Fiat and PSA seal carmaking deal to face expensive future

Paris: Rival carmakers PSA Group and Fiat Chrysler Automobiles NV agreed to combine, pooling resources to confront an expensive new era of trade tariffs, emissions rules and electrification.

The boards of Fiat Chrysler and Peugeot and Citroen-maker PSA agreed to work toward a binding agreement in the coming weeks, they said Thursday in a joint statement. The accord would create one of the world’s largest automakers with a combined market value of about $50 billion, based on current prices.

Shareholders of each company will own 50 per cent of the combined entity. Investors in Fiat will receive a dividend of 5.5 billion euros ($6.1 billion), while France’s PSA plans to distribute its 46 per cent stake in auto-parts maker Faurecia SE. Cost savings from the deal without plant closures might be as much as 3.7 billion euros.

A merger of Fiat Chrysler and PSA, the No. 2 for car sales in Europe, would create a regional powerhouse to challenge Volkswagen AG. The tie-up would bring together the billionaire Agnelli clan in Italy and the Peugeot family of France as consolidation sweeps through an industry trying to finance major transformation.

The 11-member board of the new group will include five from PSA and five from Fiat Chrysler. PSA Chief Executive Officer Carlos Tavares will be CEO and be on the board while Fiat Chairman John Elkann stays in that role.

The announcement comes several months after Fiat Chrysler and PSA explored a partnership on pooling investment to build cars in Europe, and following the collapse in June of negotiations between Fiat and French competitor Renault SA.

“It’s not as good a partner as Renault, but any partnership is good,” said Felipe Munoz-Vieira, an analyst with Jato Dynamics in Turin. Fiat Chrysler “is not facing very good times, and it seems it’s getting worse as the time passes.”

Both PSA and Fiat Chrysler lag on investments in electrification and neither has a strong presence in China, but a combination could help them grow in the lucrative commercial vehicle market in Europe, Munoz said. Fiat Chrysler, which reports third-quarter earnings on Thursday, is suffering in Europe with an ageing Jeep line-up and lack of SUVs under the Fiat brand, he said.

Automakers face tremendous pressure to combine to help pay for platform development, manufacturing and purchasing as they battle through trade wars, a global slowdown and an expensive shift toward electrification and autonomous driving. Producers face the additional burden in Europe of new rules on emissions.

Against this backdrop, the pace of deal-making has picked up. Volkswagen in July said it will work with Ford Motor Co. on electric and self-driving car technology, while Toyota Motor Corp. is strengthening ties with partners such as Subaru Corp. and China’s BYD Co. The Indian conglomerate that owns Jaguar Land Rover has said it’s open to finding partners for the British automaker but isn’t planning on selling the embattled unit.

Dismal car sales have also added to the mix. Volkswagen on Wednesday lowered its outlook for vehicle deliveries this year due to a faster-than-expected decline in auto markets.

Read: VW Drops Goal for Delivery Gains on Slowing Global Car Demand

The French government is likely to play a key role because France is one of the biggest shareholders of PSA, whose brands also include Opel and Vauxhall. The French finance ministry has signalled support for a deal, while warning it would scrutinise the jobs impact and governance structure of the new company, as well as its commitment to build a European battery-maker.

Read More: Five Reasons Why France Is Backing a Fiat-Peugeot Merger

PSA had been floated as a logical merger partner with Fiat, because of their complementary product and geographic fit, and the two sides discussed partnership possibilities this year. However, the Italian-American carmaker instead pursued a deal with Renault.

Those talks collapsed in June when Elkann, who also heads Fiat Chrysler’s largest shareholder, Exor NV, walked away amid opposition from the French government and a lack of support from Renault’s Japanese alliance partner Nissan Motor Co.

Tavares has sought to re-establish Peugeot’s foothold in the US, a market it exited in 1991. He set plans earlier this year for a return, with shipments starting from Europe or China in 2026.

The company has sought to secure its future with a larger partner for several years, dating back to late CEO Sergio Marchionne’s failed courtship of General Motors Co. After being rebuffed by GM in 2015, rumours of talks with other automakers have swirled with varying intensity.