FCA - FCA/PSA combination – the potential upside
Exploring scenarios for a combined entity
Fiat Chrysler Automobiles (FCA) is often the subject of M&A speculation – a perennial hot topic in the
auto sector. Although CEO Sergio Marchionne has publicly expressed his preference for other potential
combinations (CNBC interview, 30 March 2016), in this report we explore in detail what a merger with
PSA might look like. We think the companies complement each other well in terms of regional mix, and
at the same time see significant potential for synergies (large overlap in products and general R&D). A
merger would create a group of much greater scale (#5 car producer globally by market share, #2 in
Europe and #1 in Latam) and better regional diversification. We also look at an alliance, which offers
slightly less (but still significant) synergy potential.
€2.3-5.3bn synergies after full integration, c45-130% FCA share price upside
We estimate that a merger could yield annual synergies of €2.3-5.3bn (€1.9-4.1bn in an alliance),
equivalent to c25-60% of combined 2017E EBIT. These synergies derive from combining production
plants and model platforms, as well as from savings in general R&D, overhead and procurement costs.
Based on our NPV model, a merger could add €2.9-8.0/share in value for FCA shareholders, implying
c45-130% potential upside to the current share price, and based on a 50/50 share/cash acquisition of
PSA by FCA at a 20% premium to PSA's current market value. We've developed an interactive merger
model to enable investors to flex all the assumptions that went into our modelling.
Significant execution challenges
Our merger scenarios assume plant closures, platform consolidation, R&D rationalisation and overhead
optimisation, all of which may face political and regional challenges due to the re-allocation of resources
they would involve. Nevertheless, even in a conservative scenario and assuming no plant closures, an
FCA/PSA combination would still be value-accretive, which just serves to demonstrate how economies of
scale play out in the auto industry.
Valuation: Merger scenario not reflected in our price target; Neutral
As the likelihood and timing of any merger are unpredictable, we continue to value FCA on a standalone
basis. We maintain our Neutral rating and €7 SOTP-based price target. On a stand-alone basis, we
have a cautious longer-term stance on FCA due to its relatively weak balance sheet and strong earnings
exposure to the US trucks/SUV segment, which is at a cyclical high.