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PSA FCA Merger Looks Less Certain After Initial Excitement

PSA FCA Merger Looks Less Certain After Initial Excitement.

“No one needs 3 development centers. No one needs the entire engine factories of FCA, PSA and Opel. No one needs high Fiat vehicle capacity.

News PSA Groupe and Fiat Chrysler Automobiles (FCA) plan to merge sparked euphoria among investors, but in the cold light of dawn some ugly realities began to emerge suggesting the deal might yet stumble and die.

On day 2, criticisms included worries the newly merged company might be hit by European Union (EU) fuel efficiency rules. There was the threat of job cuts as PSA/FCA seeks to eliminate overlaps and inefficiencies. Wrangling between the wide range of important shareholders and stakeholders including the French and Italian governments, the Chinese shareholders, and the Agnelli and Peugeot families could derail the plan.

Some analysts believe PSA is paying too much to get the deal done, while others worried that if the deal does go through, that leaves the likes of Ford, and Renault, which earlier this year was close to merging with FCA, looking subscale and exposed to the much more efficient manufacturers.

On Thursday, PSA and FCA announced an agreement in principle for a 50-50 merger. The deal was acclaimed by investors as a win-win for both sides. The combination of FCA and PSA would create the 4th largest auto manufacturer in the world with annual sales of 8.7 million.

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

Speeding towards the U.S.
Professor Ferdinand Dudenhoeffer of Germany’s Center for Automotive Research (CAR) liked the fact PSA was able to speed up its big ambition to re-enter the U.S. market, and reckoned the French company would be able to help FCA solve its lack of electric cars. But it might be hard to persuade unions and governments about the need for big job cuts.

“No one needs three development centers – Turin, Paris and Ruesselsheim. No one needs the entire engine factories of FCA, PSA and Opel in Europe, and no one needs the high Fiat vehicle capacity. Many people therefore will get the golden handshake. The risk for Opel and its employees is particularly high,” Dudenhoeffer said.

PSA bought Opel and Vauxhall in 2017 from General Motors. Opel sells cars and SUVs in mainland Europe, while Vauxhall sells the same range in Britain with its badge.

Dudenhoeffer also said a deal with Renault and its Nissan affiliate would have been better because of greater manufacturing synergies and better positions in markets like China and Russia.

Norddeutsche Landesbank Girozentrale of Germany said the combination of PSA and FCA was a merger of losers.

“FCA and PSA are behind in the current automotive world and limp behind in future technologies like electromobility and autonomous driving. A merger is almost the last chance of survival for both of them,” Nord LB analyst Frank Schwope said.

A merger deal will be difficult to finalize because of disparate factions like France, Italy and the Agnelli and Peugeot families.

Investment bank Morgan Stanley said the deal was all about CO2.

“A potential merger between PSA and FCA is driven by the need for scale and cost sharing as auto companies ‘flip’ the business model from (internal combustion engines) ICE to (electric vehicles) EV. We do not view the FCA/PSA discussions as an isolated idiosyncratic event, but a sign of the stark reality facing the industry,” Morgan Stanley analyst Adam Jonas said.

Tavares is the one
Almost everybody agrees though that if anyone can bring success to the combination it is CEO elect Carlos Tavares.

“Our discussions with auto industry experts suggest Mr. Tavares is highly respected and experienced in cost cutting, execution on platform/product engineering and merger integration,” Jonas said.

Fitch Solutions Macro Research said the deal will need heavy investment to make it work

“The merger will create a major global automaker but a final deal is far from certain. The merger will help PSA enter the North American market earlier than previously planned while FCA will benefit from improved market share in Europe where it struggles the most,” Fitch said in a report.

“The deal will result in major changes to the companies’ vehicle portfolios to eliminate possible market cannibalization and to benefit from sharing a common vehicle platform. While the merger (would) bring certain benefits in the short term, both companies will still have to invest heavily in expansion and electric vehicles to secure their growth over the long term,” Fitch said.

There are also risks talks could fail if stakeholders from the U.S., Europe, and China can’t agree on the corporate structure of the merged company.

“The French and Italian finance ministries indicated that they will scrutinize both companies over the impact on jobs and corporate governance structure given that the French government and Chinese Dongfeng Motor Group both hold about 14% of PSA’s shares, while the Agnelli family owns 29% of FCA, meaning that they will become the largest shareholder of the proposed company,” Fitch said.

Paid too much?
Citi Research wondered if PSA had paid too much to secure the deal, but on balance thought the presence of Tavares was the key to success.

“Tavares must see something we cannot. It seems surprising that the shrewdest of dealmakers (PSA) would overpay for an asset, having been so patient until now,” Citi Research analyst Raghav Gupta-Chaudhary said.

“One thing we are very conscious of is the synergies look low, both compared to what has been achieved at Opel Vauxhall, and what FCA said would be possible with Renault (5 billion euros-$5.6 billion). We’ve seen PSA over-deliver in magnitude and speed and suspect the same will be true with FCA. With Tavares at the helm, we suspect the market will start to attribute a higher probability to such savings (which precludes any factory closures) when the deal is finalized,” Gupta-Chaudhary said.

Given the poor record of big automotive mergers over the years, it’s no surprise that investors are getting cold feet about this one. But Tavares’ record of saving PSA from bankruptcy after the financial crisis, and his turning around of GM’s Opel and Vauxhall suggests this one might actually work long-term if it can get over initial complications.

The Financial Times Lex column put it this way.

“Travelling hopefully is often better than arriving. The car industry has a long history of proposed takeovers that fall apart when the rubber hits the road. This one has a better chance than most,” Lex said.


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