Fiat Chrysler merger with PSA more likely than Renault deal
No plant closures, fewer government ties and independence from other entangling partnerships means Fiat Chrysler Automobiles NV’s proposed merger with French automaker Groupe PSA has a better chance of success than it had with Renault SA, according to experts.
Many of the complexities surrounding Fiat Chrysler's proposal with Renault of France, including a long-standing relationship with the French government and alliance with Nissan Motor Corp. of Japan, do not exist with PSA, home to Peugeot and Citroën. That makes the proposal detailed Thursday between FCA and PSA to create the fourth-largest automaker with the size to invest in future technologies more likely to come to fruition, experts say.
"From an economic point of view, Renault is the best deal which could be made. However, it would take too much time," said Ferdinand Dudenhöffer, a professor of automotive economics at the Center for Automotive Research at the University of Duisburg-Essen in Germany. "If you have discussions and discussions are going nowhere, it's too high risk to finalize the deal. Then, it's better to take the second-best deal."
FCA and PSA did not provide a timeline for their quickly progressing deal, but the next step would be for their boards to sign a memorandum of understanding. In an email to employees obtained by The Detroit News, Manley wrote Thursday he hopes one will be reached "in the coming weeks" — and emphasized that expected "synergies are NOT based on closing plants."
Structurally, a proposal earlier this year with Renault was similar.
A combination with PSA would create one of the world's largest automakers. Working together, it would generate billions of dollars in "synergies" from combining investments in vehicle platforms, powertrains and technology. In PSA's case, annual cost-savings were estimated at $4.1 billion.
The merger would not result in headcount reductions in manufacturing, and shareholders at both companies would receive 50% of the stock of the new entity, which would be listed on exchanges in Milan, New York and Paris. Based in the Netherlands, the combined company would retain major operations in Auburn Hills, Paris and Turin, Italy, home to FCA's precursor, Fiat SpA, and the founding Agnelli family now represented by Fiat Chrysler chairman John Elkann.
One final similarity: The French government has a double-digit stake in both PSA and Renault. The state's investment agency owns 15% of shares in Renault, while the BPIfrance sovereign wealth fund slightly is smaller with 12% shares of PSA. Elkann in June cited France's "political conditions" as the reasoning behind the Italian-American automaker revoking its offer to Renault.
French Finance Minister Bruno Le Maire had said his office wanted to take the time to ensure the deal was "done the right way." The government sought to guard against politically potent plant closings and job cuts frequently associated with industrial mergers. Although Le Maire has indicated the need to preserve French jobs, this time around, he is bullish on a deal.
“This merger between Peugeot and Fiat can create the world’s fourth-biggest automotive champion," he said Thursday at the French Finance Ministry, according to Reuters. "It gives us critical size to face the dual challenges of autonomous vehicles and electric cars."
Both companies needed partners in order to compete in the global industry going forward, said Erik Gordon, a professor at the University of Michigan's Ross Business School.
With Renault, "the French government reaction was so heavy-handed, it put an end to any chance of a merger," Gordon said. "This time, they may have the brass knuckles, but the fist is behind their back. They need French automakers as global competitors or that will be the end to jobs also. And when they used the brass knuckles, it didn't happen."
Additionally, the French government has influence over two of Renault's board directors and their relationship dates back to decades. The government's holdings in PSA began in 2014 when it agreed to take part in a bailout investment plan.
But Renault's relationship with Nissan also likely dissuaded the government, said Carla Bailo, CEO for the Center for Automotive Research in Ann Arbor. The deal had come amid deepening strains in Renault's 20-year-old alliance with Nissan and Mitsubishi Motor Corp. following charges of financial wrongdoing against longtime CEO Carlos Ghosn, who denies the allegations.
"That alone created problems," Bailo said. "As a result, the French government wasn't so profoundly supportive. All parties weren't aligned well."
And the deal with Renault lacked a strong leader to get the merger done, experts said. But PSA brings its CEO, Carlos Tavares, 61, who would lead the combined company and hold one of 11 board seats. Tavares, who learned how to restructure a business under Ghosn, took over General Motors Co.'s money-losing Opel and Vauxhall brands in 2017 and turned them into an $18 billion business.
FCA's Elkann would chair the new company's board and sit alongside four other FCA appointees. In addition to Tavares, PSA would nominate five other members, including the board's vice chairman and senior independent director.
FCA CEO Mike Manley, six years younger than Tavares, likely would become chief operating officer and run its North American operations from Auburn Hills, according to two sources familiar with the situation.
"I'm delighted by the opportunity to work with Carlos and his team on this potentially industry-changing combination," Manley said in a statement. "We have a long history of successful cooperation with Groupe PSA and I am convinced that together with our great people we can create a world-class global mobility company."
The companies expect their convergence would realize some of highest margins based on FCA's strengths in North America and Latin America, and PSA's in Europe. FCA would distribute to its shareholders a special $6.1 billion (5.5 billion euro) dividend and its shareholding in its Comau robotics business. PSA would distribute its 46% stake in auto supplier Faurecia to its stockholders.
With PSA already producing electric vehicles, FCA also would be able to take advantage of those models in hopes of avoiding hefty fines from carbon emission limitations in Europe, experts said.
Investors, however, may need some more convincing on the deal: Although Fiat Chrysler's shares closed up 2.3% Thursday, Peugeot SA's shares were down nearly 13% in Paris.
"I think the market recognized the deal is a lot better for Fiat," said Eric Schiffer, CEO of Los Angeles' Patriarch Organization, a technology private-equity firm. "It allows Fiat to be competitive in this new age of electric and these public policies that go with that."