Peugeot Is Taking Huge Gamble By Merging With Fiat Chrysler Automobiles
Peugeot SA (PSA) and Fiat Chrysler Automobiles N.V. (FCA) have announced that they are creating a new company owned 50% by current PSA shareholders and 50% by current FCA shareholders.
From the press release:
- The combination would create the 4th largest global OEM in terms of annual unit sales (8.7m vehicles)
- At its inception, the combined company would realize among the highest margins in the markets where it would operate, based on FCA’s strength in North America and Latin America and Groupe PSA’s in Europe
- The combination would unite the groups’ respective brand strengths across Luxury, Premium, Mainstream Passenger Car, SUV and Trucks & Light Commercial – making them stronger together
- The merged entity would bring together the companies’ extensive and growing capabilities in the technologies shaping the new era of sustainable mobility, including electrified powertrain, autonomous driving and digital connectivity
- Approximately €3.7 billion estimated annual run-rate synergies without any plant closures resulting from the transaction
- Highly respected combined management team recognized for exceptional value creation and with proven success in previous OEM combinations
- Dutch parent company Board would have balanced representation and a majority of independent Directors. John Elkann as Chairman and Carlos Tavares as CEO and member of the Board
About 5 years ago PSA realized it was far behind on electric mobility. The company started a crash program to develop a platform and bought Opel for $2 billion from General Motors (GM), expecting to gain insights into the Chevy Volt’s and Bolt’s technology. When Opel did not deliver on the electric expectations, PSA asked for its money back. (Nope, did not get it.)
The former CEO of FCA was a financial wizard and an old-school car man. The sound and smell were as important as the style and performance. He infamously asked the public not to buy the fully electric Fiat 500e, because the company didn’t make money on it and didn’t intend to. FCA is likely the worst prepared global OEM for the coming transition.
When there were talks about a Renault-FCA merger, the financial community salivated about the savings from Renault bringing its R&D budget down to FCA levels, before saving even more from combining the two departments. Renault decided to pass, and now we have this deal. The scariest part of the announcement is this in my eyes:
“The significant value accretion resulting from the transaction is estimated to be approximately €3.7 billion in annual run-rate synergies derived principally from a more efficient allocation of resources for large-scale investments in vehicle platforms, powertrain and technology and from the enhanced purchasing capability inherent in the combined group’s new scale.”
In other words, they expect to spend less money on key technology transitions than they would have if they had tackled the coming transition separately. The problems:
- Neither of the two has any significant autonomous products in development.
- Peugeot has an electric platform that can be used by Fiat, but it is for smaller vehicles than Chrysler makes.
- Fiat has some pilot projects on electric mobility, like a new Fiat 500e, but not much (if anything) beyond that to contribute.
I thought that at least FCA would bring a lot of cash to sustain the coming hard times. But I was mistaken. “Prior to the completion of the transaction, FCA would distribute to its shareholders a special dividend of €5.5 billion.”
The only thing going for this new combination is the quality of its management. They can generate money, implement change, and hopefully will recognize the coming transition in time to survive.
Together they could be stronger than alone, but time will tell.
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