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Will PSA Group Sneak In And Buy FCA?

Will PSA Group Sneak In And Buy FCA?

“I can imagine FCA are in the background discussing with PSA already. PSA is looking for a partner, especially for entry into the U.S. It’s a good idea, but we’ll see”

Speculation Renault and Fiat Chrysler Automobiles (FCA) will finally decide to merge reignited earlier this month, but the biggest obstacles, French government interference and company’s relationship with its alliance partner Nissan of Japan, remain in place, while a possible rival deal with PSA Group still has its supporters.

The original merger deal crashed and burned in June after FCA declared interference from the French government, which owns 15% of Renault, made the deal impossible. At that point, the problem with Nissan hadn’t been resolved.   

But FCA CEO Mike Manley recently said that he was still interested in a deal, although didn’t point to any progress solving the problems which upset the original plan.   

   Renault took control of an ailing Nissan in 1999, and the Japanese company now wants a more equal relationship. That means concessions from the French government. Since the removal of former CEO Carlos Ghosn late last year, who wanted a more formal merger with Nissan, the future of the alliance has been in question. Nissan owns a 15% non voting stake in Renault while the French company controls 43% of Nissan.

Professor Ferdinand Dudenhoeffer from Germany’s Center for Automotive Research (CAR) at the University of Duisberg-Essen expects FCA to do a deal, but it’s too soon to say who with.

“Fiat Chrysler needs a partner and is looking for one but there aren’t many available. Yes, that potential partner is most likely to be Renault, but Renault has a lot of problems with Nissan and first of all it has to solve that. Nissan is in trouble and they need to rearrange their alliance,” Dudenhoeffer said in an interview.

Radical restructuring
In July, Nissan announced a radical global restructuring plan after it reported a 99% dive in first quarter operating profit. The plan is to axe about 10% of the workforce, about 12,500. Its biggest problem is in its largest market, the U.S., where an ageing model line-up has led to increased incentives and slashed profits. Renault doesn’t operate in the U.S.

Dudenhoeffer also said it was likely PSA Group, which was originally favored to merge with FCA, was probably probing the possibilities of a deal in the background.

Citi Research reckons renewed talks on an FCA/Renault deal might start as early as next month.

“If Renault and Nissan come to an agreeable solution on the shareholder structure, this could be the catalyst for renewed talks with FCA. Renault has not been shy about their appetite for such a deal, but it first needed to ensure that Nissan was on its side. In terms of timeline, (reports) suggest the talks were in early stages but could result in an initial memorandum of understanding as early as next month,” Citi Research Raghav Gupta-Chaudhary said.

That could be a big “if”.

FCA had proposed a merger with Renault which would be owned 50/50. Combining Renault and FCA would produce a company with annual output of about 9 million vehicles, and rank third behind Volkswagen and Toyota. Including Renault alliance partners Nissan and Mitsubishi, the combined output would reach close to 15 million and into number one spot.   

Some analysts have said Renault needs to sell its stake in Nissan for a merger with FCA to work. Others have said the original deal had identified merger synergies that would save $5.6 billion a year, and that was a big incentive to get a deal done, with anyone. Another victim of the collapse of the deal was the French government’s credibility as a pro-business administration which once favored privatization.

Not everyone thinks Renault would gain much from a merger with FCA.

Uncertain FCA
French consultancy Inovev, which says FCA has an uncertain potential, and it might benefit more than Renault.

“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. By partnering with Renault, FCA could, however, have a core range with significant potential linked with the Clio (city car), Captur (small SUV), Megane (family sedan) and Kadjar (mid-size SUV), and a very popular low-cost brand Dacia, a strong presence in Russia and electrical technology, that FCA does not have,” Inovev said in a report.

“The presence of many brands in the newly created group would undermine the coherence of the entire model range, which would require substantial brand trimming. The very large number of plants serving the group could threaten some of them, especially since FCA already suffers from overcapacity, particularly in Europe and South America,” Inovev said.   

But some analysts believe a deal with PSA, with its Peugeot, Citroen and DS brands, is more likely, and point to its record after turning around GM Europe’s chronic loss makers Opel Vauxhall.

German investment bank Nord LB said PSA will have looked at the failed talks with Renault as underlining its greater ability to make synergies with FCA.

PSA covets U.S.
PSA was said to be attracted to FCA because the French company coveted a U.S. presence so it could advance its global ambitions. This was less crucial to Renault because its alliance with Nissan served up big U.S. sales. The French government also owns 13% of PSA Group, but so far has not show any tendency to interfere.

CAR’s Dudenhoeffer said PSA is probably serious about doing a merger deal with FCA.

“I can imagine they (FCA) are in the background discussing with PSA and CEO (Carlos) Tavares already. PSA is looking for a partner, especially for entry into the U.S. It’s a good idea, but we’ll see,” Dudenhoeffer said.

“FCA is not an easy partner for cooperation, but the deal with GM for Opel and Vauxhall shows Tavares was able to make the turnaround. But with Fiat it will be a harder story. Fiat is in deep trouble in Europe and the whole company is heavily dependent on the U.S. and SUVs. It will be hard work, but Tavares can do that. Tavares knows that it is necessary to have a bigger company to share all the high investments necessary to be competitive in the future,” Dudenhoeffer said.


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