https://www.barrons.com/articles/fiat-chrysler-peugeot-deal-promising-but-no-slam-dunk-51572648890
Fiat Chrysler-Peugeot Deal Could Be a Winner
Richard Rescigno
Nov. 1, 2019 6:54 pm ET
Peugeot boss Carlos Tavares, highly regarded, would lead the merged company. Photograph by Marlene Awaad/Bloomberg
Will a combined Fiat Chrysler Automobiles and Groupe PSA thrive in an automotive future filled with electric drivetrains and autonomous vehicles?
Assuming the proposed marriage clears political and regulatory hurdles, the Italian-American and French auto manufacturers both should benefit in the long term. But they'll still face daunting challenges. In the short term, Fiat Chrysler investors look as if they'll do better than PSA shareholders.
The biggest positive for both companies: "The name of the game for the global automotive industry is economy of scale. The more that you can commonize vehicles, the better off you're going to be, as far as your total cost structure," says Morningstar analyst Richard Hilgert, who is bullish on the deal.
Based on 2018 numbers, the merger would make the as-yet-unnamed auto maker the world's third largest, with about 8.7 million vehicle sales, behind Volkswagen's (ticker: VLKAF) 10.8 million and Toyota Motor's 10.6 million, and ahead of General Motors ' (GM) 8.4 million. Besides Peugeot, PSA's (UG.France) brands are Citroën, DS, Opel, and Vauxhall. Fiat Chrysler's (FCAU) include RAM, Fiat, Lancia, Chrysler, Dodge, Jeep, Alfa Romeo, and Maserati.
A prescient report by UBS analyst Patrick Hummel last spring, when the companies first seriously discussed a deal (later torpedoed by a failed mating dance involving Fiat Chrysler and Renault), projected annual savings of three billion to 6.6 billion euros ($3.34 billion to $7.35 billion) from full integration. The companies are shooting for €3.7 billion.
Peugeot's emissions expertise should reduce the tab for helping Jeeps meet tough new pollution limits in Europe, where Fiat Chrysler sold a bit more than a million vehicles last year, compared with PSA's 3.1 million for all its brands. The French company also has more modern vehicle platforms than Fiat Chrysler and is ahead of it in electrification. Combined, they'd have more money to develop e-vehicles and self-driving cars.
For PSA, the biggest benefits include gaining a ready-made launching pad—Fiat Chrysler dealerships—for its long-coveted return to the American market, which it fled more than a quarter-century ago. And although the all-stock linkup is being cast as a merger of equals, the French concern would hold more power, with Peugeot boss Carlos Tavares becoming CEO, and PSA holding six of 11 board seats. John Elkann, Fiat Chrysler's chairman and a member of Fiat's founding Agnelli family, will have the same title at the new company.
Tavares, a tough, driven executive viewed by many as one of the auto industry's savviest leaders, has helped PSA improve the quality, profitability, and attractiveness of its vehicles. More relevant to the merger, he's been able to meld different industrial cultures, quickly making GM's former chronically money-losing German-British Opel/Vauxhall unit profitable after Peugeot acquired it in 2017.
PSA's strength in Europe will bolster Fiat Chrysler there. In turn, Fiat Chrysler's financial power—it reported robust quarterly earnings of $2.2 billion Thursday, before one-time charges produced a $200 million net loss—will be a boon for PSA. Both are players in Latin America, but markets there have been weak in recent years.
Under the deal, the new company's shares will be split 50-50 between the two stockholder bases. Arndt Ellinghorst, an Evercore ISI analyst, argues that, after all balance-sheet, operating, stock-market value, and profitability factors are considered, PSA is paying about a 20% premium for Fiat Chrysler. That's why, at midday Friday in New York, Fiat Chrysler was trading at $15.68, up 19.4% on the week, while PSA was at €23.28 in Paris, down 6.3%.
Longer term, investors from both sides should gain. Ellinghorst sees the new company's margins, based on earnings before interest, taxes, depreciation, and amortization (Ebitda), hitting 12.5% in 2021 and 12.7% in 2022, versus 11.7% and 11.1% for PSA and Fiat Chrysler, respectively, last year.
As part of the transaction, Peugeot is expected to distribute to shareholders its €2.75 billion stake in Faurecia, an auto-parts maker, according to The Wall Street Journal, while Fiat Chrysler holders would get €5.5 billion from a special dividend and the sale of its Comau automation and robotics unit.
On the negative side, Hilgert observes: "Each of the countries that [Peugeot and Fiat Chrysler] operate in is looking at their company as a national champion, so they want to protect the manufacturing footprint within each of their countries." Forget about boosting efficiency by curbing employment or shuttering unneeded factories in France or Italy. In addition, the U.S.-Canada-Mexico trade pact that will replace Nafta has rules aimed at boosting U.S. vehicle content and protecting American jobs.
Another problem is that both companies are weak in China, the world's biggest market. Hilgert thinks that "Jeep has a pretty good shot in China. I'm not so confident on the Peugeot side."
Perhaps the biggest challenge: French cars never were popular in the U.S.; Peugeots had a reputation for quirkiness and unreliability. (Fittingly, Columbo, the clever but clueless hero of the classic 1970s' TV detective series, drove a ratty Peugeot convertible.) Today's Peugeots are light years ahead of yesteryears', but so are all other cars. Fiat Chrysler has had little success in peddling Italian Alfas and Fiats to Americans. Betting that it will do better with French Peugeots looks like a long shot, especially with a global auto downturn seemingly unfolding.
Write to Richard Rescigno at rich.rescigno@barrons.com