Fiat Chrysler Is Still the Winner in Merger With Peugeot
Recent negotiations have sweetened the terms for the French auto maker, but it is still shouldering more risk
The merger of Fiat Chrysler and Peugeot has passed the first milestone on its long road to completion. Not much has changed, but the details that have are telling.
The two car makers published final terms of their megadeal Wednesday, having given a rough outline following a Wall Street Journal scoop in late October. The latest negotiations have improved things slightly for Peugeot shareholders, but the French company is still taking the bigger risk.
The strategy underpinning the combination—that scale matters more than ever as technology upends the auto industry—was always a no-brainer, but investors were surprised in October by a skew in the financial terms toward Fiat Chrysler’s shareholders. Most notably, they were due to receive a €5.5 billion ($6.1 billion) special dividend, while Peugeot’s shareholders only got the company’s €3.1 billion stake in listed parts maker Faurecia EO -1.48% —even though Peugeot was the larger company by market value.
These distributions remain, but others have been tweaked. Most obviously, Comau, a robotics company owned by Fiat Chrysler, will no longer be spun off to the company’s shareholders. That means Peugeot now gets half of this small business, which was valued at €250 million during Fiat Chrysler’s failed merger attempt with Renault in May.
Second, both companies now intend to pay a €1.1 billion dividend for 2019. Analysts polled by FactSet previously forecast, on average, a payout of roughly €950 million from Peugeot and almost €1.2 billion from Fiat Chrysler. Giving the French company’s shareholders more than expected before the deal concludes, and the Italian-American company’s slightly less, is a more subtle way of shifting value to the Peugeot side.
Finally, the exchange ratio used to equalize the companies’ share capital—which hadn’t previously been disclosed—is based on existing share counts. It doesn’t include almost 40 million equity warrants issued by Peugeot to General Motors GM +1.34% in 2017 as partial payment for the latter’s European business, Opel Vauxhall. These are due to crystallize in May 2022 with an exercise price of €1. With Peugeot shares trading at €22.41, GM is currently due to receive €850 million worth of stock. This will now come at the expense of Fiat Chrysler’s shareholders, as well as Peugeot’s.
A further curiosity of these warrants is that, unless renegotiated, they will give GM a stake in the future of a company that will include Fiat Chrysler. This comes as GM is suing its Detroit rival for racketeering—allegedly bribing union officials in 2015 to give it a favorable labor deal at GM’s expense. Fiat Chrysler denies the charges, but if GM were successful it could end up hitting the value of its own warrants.
These three sweeteners have been enough to persuade Peugeot’s board and anchor shareholders—the Peugeot family, Dongfeng Motor and a French government fund—to pledge their support. Chief Executive Carlos Tavares, a chief architect of the deal who would run the combined firm, has huge sway following remarkable recoveries under his leadership at both Peugeot and Opel Vauxhall.
Still, the French company remains the one with more to lose in this deal, which will dilute the strength of its balance sheet and bring it a number of underperforming brands requiring a lot of investment, as well as the lucrative U.S. business Mr. Tavares covets. Fiat Chrysler will be the turnaround artist’s most complex and lengthy act yet. The deal won’t complete for another 12 to 15 months while the companies seek antitrust approvals.
Peugeot’s stock rose Wednesday as investors factored in the new deal terms. Its market value is now 7% above Fiat Chrysler’s, even though the companies will combine on a 50:50 basis. Fiat Chrysler is still the more obvious way for investors to play a megamerger that shows every sign of going ahead.