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Fiat/Chrysler merger announcement with PSA is the easy part

Tuesday, 5th November 2019 10:20 - by Shant

Last week, FCA (Fiat/Chrysler) and the PSA Groupe announced a 50/50 merger which would look to take advantage of economies of scale in a global climate gripped with fierce competition in every sector, not least of all the automotive industry.  This as yet is an agreement in principle, but one which would create the fourth-largest automaker behind Toyota at the top, and General Motors and the Volkswagon Group.  Annual vehicle sales of 8.7mln are anticipated if the merger goes through, providing revenues of around Eur170bln and operating profits in excess of Eur11bln.   Analysts also believe that the combined company could save Eur3.7bln in costs before any factory closures.  


However, this is one area that could cause problems in getting the deal over the line.  The French government itself is a major investor in PSA, having bailed out the Peugeot owner in 2014 and has a 12% stake in the company.  Prior to this announcement, it is worth remembering that the FCA was in a potential tie-up with Renault, with some blaming the French government for the breakdown in talks.  The French state is also a large stakeholder in Renault, though some also believe that Renault's alliance with Nissan also played a major part in the (deal) collapse.   Job losses will be a key sticking point for both sides to try and compromise over, with a number of development centres and engine factories throughout Europe providing overcapacity.  Ellesmere Port in the UK, where the PSA's Vauxhall factory is situated, employs 1100 workers, and Unite is already seeking urgent talks with both sides to limit any potential losses.


Naturally, both companies feel there are good opportunities for both sides to gain from the deal, with PSA hoping to achieve speedier access to US markets, while Fiat/Chrysler will be looking to do the same in Europe.  The joint company will be incorporated in the Netherlands, but stock market listings would remain in Paris, Milan, and NY.  Chief executive of PSA Carlos Tavares will retain his position for the combined enterprise, while the chairman of FCA, John Elkann will become the chair.  Given the astute dealings of Tavares in the past, should the merger go through, there will be a strong belief in the new management structure to build on synergies that both sides hope to capitalise on.   Analysts, however, believe the synergies with Renault/Nissan would have been greater.


Critics have also called this a CO2 deal for FCA, who are looking to take advantage of PSA's plans to fall in line with fuel efficiency ruled implemented by the European Union.  However, as the world moves further away from internal combustion engines towards electric vehicles, the research spend relative to output and sales can achieve significant savings through merger, though as above, this will come at a cost.  PSA's Tavares has a strong reputation for cutting costs, improving execution and merger integration.  The chief executive was instrumental in the purchase in Opel and Vauxhall from General Motors in 2017 and has managed to integrate both brands into the profitability of the PSA Group as a whole with Opel returning profits within itself.


So with both companies behind in the technologies involved in electric cars - according to automotive analysts - the merger clearly looks appealing to each side, though the complexities of the individual corporate structures, as well as the ownership stakes involved, are likely to make this merger process long and drawn out to say the least.  That said, given the aggressive and no-nonsense approach of Carlos Tavares, the will be no shortage of effort in trying to tie this deal up as soon as possible.  A keen car racing enthusiast himself, he is expected to adopt the same approach to getting the 'business done' as speedily, but efficiently as possible.



The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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