Peugeot Board Approves Merger With Fiat Chrysler, Creating European Auto Giant

The board of French carmaker and Peugeot parent, PSA Group, approved a plan to merge with Italian-American rival Fiat Chrysler Automobiles NV late on Wednesday, the Wall Street Journal and others reported. Fiat Chrysler’s board meeting was still in progress while the board of Exor, the Agnelli family holding company that controls the Italian-American car maker, was scheduled to meet later on Wednesday night to give its blessing.

As WSJ notes, Fiat Chrysler Chairman John Elkann would become chairman of the newly-merged company while Peugeot CEO Carlos Tavares would be CEO. Both would have seats on the board of the new company, which would comprise six Peugeot appointees, including Mr. Tavares, and five from Fiat Chrysler.

A merger of Fiat Chrysler and PSA, the No. 2 for car sales in Europe, would create a regional powerhouse to rival Volkswagen AG, and have a stock-market value of about $49 billion, comparable to Japan’s Honda Motor, according To Bloomberg calculations. The tie-up would also bring together two auto-making dynasties, the billionaire Agnelli clan in Italy and the Peugeot family of France.

As part of the deal, Peugeot would pay €3 billion to its shareholders from the sale of a stake in auto parts maker Faurecia while Fiat Chrysler will pay its shareholders a dividend of €5 billion and would also distribute the proceeds from the sale of its Comau unit, which is valued at about €250 million.

The U.S. and French governments have been briefed on the deal, with Bloomberg reporting earlier that the French government is monitoring the latest developments “with a lot of openness” and shares the goal of consolidation in auto sector, spokeswoman Sibeth Ndiaye tells reporters on Wednesday. She added that while the state is shareholder in PSA, it is not up to government to manage company, although she did say that the government is paying attention to “safeguaring jobs.”

Among the issues that need to be clarified for the merger to proceed, include where the joint company would be based.

There’s more.

Even if the deal wins approval from both boards, it faces a lot of obstacles, with challenges including consolidation, clashing corporate cultures and government and regulatory approval, among many other thorny 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.

Some have expressed skepticism that this particular tie-up will have a happier ending.

As CNBC reported earlier, 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”, something which the French government will vocally protest and will likely scuttle the deal again. A combination, Murphy said, also could alienate U.S. buyers, lowering the potential benefit of the two automakers combining.

Even if the merger is approved by shareholders and regulators, “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.”

Not everyone is skeptical: 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.

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.

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A successful deal for Fiat Chrysler 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.

It would also result in tens of thousands of job cuts for a sector that is already plagued by Europe’s manufacturing recession and the slow-motion collapse in globalization.

“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. Indeed, Marchionne’s 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. Then again, one has to consider the cost basis: after all, Fiat “bought” Chrysler out of bankruptcy. 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.

Finally, the deal with PSA would give Fiat Chrysler access to PSA’s newer vehicle platforms in Europe as well as emerging technologies.