The Birth of a Giant: FCA-PSA merger

Nowadays, it is very challenging and strenuous to be a globally prosperous automaker. For this reason, major players of the sector are trying to merge to maximize shareable costs. Examples of this could the devising new propulsion technologies, such as electric powertrains and competing with tech firms on alternative transportation methods such as connected cars and autonomous vehicles.

Hence, many of the contemporary automakers have merged with competitors or are considering doing so. The structure of the automaking industry is being heavily reshaped: The Renault-Nissan-Mitsubishi alliance is currently in the process of collapsing, Ford and VW are attempting to dissolve any merger discussion and GM is trying to entangle its European division more solidly in the European market by merging it with regional automakers. Currently, the biggest merger announcement regards the potential consolidation of  FCA and PSA. 

The hypothesized merger between FCA and PSA doesn’t represent the first attempt of the Italian automaker. FCA had previously speculated about a consolidation with the French carmaker Renault. This merger failed in June after FCA declared a strong interference from the French government, which owns 15% of Renault.

The current merger arrangement between FCA and PSA is on a constructive and encouraging path to be realized. PSA would profit greatly by effectively taking over the Jeep brand and receive continuous and direct access to the North American market with its valuable and voluminous pickup-truck and SUV end-market. 

Besides, FCA does not own any pure electric or autonomous drive technology which could play a significant role in the next future. Thus, the merger between the two players will not target the general market gaps but rather will focus on assorted and embedded problems within the existing conventional carmaker traditions. This was an additional reason why the speculated merger between FCA and Renault fell apart.

The announcement of the possible merger has been published on October 30th, with the approval of the PSA’s board. The formula agreed on is a 50/50 share-swap, and the creation of  a new automotive company. In the end, who is buying who?

Figure 1: Share movement comparison of FCA and PSA after the merger announcement. 

FCA’s stock rose more than 17% from the day before the announcement, while PSA plumbed to almost 9%. Considering the share price of FCA on the 1st November, PSA is paying a $3.9 premium for the Italian-American-Dutch group. FCA has also declared that it will pay a special dividend prior to the acquisition amounting to $5.5 billion, which means $3.5 per share, or  more than 20% of the current share price. 

By summing up all this data is reasonable to state that FCA’s shareholders are the real winners of the operations, while PSA would almost be facing most of the market risk. 

The merger, carried out under a Dutch parent company, will greatly impact the shareholder structures of FCA and PSA, as well as their respective voting rights.

The governance of the new company would be balanced between the contributing shareholders, with the majority of the directors being independent. The Board would be composed of 11 members, of which 5 nominated by FCA (including John Elkann as Chairman) and 5 nominated by Groupe PSA (including the Senior Independent Director and the Vice-Chairman).

The Chief Executive Officer would be Carlos Tavares for an initial term of five years.

It is proposed that the by-laws of the new combined entity would provide that FCA’s loyalty voting program will not operate to grant voting rights to any single shareholder exceeding 30% of the total votes cast. Additionally, there would be no carryover of existing double voting rights which would accrue after a three-year holding period starting from the completion of the merger.

A standstill of 7 years and a 3-year lock-up period  would be applied to the shareholdings of EXOR N.V., Bpifrance Participations SA, DFG and the Peugeot Family, with an exception made for the last one , which would be allowed to increase its shareholding by up to 2,5% during the first 3 years following the closing, through Bpifrance Participations and DFG.

Figure 2: Possible shareholder structure of the new company

The value creation from the deal is mainly derived from the synergies created by more efficient resource allocation. The majority of the $4.12 billion estimated synergies are supposed to be achieved in the following 4 years. The new company will generate total  revenues for $188 billion and will sell 8.7 million vehicles per year, overcoming General Motors and Volkswagen in terms of sales volume.The technological synergies would also be relevant and are projected to be between €3 and €6.6 billion in the long run. 

Surely this deal will face different obstacles, due to uncertainties on multiple fronts, such as the  political implications of the deal.

From a political standpoint it is renown that FCA already faced a certain degree of opposition when, months before, it had approached PSA’s French rival Renault for a possible merger discussion, which was subsequently terminated due to the decision by the French government to walk away last June.

The French government is Renault’s biggest shareholder, with a stake exceeding 15%, and thus had a relevant size to oppose the deal’s development. However, in the PSA case, the French government possesses the same amount of shares as the Peugeot family and Dongfeng, which represents a mitigating factor according to analysts. Furthermore, the French government  declared its support to the deal’s logic and the size of the NewCo which will be able to able to protect workers’ interests.

The logic of the deal itself is a point of uncertainty. Comparing it with the previous merger attempt between FCA and Renault, the deal with PSA presents a stronger logic and thus, has a greater chance of succeeding. 

The newly formed  entity would allow Peugeot to diversify its geographical presence, penetrating the  US and Latin America markets, at the same time, it would mitigate FCA’s risk of regulatory financial backlash by granting access to PSA’s power-train technology at a highly competitive cost.

The likelihood that the merger will actually take place is growing day by day. On November 25th, Reuters announced that both FCA and PSA have produced an internal communication, stating that more than 50 people are working towards the finalization of the mergers. 

Excluding any unexpected turn of events, the new automotive behemoth will see the light of day within the next few months. The good prospects are confirmed by the willingness of the two parts to sign a memorandum of understanding within the 20th of December, in order to give a more precise direction to the deal. 

As everybody knows, there is no gain without pain. General Motors did not stand by looking, suing  FCA for presumed corruption with the American union “United Auto Workers”. We will see in the next few weeks how this is going to affect the deal and the values proposed for it . For now, it seems that  the road is open for the real game-changer of the decade in the automotive sector.

Authors: Leo Paus, Mattia Lorenzo di Lilla, Federico Felice Intini

Sources:

https://www.ft.com/content/11e7b5c8-fbab-11e9-a354-36acbbb0d9b6

https://www.ft.com/content/474182c8-fa82-11e9-98fd-4d6c20050229

https://media.groupe-psa.com/en/groupe-psa-and-fca-plan-join-forces-build-world-leader-new-era-sustainable-mobility

https://www.autonews.com/executives/fca-psa-tell-employees-they-will-sign-merger-agreement-coming-weeks

https://www.reuters.com/article/us-fiat-chrysler-m-a-psa/peugeot-fca-accelerate-merger-talks-sources-idUSKBN1X90LF

https://europe.autonews.com/automakers/psa-buyer-fca-50-50-merger

https://www.cnbc.com/2019/10/31/fiat-chrysler-and-peugeot-confirm-deal-to-merge.html

https://it.reuters.com/article/topNews/idITKBN1Y00XH

https://www.bloomberg.com/quote/FCAU:US

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