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Peugeot, Fiat Chrysler join forces reshaping the automotive sector

posted onOctober 31, 2019

PSA Group, the French owner of Peugeot and its US-Italian rival Fiat Chrysler Automobiles (FCA) confirmed on Thursday (Oct. 31) the two companies will merge.

The €40bn merger of the two groups would create the world’s fourth-largest carmaker with annual vehicle sales of 8.7m, revenues of €170bn, operating profits of more than €11bn and a combined 400,000 employees. 

The 50-50 tie-up would also bring a number of brands under one roof including Fiat, Dodge, Ram, Chrysler, Alfa Romeo, Maserati, Peugeot, DS, Citroën, Opel and Vauxhall. 

The newly-formed company would be based in the Netherlands, a neutral location, where FCA is domiciled. Once a merger is finalised,  PSA's CEO Carlos Tavares will become chief executive of the new company while FCA’s John Elkann will become its chairman. 

"Discussions have opened a path to the creation of a new group with global scale and resources owned 50% by Groupe PSA shareholders and 50% by FCA shareholders," the companies said in a joint statement.

"In a rapidly changing environment, with new challenges in connected, electrified, shared and autonomous mobility, the combined entity would leverage its strong global R&D footprint and ecosystem to foster innovation and meet these challenges with speed and capital efficiency," they added.

FCA's stock increased by over 10%, while PSA Group's shares declined 9% after both companies confirmed the merger deal. The combined group’s shares will be listed in New York, Paris and Milan.

The agreed deal comes months after a similar merger attempt between FCA and French carmaker Renault collapsed, with the companies blaming the intervention of the French government, Renault’s largest shareholder.

The French state also has a stake in PSA through its investment bank. There were no signs of resistance to this new deal, with French Finance Minister Bruno Le Maire welcoming the merger on Thursday. However, he added Paris would "be particularly vigilant over preserving (the group's) industrial footprint in France." 

The next step in the deal is expected to be a signing of a Memorandum of Understanding, which could come before the end of the year. Prior the competition of the deal, FCA said it would distribute to its shareholders a special dividend of 5.5 billion euros, as well as proceeds from the sale of its robot-making Comau unit.

Peugeot said it would distribute its 46 per cent stake in parts maker Faurecia to shareholders.

Fiat Chrysler PSA CEO

(PSA's chief executive Carlos Tavares will become CEO of the new combined company FCA PSA)

Just hours after the announcement that FCA and PSA  plan to merge their operations, the Italian-American automaker reported strong quarterly operating results.

North America achieved record results, offsetting weakness in Europe and China, with €2.0 billion in Adjusted earnings before interest and tax (EBIT) along with 10.6% margin. In Latin America net revenues were up 10%, while shipments remained flat. Adjusted EBIT was up 83% due to higher revenues.

The strong results led FCA to reiterate its full-year guidance of adjusted EBIT over 6.7 billion euros. Looking ahead, it expects a further improvement of its financial performance in 2020. 

"Our strong Q3 results, built on record North America profitability, put us in a position to deliver our full-year guidance and to further improve financial performance in 2020. In addition, changes to our product portfolio plans are central to our strategy to improve performance in EMEA and Maserati," chief executive Mike Manley stated. 

When complete, the merger-which triggers a new wave of consolidation in the car industry- is expected to generate $4.1 billion (3.7 billion euros) in annual "synergies without any plant closures." 

Fiat Chrysler

(Graph data source: Reuters)

The deal also comes at a difficult time for the auto industry amid trade wars, a world economic slowdown and drop in demand. 

A shift toward electric and self-driving vehicles, costly new technologies and European legislation forcing a further reduction in vehicle C02 emissions, have also added to the mix. 

Ford, Daimler and Volkswagen have in the past months lowered their forecasts citing a steeper-than-expected drop in demand.The latter in July said it will work with Ford closely to develop electric- and self-driving vehicles  in an attempt to reduce costs on new technologies. 

Toyota and Subaru which began their partnership in 2005, announced last month that they will acquire even more stock in the others’ company. The companies will also work together on battery electric vehicles (BEV). 

India's Tata Motors that owns Jaguar Land Rover has said it’s open to finding partners for the British luxury car maker  but isn’t planning on selling the embattled unit.

Looks like once fierce rivals are joining up as the industry is struggling to afford its own future. 

UPDATE 18/12/2019

Fiat Chrysler and Renault signed on Wednesday their $50 billion merger of equals, creating the world's fourth-largest car manufacturer by volume and third by revenue.

"The proposed combination will be an industry leader with the management, capabilities, resources and scale to successfully capitalise on the opportunities presented by the new era in sustainable mobility," the companies said in a joint statement.

The newly formed company will be domiciled in the Netherlands – a neutral location – but listed in Paris, Milan and New York.