrastructure to build electric batteries” needed for the shift to new vehicles.

While investors cheered when the automakers first confirmed their talks on Wednesday, October 30, with Fiat Chrysler shares in Milan rising 9% and PSA shares adding 4% in Paris, the reception to Thursday’s details was quite different.

PSA shares fell nearly 9% as trading got underway in Paris while those in Fiat Chrysler jumped 10.6% in Milan.

Size matters

The tie-up would make the new automaker the 4th largest in terms of sales behind Volkswagen, Renault-Nissan-Mitsubishi, and Toyota, and would combine a host of well-known brands from Alfa Romeo, Jeep, and Dodge to Citroen, Opel, and Peugeot.

The merger plan comes as the auto manufacturing sector – which accounts for 5.7% of global gross domestic product and 8% of goods trade – shrank by 1.7% last year by volume of vehicles produced, according to the International Monetary Fund.

It makes business sense for both automakers beyond just sharing costs. 

PSA relies heavily on the European market, exposing it to risks of a protracted slowdown there. Joining Fiat Chrysler would mean it is an automaker with a big presence in the key US market thanks to the Chrysler, Jeep, Dodge, and Ram brands.

Meanwhile, Fiat Chrysler would gain access to PSA’s electric vehicle technology.

Analysts said size is important as automakers invest into electrifying their vehicles and are faced with lower margins as the market slows.

“We’re in a period where gray skies are gathering over the auto industry. When business is harder, competition is stronger and margins get thinner,” said Flavien Neuvy, director of the Cetelem Observatory, a research unit of BNP Paribas. 

To offset the billions required to invest in advanced technologies, size is critical, Neuvy added. – Rappler.com

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