PSA, FCA Plan Merger As Investors Applaud

Would PSA Groupe CEO Carlos Tavares be toasting the planned merger with Fiat Chrysler Automobiles (FCA) if Carlos Ghosn was still at the helm of the Renault-Nissan Alliance, instead of cooling his heels in Japan?

After all, earlier this year it seemed that Renault was about to agree a merger with FCA, but it fell apart at the last minute as the Italian-American company objected to interference from the French state, and worried about unsolved complications from the Japanese end of the alliance.

The French state has a 15% stake in Renault, and 13% in PSA.    

You have to wonder if Ghosn had been free to strut his stuff, the deal might still be alive.

Ghosn is awaiting trial in Japan on charges of financial misconduct, which he denies.

PSA and FCA announced today an agreement in principle for a 50-50 merger. The deal was acclaimed by investors as a win-win for both sides with such unanimity that cynics will recall the thunderous applause in 1998 for the merger between Mercedes Benz parent Daimler and Chrysler which crashed and burned. Daimler dumped Chrysler in 2007 and Fiat bought it after the financial crisis of 2009.     

But some analysts wondered if PSA overpaid for FCA.

The combination of FCA and PSA will create the 4th largest auto manufacturer in the world with annual sales of 8.7 million.

“The merged entity would bring together the companies’ extensive and growing capabilities in the technologies shaping the new era of sustainable mobility, including electrified powertrain, autonomous driving and digital connectivity. Approximately 3.7 billion euros ($4.1 billion) are estimated annual run-rate synergies without any plant closures resulting from the transaction,” a joint statement said.

The statement made no further reference to the possibility of job losses.

FCA chairman and Agnelli family scion John Elkann will chair the combined company and PSA’s Tavares will be CEO, if an agreement is concluded “in the coming weeks”. The combined company will be domiciled in The Netherlands.

FCA includes the Jeep, Dodge, RAM, Fiat and Chrysler mainstream brands and Alfa Romeo and Maserati sporty and luxury brands. PSA includes the Peugeot, Citroen, Opel and Vauxhall mass market players, and DS, an upmarket wannabe.

Investment bank UBS described the deal as a win-win for both PSA and FCA.

“As the turnaround of Opel is well on track, PSA seeks to increase its exposure to new regions and segments. In our view, a combination with FCA would accelerate this expansion in North America, South America and with Jeep and (the) Premium (sector). Further, PSA would become number 1 in Europe and be buying the most profitable U.S. manufacturing business,” UBS analyst David Lesne said in a report.

PSA bought Opel and Vauxhall two years ago from General Motors. CEO Tavares has quickly turned what were chronic loss makers into profit producers by rationalizing production and enhancing scale economies. Many Opels and Vauxhalls have PSA engines and components, and use PSA designs tweaked to make them look different.

In a recent report looking at the benefits for Renault of a merger with FCA, French consultancy Inovev, said the Italian American company had some troubles to solve.

“FCA has an incomplete range of models, some of which might have an uncertain future. The Chrysler, Dodge, Lancia and Alfa-Romeo brands are under threat, Fiat exists only through the 500 range, its SUVs and its South American market. Only Jeeps and Rams are sold in large quantities,” Inovev said.

FCA also had overcapacity, particularly in Europe and South America, Inovev said.  

Bernstein Research analyst Max Warburton wondered if PSA had paid too much, as its shares fell 10% after terms were announced, while FCA jumped about 8%, but he too liked the deal.

“Can Tavares work his magic? In simple terms: yes. But the opportunity here is less immediate and less simple than at Opel. This deal is more about ‘future-proofing’ PSA and protecting it on the downside than about powering up earnings in the near-term. Tavares’ playbook has been to take on loss making businesses and fix them, rapidly. We believe he can achieve something similar at Fiat in Europe,” Warburton said.

“PSA’s main weakness is its utter dependency on Europe and this is something investors fret about constantly. Merging with FCA will address this and give the NewCo more diverse (and potentially more reliable) profit pools,” Warburton said.

Citi Research also wondered if PSA had paid too much for FCA, but Julien Brunel, automotive specialist at management consultancy Vendigital, had no reservations.

“The decision by Fiat Chrysler and Peugeot to combine forces will give them significant critical mass, consolidating the new group as the second largest automotive manufacturer in Europe. For both brands, this is a hugely positive development. The merged business is planning to make significant cost savings by sharing common platforms for vehicle development and it will benefit from increased leverage in the supply chain. The synergies between the many car brands in their portfolios are strong across most segments; from small and medium cars to SUV and premium ranges. Both groups already successfully collaborate in the field of light commercial vehicles,” Brunel said.

“The merged business will be sharing platforms and technologies with a particular focus on all-electric and hybrid vehicles, an area where Fiat Chrysler in particular has been lagging behind. PSA will take advantage of the new group’s expanded footprint to make a comeback on the North American market, where they have been absent for more than 30 years,” Brunel said.

Meanwhile in Tokyo, Carlos Ghosn is probably wondering, what might have been for Renault?