Fiat Chrysler, Renault pursue game-changing $48b merger

A Fiat Chrysler Automobiles' (FCA) Fiat 500 on display at a dealership in Tokyo. French group Renault said it was studying the proposal from the Italian-American FCA with interest, and considered it friendly. A deal could help both companies address
A Fiat Chrysler Automobiles' (FCA) Fiat 500 on display at a dealership in Tokyo. PHOTO: BLOOMBERG
A Fiat Chrysler Automobiles' (FCA) Fiat 500 on display at a dealership in Tokyo. French group Renault said it was studying the proposal from the Italian-American FCA with interest, and considered it friendly. A deal could help both companies address
French group Renault said it was studying the proposal from the Italian-American FCA with interest, and considered it friendly. A deal could help both companies address some of the shortcomings that have led their market valuations to lag those of major rivals, as well as the challenges of switching to electric and self-driving technologies and tougher emission regulations.PHOTO: EPA-EFE

If successful, it would rank third in global auto industry behind Toyota and Volkswagen

MILAN/PARIS • Fiat Chrysler Automobiles (FCA) pitched a finely balanced merger of equals to Renault yesterday to confront the costs of far-reaching technological and regulatory changes by creating the world's third-biggest automaker.

If it goes ahead, the US$35 billion (S$48.1 billion) tie-up would alter the landscape for rivals including General Motors and Peugeot maker PSA Group, which recently held inconclusive talks with FCA, and could spur more deals.

French group Renault said it was studying the proposal from the Italian-American FCA with interest, and considered it friendly.

Shares in both companies jumped more than 10 per cent as investors welcomed the potential creation of a company that would produce more than 8.7 million vehicles a year and aim for €5 billion (S$7.7 billion) in annual savings.

It would rank third in the global auto industry behind Japan's Toyota and Germany's Volkswagen.

But analysts also warned of big complications, including Renault's existing alliance with Nissan, the French state's role as Renault's largest shareholder and potential opposition from politicians and workers to any cutbacks.

"The market will be careful with these synergy numbers as much has been promised before and there isn't a single merger of equals that has ever succeeded in autos," said Evercore ISI analyst Arndt Ellinghorst.

With these sensitivities in mind, FCA proposed an all-share merger of equals under a listed Dutch holding company.

After a €2.5 billion dividend for existing FCA shareholders - giving a big upfront boost to the Agnelli family that controls 29 per cent of FCA - investors in each firm would hold half of the new entity.

The merged group would be chaired by Agnelli family head John Elkann, said sources familiar with the talks, while Renault chairman Jean-Dominique Senard would likely become chief executive officer.

Italian Deputy Prime Minister Matteo Salvini said the proposed merger could be good news for Italy if it helped FCA to grow, but it was crucial to preserve jobs. He did not comment on the French government's 15 per cent stake in Renault.

A deal could also have profound repercussions for Renault's 20-year-old alliance with Nissan, already weakened by the crisis surrounding the arrest and ouster of former chairman Carlos Ghosn late last year. In a letter to employees seen by Reuters, FCA chief executive Mike Manley cautioned that a merger with Renault could take more than a year to finalise.

A deal could help both companies address some of the shortcomings that have led their market valuations to lag those of major rivals, as well as the challenges of switching to electric and self-driving technologies and tougher emission regulations. FCA has a highly profitable business in North America with its RAM trucks and Jeep brand, but lost money in Europe last quarter.

Renault, by contrast, was an early mover in electric cars, has relatively fuel-efficient engine technologies and a strong presence in emerging markets, but no US business. A deal would do little, however, to address both companies' limited presence in China, the world's biggest auto market.

FCA said the case for a merger was "strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry".

The huge cost of these changes, including meeting the threats posed by new market entrants such as Tesla in electric cars as well as Uber and Google in self-driving vehicles, has pushed other automakers to work more closely together, including Volkswagen and Ford.

MARKET CAREFUL

The market will be careful with these synergy numbers as much has been promised before and there isn't a single merger of equals that has ever succeeded in autos. 

EVERCORE ISI ANALYST ARNDT ELLINGHORST, who like other analysts warned of big complications in the proposal.

The French government supports a merger with FCA in principle but will need to see more details, its main spokesman said. France will be "particularly vigilant regarding employment and industrial footprint", another Paris official said.

Any deal must safeguard Renault's alliance with Nissan, the official added. FCA said Nissan, 43.4 per cent owned by Renault, would be invited to nominate a director to the 11-member board of the new company.

But analysts said Nissan brought another layer of complexity.

"We now have the French, the Italians, the Japanese and the Americans needing to find consensus on the board of a Dutch company, where the French state stands to lose its special status," Mr Ellinghorst said.

REUTERS

A version of this article appeared in the print edition of The Straits Times on May 28, 2019, with the headline 'Fiat Chrysler, Renault pursue game-changing $48b merger'. Print Edition | Subscribe