Fiat Chrysler, Peugeot Merger Has One Clear Winner

Fiat Chrysler Automobiles N.V. (NYSE: FCAU) and Peugeot (Groupe PSA) have announced a merger of equals that will create the world’s third-largest automaker measured by revenue and the fourth largest measured by sales volume. The two companies expect the merger to take 12 to 15 months to be completed. Until that time, Fiat Chrysler and Peugeot remain competitors.

Carlos Tavares, CEO of Groupe Peugeot, will be the CEO of the combined company, and John Elkann, chair of Fiat Chrysler, will be board chair. Elkann is the scion of the Agnelli family that owns a controlling stake of nearly 50% of the voting power of FCA through its Netherlands-based holding company Exor.

Ahead of the closing, FCA will distribute a special dividend of €5.5 billion to its shareholders and Peugeot will distribute its 46% in car-parts maker Faurecia to its shareholders. Exor and the three holders of more than 2.5% of Peugeot stock (private equity firm Bpifrance, Dongfeng Motor Group and the Peugeot family) have all agreed to vote their holdings in favor of the merger.

Groupe PSA shareholders will receive 1.742 shares of the new combined company for each share of Groupe PSA, while FCA shareholders will have one share of the new combined company for each share of FCA. The exchange ratio reflects the relative value of each firm’s shares. In addition, both companies intend to distribute a €1.1 billion ordinary dividend in 2020 related to fiscal year 2019, subject to approval by each company’s board of directors and shareholders.

The combined company will be domiciled in the Netherlands (current home of FCA) and will be listed on Euronext, Borsa Italiana and the New York Stock Exchange. The company will get a new, yet-to-be-determined name.

What Groupe PSA gains from the deal is a solid footing in the North American market. The company’s North American sales in 2018 totaled about €4.2 billion on total group sales of more than €70 billion.  What FCA gains is a much larger footprint in Europe, where Group PSA trails only Volkswagen in market share among European Union nations.

The Agnelli family, through its ownership stake in FCA, is a clear financial winner, and FCA also gets one of the auto industry’s stars in Tavares who has been responsible for pulling Groupe PSA back from the edge of a cliff. A proposed FCA merger with Renault fell apart earlier this year, but that may have been a blessing in disguise for FCA given the fallout around former Renault Chief Carlos Ghosn.

On a pro forma basis, the two companies sold 8.7 million vehicles last year, while having the potential to manufacture 14 million. The problem is that the new company’s largest market remains in Europe where competition is fierce. In China, both Groupe PSA and FCA are behind their competitors and neither is well-positioned for a shift to electric vehicles. Tavares will earn his salary if he can sort this all out.

Fiat shares traded down about 1.1% at $15.16 in New York, while Peugeot shares traded up about 1.5% at €22.44 in Paris.

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