Fiat Surges, Peugeot Tumbles As “Merger Of Equals” Creates World’s 4th Largest Carmaker

Italy’s Fiat Chrysler and French Peugeot owner PSA agreed to join forces in a what was described a 50-50 share swap merger of equals, creating the world’s fourth-largest automaker, triggering a fresh wave of consolidation in the reeling car industry.

As first leaked earlier this week, Fiat Chrysler and PSA said they aimed to reach a binding deal to create a $50 billion company domiciled in the Netherlands, with listings in Paris, Milan and New York and with PSA’s Carlos Tavares as CEO and FCA’s John Elkann as chairman. The move comes less than five months after Fiat abandoned merger talks with PSA’s main French rival Renault and would give both companies the scale to help manage a global downturn in auto markets as well as costly investments in new technologies such as electric and self-driving vehicles.

As Reuters notes, FCA would get access to PSA’s more modern vehicle platforms, helping it to meet tough new emissions rules, while Europe-focused PSA would benefit from FCA’s profitable U.S. business.

The details of the transaction are as follows, via Bloomberg:

• Dutch parent company to have John Elkann as Chairman and Carlos Tavares as CEO; Both boards have given the mandate to their respective teams to finalize the discussions to reach a binding Memorandum of Understanding in the coming weeks;
  • Board would be composed of 11 members; five members would be nominated by FCA, and five would be nominated by PSA
• Tavares to be CEO for an initial term of five years, also be a member of the Board
• FCA would distribute to its shareholders a special dividend of EU5.5 billion
• Peugeot would distribute to its shareholders its 46% stake in Faurecia
• Approximately EU3.7 billion estimated annual run-rate synergies; no plant closures resulting from the transaction
  • Projected 80% of the synergies would be achieved after 4 years
  • Total one-time cost of achieving the synergies is estimated at EU2.8 billion
• New group’s Dutch-domiciled parent company would be listed on Euronext (Paris), the Borsa Italiana (Milan) and the New York Stock Exchange
  • Continue to maintain significant presences in current operating head-office locations in France, Italy and the U.S.

Yet for a “merger of equals”, the stocks had two distinctly different reactions, as shares of Fiat Chrysler jumped 10% Thursday after the two sides announced the deal, while Peugeot parent PSA fell by about the same amount, taking the typical acquirer’s hit.

Why? Because as Jefferies analyst Philippe Houchois said, adjusting for the differences in market value and planned dividend payments, achieving the 50-50 split would effectively see PSA paying a 32% premium to take control of FCA.
As part of the deal,

The math, as Bloomberg notes, bears it out. Fiat will pay its shareholders a 5.5 billion euro ($6.1 billion) special dividend and hand them shares in its robot-making unit Comau. PSA, meanwhile, will distribute to its investors its 46% stake in supplier Faurecia. Citi analysts said the cash payout for FCA shareholders contrasted with the Faurecia shares, worth about 2.7 billion euros at Wednesday’s close, being offered to PSA shareholders, saying the latter were “being asked to remain patient.”

As of Tuesday, PSA had a market value of 22.6 billion euros. Before it merges with Fiat, it’ll hand shareholders its almost 3 billion-euro stake in French parts maker Faurecia SE, leaving about 19.6 billion euros to be contributed to the new company.
Fiat shareholders will throw in at least 5 billion euros less. The Italian-American company had a market value of 20 billion euros as of Tuesday. But before the deal closes, the carmaker will jettison about 5.75 billion euros: Along with the dividend, it’ll give shareholders its robotics arm Comau, with an estimated value of about 250 million euros.

China’s Dongfeng Motor has a 12.2% equity stake and 19.5% voting stake in PSA, and there has been speculation it might use the tie-up to sell its holdings.

The biggest winners are of course, also the wealthiest stakeholders: of the €5.75 billion in payouts before the deal closes, Fiat’s founding Agnelli family will reap almost $1 billion in value. The family’s holding company, Exor NV, is Fiat Chrysler’s largest shareholder and will receive about €1.65 billion of the total. The family owns just over half of Exor, so its share of the windfall would be just under 900 million euros, or almost $1 billion.

It doesn’t end there: Fiat Chrysler’s chairman, Agnelli family scion John Elkann, will still have a lot of clout. He’ll be be chairman of the merged company, and Exor will be its largest shareholder with about a 14% stake.

The combination with PSA would give Fiat Chrysler access to the French group’s more modern and more flexible vehicle technologies, including the CMP modular platform, which was launched in 2019 for Peugeot’s e-208 compact city car, and donated the technology which allowed Opel to build the Corsa-e mini. The CMP platform was jointly developed by Dongfeng and PSA.

Strategy firm PA Consulting has forecast FCA faces a fine of 700 million euros ($777 million) unless it radically changes its emissions profile to sell more electric and hybrid cars.  PSA has already integrated Opel and Vauxhall, which it bought from General Motors in 2017, shifting them from nine GM platforms to just two, a step which helped Opel to return to profit after more than a decade of losses.

Finally don’t forget the bankers: FCA is being advised by Goldman Sachs and D’Angelin, while PSA is working with Morgan Stanley, Mediobanca’s Messier Maris & Associes unit and Perella.