Cost cuts have Wall Street optimistic about possible FCA-Renault merger

The Fiat Chrysler Automobiles logo appears above a post on the floor of the New York Stock Exchange on Tuesday. Fiat Chrysler is proposing a merger with French carmaker Renault aimed at saving billions of dollars for both companies.

A potential merger between Fiat Chrysler Automobiles NV and Renault SA would create a massive global company, but it's the cost cuts proposed by FCA that has investment analysts optimistic about the deal.

The proposed 50-50 merger between the Italian-American Fiat Chrysler and France's Renault would create the third-largest automaker in terms of sales, behind Volkswagen AG and Toyota Motor Corp. It's a move that would also save some $5.6 billion (5 billion euros) annually for the companies as they find ways to cut costs in manufacturing, purchasing and R&D.

It's not the first cost-cutting move Detroit has seen this year. General Motors Co. and Ford Motor Co. are executing global restructurings designed to reduce costs and divert capital toward expensive electrification and autonomy efforts — moves experts say are necessary to prepare for the next iteration of the automotive industry.

And as the global automotive market becomes more competitive and expensive, automakers that don’t currently have the edge on electrification and autonomous vehicles — areas in which FCA is considered to be behind — will continue to forge tie-ups, said David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC.

"It's a way to be competitive in this marketplace going forward," he said. "It ends up being a positive for all the players."

According to FCA's summary of its proposal to Renault, the newly formed company would be 50% owned by the Italian-American automaker and 50% owned by Renault. The new company would be listed on the New York Stock Exchange, Borsa Italiana in Milan and Euronext in Paris. 

FCA's stock shot up 7.2% Tuesday to $13.78 in New York. Renault's stock was up nearly 1% to 56.50 euros on the Euronext exchange in Paris.

Moody's Investor Services, which recently upgraded FCA's credit rating to the highest level of "junk" status, sees the efficiencies and potential technology-sharing between the two companies as a credit-positive for FCA and Renault, but warned of potential complications given the complexity of the currently unstable Renault-Nissan-Mitsubishi alliance.

Renault's 20-year-old alliance with Nissan and Mitsubishi, once a model of cooperation in the industry, is under considerable strain following charges of financial wrongdoing against longtime CEO Carlos Ghosn. He's gone, but the bitterness remains in Japan over French efforts to consolidate the alliance into a merged company that likely would derive more profit from Nissan than Renault.

"Combining Fiat Chrysler and Renault would be credit-positive in general as it makes strategic sense and could create a substantial amount of synergies," Falk Frey, senior vice president and auto analyst at Moody’s, said in a Tuesday note. "However, we’ll also consider significant execution risks of such a large scale transaction given the complexity of the two group's businesses' operations, particularly in view of Renault's existing alliance with Nissan Motor Co. Ltd and Mitsubishi Motors Corporation."

Renault is expected move forward with FCA's proposal as soon as next week after Nissan and Mitsubishi were briefed on the matter, Bloomberg reported.

Renault is likely eyeing FCA’s valuable footprint in the North America and leading position in the U.S. truck and SUV markets. After a series of successful new product launches, FCA is closing the gap between Ford and GM with its highly profitable and sought-after Jeep utes and Ram pickups.

FCA would look to Renault for its electrified vehicles and scale in Europe. Kudla said a no-barriers partnership like that currently being considered by FCA and Renault would be the best possible partnership for global automakers. It would allow both automakers to reap more benefits than a partnership on one facet of the company.

But if the deal goes through, Kudla doesn’t expect to see many others like it.

"I don’t think we’ll get to the point where there are a few global oligopolies in the automotive space,” Kudla said. "But it’s so fiercely competitive. The more economies of scale you have, the better position you are in. It’s really a much more efficient partnership (when) there are no lines drawn."