DETROIT – From Daimler-Chrysler to Fiat Chrysler, the former American automaker Chrysler Corp. has gallivanted around the world to find partners to assistin its growth or help keep it afloat.
It now has its sights set on Peugeot maker PSA Group. Both the French carmaker and Fiat Chrysler on Wednesday confirmed they are in talks to create the world’s fourth-largest automaker with a roughly $50 billion valuation.
The PSA board approved the merger and the Fiat Chrysler board is set to meet Wednesday, a person familiar with the deal told CNBC. Executives have briefed regulators in the U.S. and France, the Wall Street Journal reported, citing unnamed sources.
Peugeot CEO Carlos Tavares is expected to lead the combined automaker as its CEO, while John Elkann, Fiat Chrysler chairman and heir of the Agnelli family dynasty that founded Fiat, would continue his role with the combined company, the WSJ reported.
The deal gives Peugeot six board seats and Fiat Chrysler five, according to the WSJ.
“We will not comment beyond the press release issued this morning,” PSA Spokesman Pierre-Olivier Salmon said in an email, citing a press release issued earlier in the day that confirmed the two companies were holding “ongoing discussions aiming at creating one of the world’s leading automotive groups.”
Fiat Chrysler spokesman Niel Golightly said he had “nothing to add at this time.”
Reports of the talks, including a potential “all-share merger of equals,” as the Wall Street Journal first reported, sent shares of Fiat Chrysler surging as much as 8% on Tuesday. The stock rose by less than 2% in midday trading Wednesday.
The confirmation of the talks comes about five months after Fiat Chrysler ended merger discussions with PSA’s French rival, Renault. Fiat Chrysler, the world’s seventh-largest automaker, has been on a quest for a tie-up to grow scale and consolidate costs for several years.
‘Litany of obstacles’
Even if the deal wins approval from both boards, it faces a lot of obstacles. Challenges include consolidation, clashing corporate cultures and government and regulatory approval, among other issues.
Talks of a potential tie-up between Fiat Chrysler and Renault ended earlier this year largely due to the French government, which owns a roughly 12.2% stake in Renault. The French government currently owns a 13.7% stake in PSA.
Bank of America Merrill Lynch analyst John Murphy cited the French government’s ownership as one of a “litany of obstacles” facing such a deal. Murphy said similar to Fiat Chrysler’s potential tie-up with Renault, the “industrial logic” is “unclear unless there is massive headcount reduction.”
Such a deal, according to Murphy, also could alienate U.S. buyers, lowering the potential benefit of the two automakers combining.
Even if the merger is approved by shareholders and regulators, “there is a material risk American consumers may shift to Ford and GM products due to FCA possibly no longer being perceived as an ‘American’ identity, not to mention the potential political implications of this potential deal.”
Bernstein analyst Max Warburton said a merger between Fiat Chrysler and Peugeot “has more logic” than one with Renault. He specifically cites the potential for Tavares to create “long-term value.”
“We ultimately think a deal could be made to work — this would be as much about raising performance as it would be about synergies,” he wrote in a Tuesday note to investors.
However, Warburton noted a deal between the two does little to increase business in China, the world’s largest auto market, and the timing is “sub-optimal” given FCA’s earnings are at all-time high.
Analysts see the merger as a quick way for Peugeot to re-enter the U.S. market after a decades-long hiatus, while continuing to grow its European operations following the company’s acquisition of GM’s European business in 2017.
“This news is not unexpected, given that both companies have been actively exploring tie-ups with others to yield cost savings and other synergistic benefits,” said David Leggett, automotive editor at data analytics firm GlobalData.
For Fiat Chrysler, it would finally cement former CEO Sergio Marchionne’s vision of creating a global automaker with the resources to successfully compete in the ever-changing auto industry.
In 2015, Marchionne, who unexpectedly died in July 2018, called for industry consolidation in a presentation called “Confessions of a Capital Junkie.” Consolidation would save capital that was being wasted by automakers developing redundant technologies, he said.
“These were not hallucinations of somebody looking to grandstand in the industry,” Marchionne said at the time. “We have spent a lot of time trying to understand what makes this machine tick. And the machine can tick a lot better if certain things happened.”
Marchionne believed only a handful of the world’s largest automakers would survive and have the capital to compete as automakers push for autonomous and all-electric vehicles.
The deal with PSA would give Fiat Chrysler access to PSA’s newer vehicle platforms in Europe as well as emerging technologies.
Marchionne’s methodical combination of Fiat and Chrysler a decade ago is considered one of the more successful tie-ups for the auto industry in the recent years.
Chrysler’s previous “merger of equals” with German automaker Daimler-Benz in 1998 was a culture clash and failure that led to a divorce less than a decade later, followed by Chrysler spiraling into bankruptcy in 2009.