FIAT stand during the Geneva International Motor Show.
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News Fiat Chrysler Automobiles (FCA) and France’s PSA Groupe were talking merger won’t have surprised investors wondering where FCA might end up after its failed combination talks with Renault earlier this year, and which still might react with a counter deal for FCA.
FCA and PSA, Europe’s second biggest auto maker in terms of sales behind Volkswagen, confirmed the merger talks Wednesday, which would create a $47 billion global company, and a powerful rival to VW.
The world’s leading auto manufacturers are coming under pressure to form alliances that would allow improved efficiency as global markets weaken, and huge resources are required to fund new technologies like electric cars and computer driven ones. European Union rules which kick in next year to slash carbon dioxide (CO2) emissions will cost big money too.
FCA issued a short statement Wednesday confirming the talks.
“There are ongoing discussions aimed at creating one of the world’s leading mobility groups,” FCA said.
A planned merger between FCA and France’s other big carmaker Renault collapsed in June after FCA declared interference from the French government, which owns 15% of Renault, made the deal impossible.
FCA CEO Mike Manley recently said that he was still interested in a deal, so today’s news isn’t a big surprise.
Analysts believe a deal with PSA, with its Peugeot, Citroen and DS brands, is more likely to work, and point to its record after turning around GM Europe’s chronic loss makers Opel Vauxhall. PSA was said to be attracted to FCA because the French company coveted a U.S. presence so it could advance its global ambitions. The French government owns 13% of PSA.
Reuters Breaking Views columnist John Foley wonders if the PSA move might provoke a reaction from Renault to revive its deal.
“In any case, the idea of a Fiat-Peugeot merger might be more signal than manoeuvre, if it serves to bring Renault back to Fiat’s table. Strategically, that deal would make sense too. It brings with it a partnership with Nissan Motor and the promise of better access to Asia,” Foley said.
“The complexities that sank that tie-up in the first place, including Renault’s tetchy relationship with Nissan and the French government’s protective embrace, might be less of a barrier now. The French government may have softened in light of Renault’s poor (recent financial) performance. One way or another, a European car merger is looking more likely again – but not necessarily the one that’s currently in the headlines,” Foley said.
Citi Research though likes the idea of a merger between FCA and PSA.
“A combination between FCA and PSA is the one the market was expecting. We think PSA is a more likely contender for a deal with FCA. Following the successful and still ongoing integration of Opel-Vauxhall, Groupe PSA has shown that not all (manufacturer) combinations are doomed for failure. Given the track record of the current management team, we would expect the market to respond more positively to the prospect of this deal than it did to the idea of a combination between Renault and FCA,” Citi Research analyst Raghav Gupta-Chaudhary said.
Gupta-Chaudhary said the most pressing issue for FCA is the fuel inefficiency of its vehicle fleet, and PSA has shown it can solve these problems at Opel Vauxhall. Obstacles to the deal might include EU market share monopoly rules, while the ability to cut workforces in tightly regulated Europe might also be a stumbling block.
Bernstein Research analyst Max Warburton reckons the FCA-PSA deal has more logic than FCA-Renault and has more chance of success. Warburton points to PSA Groupe’s CEO Carlos Tavares work at turning the chronic loss maker Open Vauxhall into the black.
“The Renault deal fell over pretty quickly, given both Nissan troubles and political complexities. A deal with PSA continues to make decent sense, in our view, but it appears to have some obstacles, both new and old, that need to be overcome,” Warburton said.
Investment bank Morgan Stanley said industry mergers are important for the future of the auto industry.
“We believe auto industry consolidation is not just a fad but a strategy, with far reaching implications for labor, policy makers, technology shifts from internal combustion engines to electric vehicles to EV and relationships with suppliers,” Morgan Stanley said in a research note about the potential merger.
