Peugeot-maker PSA and Fiat Chrysler to merge; deal will create US$46b automaker

Milan

PSA Group and Fiat Chrysler Automobiles NV agreed to combine in a deal that will create the world's fourth-biggest auto manufacturer.

The French and Italo-American carmakers signed a binding accord for a 50-50 merger of their businesses, they said on Wednesday.

The combined company will be led by PSA chief executive officer Carlos Tavares, with Fiat chairman John Elkann holding the same role at the enlarged firm.

The merger would forge a regional powerhouse to rival Germany's Volkswagen AG and have a stock-market value of about US$46 billion, surpassing Ford Motor Co.

The tie-up also brings together two carmaking dynasties - the billionaire Agnelli clan of Italy, led by Mr Elkann, and the Peugeots of France.

The deal will give Peugeot-maker PSA a long-sought presence in North America and should help Fiat gain ground in developing low-emission technology where it's lagged rivals.

Yet the company will still be heavily reliant on Europe's saturated auto market, and poorly positioned in China, the world's largest country for car sales.

Like executives across the industry, Mr Tavares and Mr Elkann are responding to growing pressure to pool resources for product development, manufacturing and purchasing in the face of trade wars and an expensive shift toward electric and self-driving technology.

"The challenges of our industry are really, really significant," Mr Tavares told reporters on a call on Wednesday. "The green deal, autonomous vehicles, connectivity and all those topics need significant resources, strengths, skills and expertise."

The companies are aiming to extract 3.7 billion euros (S$5.9 billion) in annual synergies from the deal, without closing any plants, unchanged from the target they announced when they revealed their merger discussions six weeks ago.

The challenges will be manifold, from improving Fiat's struggling European operations to meeting tough new rules on emissions that kick in next year in Europe.

Mr Tavares, known as a hard-nosed cost-cutter, will also have to navigate the political crosscurrents in France, Italy and the United States, where the automakers have deep national roots.

Yet he has tackled tough jobs before. Mr Tavares led the French carmaker back from the brink after taking over in 2014, and revived the loss-making Opel brand after acquiring it from GM two years ago.

China's Dongfeng Motor Corp, which owns 12 per cent of PSA, will see its stake in the combined company decline to 4.5 per cent as a result of the merger and the sale of a portion of its holding to the French carmaker.

Dongfeng's stake in PSA has attracted attention because of the possibility it could interfere with US regulatory approval for the deal.

US economic adviser Larry Kudlow said last month the Trump administration would review the proposed merger because the deal would give the Chinese carmaker a stake in the combined company.

Mr Tavares said the companies don't expect any significant issues from the antitrust regulators. Fiat CEO Mike Manley dismissed concerns over legal and tax issues that arose in recent weeks.

General Motors Co in November accused Fiat Chrysler of bribing a union in the US for more favourable terms. Mr Manley called the allegation meritless.

Separately, Italian tax authorities have claimed that Fiat owes the government a hefty sum after underestimating Chrysler's value following its purchase several years ago. Mr Manley reiterated that the case would have no material impact, and said both issues were reviewed during due diligence with PSA.

Before the closing of the deal, Fiat will distribute to its shareholders a special dividend of 5.5 billion euros while PSA will distribute its 46 per cent stake in car-parts maker Faurecia SE to its own investors.

The spin-off or sale of Fiat's robotics arm Comau for the benefit of the Italian company's shareholders has been modified since October.

Now, the planned separation will occur after the closing, and shareholders of the combined company will benefit. BLOOMBERG