Fiat Chrysler & PSA Group Reach Deal to Become the World's 4th Biggest Automaker
The news of a possible Fiat Chrysler and Peugeot merger has been circulating through the auto industry after the Wall Street Journal published a report saying the two automakers were in talks to consolidate their operations. Now it looks as though the two companies have reached a tentative agreement after board members approved the deal.
Peugeot owner PSA Group and Fiat Chrysler confirmed today that they are in talks to merge, creating the world's fourth-largest automaker with a value of $50 billion. However, we are still awaiting official confirmation of any tie-in between the two automakers.
The PSA board approved the merger and the Fiat Chrysler board meet Wednesday, a person familiar with the deal told CNBC. Executives have briefed regulators in the U.S. and France, the Wall Street Journal reported, citing unnamed sources.
Peugeot CEO Carlos Tavares is expected to be appointed CEO of the new company, while John Elkann, Fiat Chrysler chairman and heir of the Agnelli family dynasty that founded Fiat in 1899, would continue his role with the combined company, the WSJ reported.
The deal gives Peugeot six board seats and Fiat Chrysler five, according to the WSJ.
"We will not comment beyond the press release issued this morning," PSA Spokesman Pierre-Olivier Salmon said in an email to CNBC. PSA Group issued a press release today confirming that the two automakers were involved in "ongoing discussions aiming at creating one of the world's leading automotive groups."
Fiat Chrysler spokesman Niel Golightly said to CNBC that he had "nothing to add at this time."
Reports of the talks, including a potential "all-share merger of equals," as the Wall Street Journal first reported, sent shares of Fiat Chrysler surging as much as 8% on Tuesday.
The confirmation of the talks comes after Fiat Chrysler ended merger discussions with PSA's French rival, Renault in May 2019 after they failed to reach an agreement.
Fiat Chrysler is the world's seventh-largest automaker, producing vehicles under the well-known brands Jeep, Dodge, Ram and Italian brand Alfa Romeo. FCA sold 4.8 million vehicles in 2018, while Renault reported sales of 3.8 million vehicles. The combined total would make the new company the third largest in the auto industry, followed by Volkswagen and Toyota.
Even if the deal wins approval from both boards, any potential tie-in between the two companies faces obstacles. Among the issues are clashing corporate cultures and government and regulatory approvals spanning multiple countries.
Talks of a potential tie-up between Fiat Chrysler and PSA rival Renault ended earlier this year due to "political conditions."
The French government, which owns around a 12.2% stake in Renault, as well as owning a 13.7% stake in PSA. Bank of America Merrill Lynch analyst John Murphy told CNBC that the French government's ownership is one of a "litany of obstacles" that could derail the deal.
Murphy also raised concerns that the merger could alienate U.S. buyers, lowering the potential benefit of the two automakers combining. FCA brands include popular U.S. name plates Dodge, Chrysler, Ram and Jeep.
Even if the merger is approved by shareholders and regulators, "there is a material risk American consumers may shift to Ford and GM products due to FCA possibly no longer being perceived as an ‘American' identity, not to mention the potential political implications of this potential deal."
Chrysler is Owned by Fiat
Although Chrysler is still perceived as an American car brand with popular models like the Dodge Caravan, Dodge Ram trucks and Jeep 4X4 models, the company has been wholly-owned by Fiat since 2014. The company name was changed to Fiat Chrysler Automobiles (FCA) the same year.
However, Chrysler's change of ownership began 16 years earlier. In 1998, Mercedes Benz parent Daimler Benz acquired Chrysler in a buyout forming Daimler Chrysler.
However, Chrysler's surprising merger with Daimler-Benz in 1998 created a culture clash, which led to a falling out less than a decade later. In 2007 after nearly a decade of controlling Chrysler, Daimler sold off 80% of of the automaker to private equity firm Cerberus Capital Management and renamed the automaker Chrysler LLC.
Soon after, the recession hit in the U.S. which led to an unpreceded government bailout of the U.S. auto industry, which led to U.S. automakers Chrysler and General Motors to file for bankruptcy protection.
In total, the "big three" U.S. automakers, General Motors, Ford and Chrysler LLC received a $80.7 billion lifeline from the U.S. government to preserve nearly 3 million American jobs as auto sales plummeted as a result of the recession.
Chrysler received $12.5 billion of that amount after filing for bankruptcy protection along with GM. As part as the restructuring plan that followed, Chrysler LLC was allowed to retain all of its U.S. brands (Chrysler, Dodge, Jeep, Ram and Mopar).
In 2014 Chrysler LLC merged with Italian holding company Fiat S.p.A. and became a subsidiary of Fiat. Fiat completed the full purchase of Chrysler when it purchased the remaining $3.65 billion stake in the automaker. Today, the new company is called Fiat Chrysler Automobiles, or FCA.
Fiat Chrysler owns the popular Jeep brand in the U.S.
Merger May Help Peugeot Re-enter the U.S. Market
Analysts view the merger as a quick way for Peugeot to re-enter the U.S. market after a decades-long hiatus, while continuing to grow its European operations following the company's acquisition of GM's European business in 2017, according to CNBC.
"This news is not unexpected, given that both companies have been actively exploring tie-ups with others to yield cost savings and other synergistic benefits," said David Leggett, automotive editor at data analytics firm GlobalData to CNBC.
The merger would fulfill CEO Sergio Marchionne's vision of creating a global automaker with the resources to successfully compete in the ever-changing auto industry. Marchionne died in July 2018.
Marchionne became CEO of Fiat on June 1, 2004, and oversaw one of the more successful tie-ups for the auto industry in recent years with the creation of FCA.
In 2015, Marchionne, called for auto industry consolidation in a presentation he called "Confessions of a Capital Junkie." He said that consolidation would ultimately save capital that was being wasted by automakers developing the same technologies separately.
Marchionne believed only a handful of the world's largest automakers would survive and have the capital to compete as automakers push for autonomous and all-electric vehicles.
The deal with PSA would give Fiat Chrysler access to PSA's newer vehicle platforms in Europe as well as emerging technologies.
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