Fiat Chrysler-Peugeot Merger Faces a Rocky Road to Success
Auto makers are looking to add heft, but auto-sector deals have a checkered history
MILAN— Fiat Chrysler Automobiles FCAU 2.27% NV and Peugeot PUGOY -13.90% maker PSA Group unveiled their $50 billion merger on Thursday. Making it work in an industry littered with unsuccessful mergers will be the hard part.
The companies are betting that more heft will boost profitability, which has long been low in the industry. Auto makers often invest billions of dollars in their operations, only to achieve modest margins.
Many companies have tried the merger route only to have the deal blow up, with Daimler AG ’s unsuccessful purchase of Chrysler one of the more spectacular examples.
Under the deal announced Thursday, which confirmed a report by The Wall Street Journal, the shareholders of each company will own 50% of the new entity. Fiat Chrysler’s John Elkann will retain his role as chairman and Peugeot Chief Executive Carlos Tavares will be CEO.
To make the deal work, Mr. Tavares will have to solve a host of problems at Fiat Chrysler that include an aging model lineup, a lack of investment in new technologies and a dependence on one region, North America. Both companies have failed in efforts to build a successful business in China.
Mr. Tavares will face the challenge of delivering €3.7 billion ($4.1 billion) in annual savings. The companies said they would achieve them principally from a more efficient allocation of resources and improved purchasing agreements with suppliers.
“Great on a spreadsheet, but tricky to execute,” Jefferies analyst Philippe Houchois wrote about a potential Fiat Chrysler-Peugeot deal before the announcement. He nevertheless called the logic underpinning the deal “overwhelming.”
A major issue Mr. Tavares will confront is Fiat Chrysler’s excess production capacity in Europe, a problem the Italian-American company’s late former CEO, Sergio Marchionne, tried to address but never solved.
Fiat Chrysler’s Italian factories ran at 57% capacity last year, compared with 88% in the U.S., according to LMC Automotive.
In the face of fierce political opposition, Mr. Marchionne, who died last year, closed one relatively small Italian factory. Instead of further closures, he relied—as many large Italian companies do—on temporary layoff schemes largely paid for by the government.
While Italian labor unions have lost some clout over the years, including in their battles with Mr. Marchionne, they remain powerful. On Wednesday, a union leader said any deal must guarantee “full employment and full use of Italian factories.”
Fiat Chrysler and Peugeot, which together produced 8.7 million vehicles last year to put them in third place among the world’s auto makers, said the projected savings won’t result from any factory closings. They estimate 80% of those savings will be realized after four years and that there will be a one-time cost of €2.8 billion.
The auto makers didn’t say what they intended to name the new company.
Both car makers have significant market shares in Europe, which provides the opportunity for cost cutting, but also makes the capacity utilization issue more pressing. Together, Fiat Chrysler and Peugeot have a market share of about 23% in the region, just behind Volkswagen AG.
Fiat Chrysler rose 2.3% on Thursday, while Peugeot’s stock sank 13%, indicating investors in the Italian-American car maker were perceived to have gotten the better deal. Fiat Chrysler shares had already jumped 9.5% Wednesday, after the Journal first reported the companies were in talks. Peugeot shares had risen 4.5% Wednesday.
Fiat Chrysler shares were buoyed by a €5.5 billion special dividend that the company will pay to its shareholders before the deal. The arrival of Mr. Tavares, considered a turnaround specialist, may have also contributed to the rise.
“It’s not hard to understand this reaction when you consider the job done by Peugeot management over the last five years, while Fiat Chrysler management have overseen a tired product line and little in the way of innovation,” CMC Markets analyst Michael Hewson wrote.
Mediobanca and Morgan Stanley advised PSA on the deal, Goldman Sachs and d’Angelin advised Fiat Chrysler and Lazard advised Exor. Zaoui advised the Peugeot family and Perella Weinberg advised PSA’s board.