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Fiat and PSA tie-up will pool resources to face expensive future

Paris

RIVAL carmakers PSA Group and Fiat Chrysler Automobiles NV unveiled a plan to combine, pooling resources to confront an expensive new era of trade tariffs, emissions rules and electrification.

The boards of Fiat Chrysler and Peugeot and Citroen-maker PSA agreed to work toward a binding agreement in the coming weeks, they said on Thursday in a joint statement. The accord would create the fourth-largest automaker with a combined market value of about US$50 billion, based on current prices.

PSA shares dropped as much as 9.1 per cent in Paris, the most in more than three years, while Fiat rose as much as 10 per cent in Milan.

Shareholders of each company will own 50 per cent of the combined entity, to be listed in Paris, Milan and New York. Investors in Fiat will receive a dividend of 5.5 billion euros (S$8.35 billion) and its robotics arm Comau, while France's PSA plans to distribute its 46 per cent stake in auto-parts maker Faurecia SE. Cost savings from the deal without plant closures are projected to be about 3.7 billion euros.

A merger of Fiat Chrysler and PSA, the No. 2 for car sales in Europe, would create a regional powerhouse to challenge Volkswagen AG. The tie-up would bring together the billionaire Agnelli clan in Italy and the Peugeot family of France as consolidation sweeps through an industry trying to finance major transformation.

The 11-member board of the new Netherlands-based group will have six members from PSA including chief executive officer Carlos Tavares, who will remain CEO for five years, and five from Fiat Chrysler. Fiat chairman John Elkann stays in that role. It's unclear what role Fiat CEO Mike Manley will hold.

The announcement comes several months after Fiat Chrysler and PSA explored a partnership on pooling investment to build cars in Europe, and following the collapse in June of negotiations between Fiat and French competitor Renault SA.

"It's not as good a partner as Renault, but any partnership is good," said Felipe Munoz-Vieira, an analyst with Jato Dynamics in Turin. Fiat Chrysler "is not facing very good times, and it seems it's getting worse as the time passes".

Both PSA and Fiat Chrysler lag on investments in electrification and neither has a strong presence in China, but a combination could help them grow in the lucrative commercial vehicle market in Europe, Mr Munoz-Vieira said, adding that Fiat Chrysler is suffering in Europe with an ageing Jeep line-up and lack of SUVs under the Fiat brand.

Automakers face tremendous pressure to combine to help pay for platform development, manufacturing and purchasing as they battle through trade wars, a global slowdown and an expensive shift toward electrification and autonomous driving. Producers face the additional burden in Europe of new rules on emissions.

Against this backdrop, the pace of dealmaking has picked up. Volkswagen in July said it will work with Ford Motor Co. on electric and self-driving car technology, while Toyota Motor Corp. is strengthening ties with partners such as Subaru Corp. and China's BYD Co. The Indian conglomerate that owns Jaguar Land Rover has said it's open to finding partners for the British automaker but isn't planning on selling the embattled unit.

France is one of the biggest shareholders of PSA, whose brands also include Opel and Vauxhall, and the government has signalled support for a deal, while warning it would scrutinise the jobs impact and governance structure of the new company, as well as its commitment to build a European battery-maker.

"The operation responds to a need in the auto industry for consolidation to face the challenges of the future," French Finance Minister Bruno Le Maire said in a statement on Thursday. BLOOMBERG

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