What the Fiat Chrysler/PSA Group Merger Means for the Future of the Auto Industry

On December 18, Fiat/Chrysler (NYSE:FCAU) and Groupe PSA (OTCMKTS:PUGOY) the owner of Peugeot signed a binding combination agreement. The deal, when finalized, will create an automaker larger than General Motors (NYSE:GM) and Hyundai-Kia (OTCMKTS:HYMLF). The deal was first announced in October and is expected to be finalized in twelve to fifteen months.

Based on their respective market capitalizations, the combined company (which has yet to be named) will have an equity value of approximately 41.1 billion euros. The company will have a projected revenue of 170 billion euros and a workforce of approximately 400,000. The company is expected to manufacture 8.7 million vehicles per year.

For their part, shareholders of each entity will hold 50% in the new company. Each company intends to pay out a 1.1 billion euro dividend. Individually, Fiat Chrysler will pay a 5.5 billion euro special dividend to its shareholders. And PSA intends to distribute 46% of its stake in Faurecia, a components supplier, to its investors.

According to both companies, Carlos Tavares, the current CEO of Groupe PSA will retain that title for an initial mandate of five years. John Elkann of Fiat Chrysler will hold the title of chairman. “This is a merger between two healthy companies (that) are highly profitable,” said Mr. Tavares. “We have to leverage the strength of both companies to make a new car company even more competitive.”

What’s at stake in the merger?

This merger is more than two companies combining brands and merging cultures. To be fair, those areas present concerns for some analysts. “It is very clear that especially in Europe, the combined entity will face massive challenges, including finding cost savings and shrinking the number of brands, in order to be able to electrify its portfolio and meet EU standards,” said Arndt Ellinghorst of Evercore ISI.

Max Warburton of Bernstein said: “This is an industry where M&A has a poor record and where cultural clashes are common, causing investors to be cautious about the prospects of big deals. “But we believe there will be less dancing around, less cultural impediments and fewer stupid power games than we’ve seen in many auto sector deals.”

The combined company is largely about investing in the new technologies that will redefine the automotive sector. Thus far, much of the headlines about electrification and autonomous vehicles lead to conversations about Tesla (NASDAQ:TSLA) and its founder, Elon Musk. And Tesla is getting the attention of analysts who cite its battery as a possible competitive advantage that can extend beyond just the electric vehicle market.

However, any conversation about transforming the industry leads to questions about economies of scale as the industry struggles to respond to regulatory calls for electric vehicles and self-driving systems. 

There’s no debate that the world’s leading automakers are increasing their investment in electrification. In January 2018, Ford (NYSE:F) announced plans to invest $11 million in the development of 40 hybrid and fully electric vehicles by 2022. Also by 2022, Honda Motor (NYSE:HMC) has pledged to only be selling electric and hybrid vehicles in Europe. This is a full three years earlier than the company’s previous plan. And Toyota (NYSE:TM), which has been considered a laggard in terms of their commitment to electric cars, is planning to sell one million cars with plugs by 2025.

The merger still has unknown consequences

In the announcement, the two companies talks of targeted cost savings totaling around 3.7 billion. However, both companies are saying, at least initially, that no plants will be closing. But neither Mr. Tavares nor FCA CEO Michael Manly commented on how much of a burden each company will bear regarding potential redundancies.

However, Ferdinand Dudenhoffer, from the CAR-Center Automotive Research at Universität Duisburg-Essen, suspects that PSA’s Opel unit will be the “loser” in the merger. Dudenhoffer predicted a minimum of 10,000 overall engineering job losses. “Opel’s role in the new group will become weaker. (It will have to) fight alongside mass-market brands Fiat, Citroën and Peugeot for the same customers,” said Dudenhoffer.

PSA has no concerns over lawsuit against Fiat Chrysler

In November, Fiat Chrysler was targeted in a racketeering lawsuit brought forward by General Motors. According to the complaint, Fiat Chrysler bribed officials from the United Auto Workers union in an effort to get an advantage over General Motors. Fiat has called the suit “meritless”.

For their part, PSA is not displaying reservations about moving forward with the merger. On a conference call, Carlos Tavares the head of PSA said he supported Fiat Chrysler while remarking, “We have obviously done our due diligence.”