Fiat Chrysler Shares Zoom, Then Stall, After China Bid Rumour.
Back To The Drawing Board For FCA’s Merger Partner.
Reports Guangzhou Automobile Group of China was about to launch a bid for Fiat Chrysler Automobiles (FCA) excited shareholders briefly, until the story was denied by the Chinese.
FCA Chairman John Elkann later denied the deal too
Reports of possible merger candidates for FCA have ranged from GM to Ford and Volkswagen. Elkann denied a more recent rumour that PSA Group was a merger candidate.
Guangzhou Automobile Group of China has a joint venture with FCA to produce cars for its domestic market. Last month the venture began making Jeep Renegades. Capacity of the plant is 160,000 vehicles a year.
Last month FCA CEO Sergio Marchionne said Guangzhou was a respected and valuable partner. There was no mention then that the partnership might lead to anything more.
The latest rumour originated in an unsourced report in the Il Giornale newspaper that the Chinese company wanted to buy a majority stake.
Barclays Equity Research said a bid by Guangzhou Automobile would have made sense, especially after the move by Nissan to buy a controlling interest in Mitsubishi Motors, presumably on the grounds that any manufacturer interested in buying another one to raise its production level needs to act before the candidates run out.
FCA’s efforts to induce a merger with General Motors crashed and burned last year. Since then, investors have suspected Marchionne has been seeking a merger partner to attain the scale he craves to make FCA a viable global contender. Last month Marchionne hinted that despite being spurned by GM, Ford, Volkswagen or Toyota might make suitable merger candidates.
But despite Marchionne’s obsession, a deal hasn’t been forthcoming, not least because of FCA’s weakness.
According to Barclays Equity Research, FCA had net industrial debt of €5 billion at the end of 2015, the only big European vehicle maker with a net debt position. If Guangzhou Automobile bought a stake in FCA, that wouldn’t offer any financial benefit, but now that the Ferrari luxury sports car interest has been spun off, FCA owners might be more willing to dilute their stake.
FCA may be burdened by large debts, but last month Moody’s Investors Service upgraded the company’s credit rating. Moody’s said FCA profits will continue to improve in the next 18 months.
FCA’s margins will rise in the North American Free Trade Agreement (NAFTA) because steadily increasing demand for SUVs and trucks will fuel Jeep and Ram sales.
“Moody’s views the global rollout of the Jeep brand as a cornerstone of FCA’s strategy. The roll out has particularly helped the company improve its competitiveness in the Far East and leverage its industrial base in Western Europe,” it said in a report.
Access to cash flows
FCA made progress towards getting its debt under control by gaining access to all the cash flows at Chrysler.
Moody’s saw some areas of possible problems too, warning that FCA operated in a highly competitive global market that constrains pricing.
“It’s profitability outside of NAFTA remains weak, and some of the company’s strategic initiatives – revival of the Alfa brand – will take time to bear fruits. Industry conditions have also weakened in emerging markets such as Latin America and China resulting in a large margin compression for FCA, including earnings erosion at its luxury brand Maserati, since the start of 2015,” the report said.
As for merger candidates for FCA, PSA Group was often touted as a possibility, given that the companies combined sales of about 7.7 million would bring the economies of scale Marchionne has been seeking. PSA Group, is said to dovetail nicely with FCA.