Renault will consider 50-50 merger proposal from Fiat Chrysler

Nora Naughton and Daniel Howes
The Detroit News
Carmaker Fiat Chrysler Automobiles and French automaker Renault are in talks about a possible alliance

French automaker Renault SA is considering a 50-50 merger proposal from Fiat Chrysler Automobiles NV, a deal that would create the third-largest global automaker behind Toyota Motor Corp. and Volkswagen Group with a combined 8.7 million in annual sales.

Renault's board of directors met Monday to examine the overture that Fiat Chrysler made earlier in the day, which followed talks between the two companies. The meeting adjourned without a decision, and Renault gave no indication when such a decision might be made. 

"After careful review of the terms of FCA’s friendly proposal, the Board of Directors decided to study with interest the opportunity of such a business combination, comforting Groupe Renault’s manufacturing footprint and creating additional value for the Alliance," Renault said in a statement. "A further communication will be issued in due course to inform the market of the results of these discussions, in accordance with applicable laws and regulations."

As put forth by Fiat Chrysler, the new company formed in the merger would have a single management structure, which is yet to be determined at this early stage. The combined business would be 50% owned by Fiat Chrysler shareholders and 50% by Groupe Renault shareholders.

As proposed, the deal would not result in plant closures, according to Fiat Chrysler. Two sources told The Detroit News that existing investments — like the automaker's plans to build a new Jeep assembly plant in Detroit — would continue uninterrupted.

Left unanswered is where the operational headquarters of merged company would be located, and how that might affect the structure at Fiat Chrysler's Auburn Hills headquarters. The proposed tie-up comes as the automaker begins negotiations for a new contract with the United Auto Workers union.

Fiat Chrysler says the deal would net some $5.6 billion (5 billion euros) in efficiency savings for the Auburn Hills-based automaker. Among the areas most ripe for Fiat Chrysler to consolidate with Renault are vehicle platforms, and powertrain and electrification investments — an area in which Fiat Chrysler is considered to be behind. The new plant in Detroit is part of the company's existing plan to eventually pivot to hybrid and electric vehicles. 

The result, should the Renault board approve FCA's proposal, would be a realization of late Fiat Chrysler CEO Sergio Marchionne’s “Confessions of a Capital Junkie,” the title of a 2015 presentation to analysts in which he stressed the auto industry's need for consolidation.

In recent months, CEO Mike Manley has said repeatedly that Fiat Chrysler and its chairman, John Elkann, are willing to consider industry combinations that promise to use shareholder capital more wisely and deliver higher profit margins and share prices. Fiat Chrysler held parallel talks with Group PSA SA, maker of Peugeot and Citroën cars, before turning to Renault.

The proposed merger comes as automakers face increasing pressure from regulators in the United States, the European Union and especially China to invest in electrification to reduce emissions, as well as self-driving technology to blunt advances by tech giants into the traditional automotive space.

The merger is explicitly not touted as a "merger of equals," a reference to the ill-fated combination of Detroit’s Chrysler Corp. and Germany’s Daimler-Benz AG. The first transatlantic deal of its kind, the partners proved to be anything but equals in what was undeniably a German acquisition of Chrysler.

Renault’s 20-year relationship with alliance partner Nissan Motor Co. has been strained following the ouster of longtime Renault-Nissan CEO Carlos Ghosn on charges of financial wrongdoing in Japan, as well as efforts to consolidate the group under French control.

While the proposed merger does not yet detail management structures, Fiat Chrysler says the board of the newly formed company would be composed of 11 members, the majority of whom would be independent. Fiat Chrysler and Renault would have equal representation with four members and Nissan would have one nominee.

The proposed merger is limited to Fiat Chrysler and Renault for now, though Fiat Chrysler said it "looks forward ... to working with Groupe Renault's Alliance partner companies on ways to create additional value." Nissan is not required to sign off on the merger deal.

An agreement would hold the potential for extensive cost savings in Europe – both through sharing investments and reducing costs in the struggling market. Almost one-third of Fiat’s global workforce of 198,500 was located in the region at the end of last year, even though the company makes almost all of its profit in North America. Renault, which is 15% owned by the French government, counts on Europe for almost half its sales.

Fiat would give Renault access to the North American market, while the French could help Fiat expand in Russia, the French carmaker’s second-biggest market with its Avtovaz unit. Overall, Renault deliveries fell 5.6% to 908,348 vehicles in the first quarter, while Fiat Chrysler sales were down 14% to 1.04 million cars and light trucks.

Other carmakers are also looking to each other for savings. BMW AG and Daimler AG have pushed aside rivalries to join forces in sharing services and autonomous cars. VW has been in talks with Ford Motor Co. to team up on e-cars and autonomous vehicles.