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MarketScreener Homepage  >  Equities  >  Italian Stock Exchange  >  Fiat Chrysler Automobiles    FCA   NL0010877643


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Fiat Chrysler Gets Second Chance at Merger, This Time With Peugeot -- 3rd Update

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10/30/2019 | 10:21am EST

By Eric Sylvers

MILAN -- John Elkann, chairman of Fiat Chrysler Automobiles NV, learned a lesson from the Italian-American car maker's longtime Chief Executive Sergio Marchionne, who died last year: Merge and grow, or fade into irrelevance.

Five months after a failed merger attempt with Renault SA, Mr. Elkann, the U.S.-born heir of the Agnelli dynasty that founded Fiat, is once more front and center as he personally negotiates with Peugeot CEO Carlos Tavares about a $46 billion merger that would create the world's fourth-largest car maker.

On Wednesday, the two companies confirmed they are in talks that could lead to a merger, after The Wall Street Journal reported the discussions Tuesday. They didn't provide further details. One of the possibilities being discussed is an all-stock merger of equals in which Mr. Elkann would become chairman of the new group and Mr. Tavares would be CEO, the Journal reported.

The two companies could announce a memorandum of understanding as soon as Wednesday, which would indicate they are in exclusive negotiations, according to people familiar with the matter. They plan to announce the deal on Thursday morning, provided there are no hiccups, according to a person close to the negotiations.

"We're moving forward. The mind-set is positive," the person said.

Both car makers have significant market shares in Europe providing the opportunity for cost cutting. But the management of a combined company would face the same challenge that European auto executives have stared down for decades: how to reduce production capacity in a continent where factory jobs are particularly politically sensitive. Fiat Chrysler's excess production capacity in Europe was an issue Mr. Marchionne could never solve. While Italian labor unions have been weakened over the years, including in their battles with Mr. Marchionne, they still hold sway. On Wednesday, a union leader said any deal would have to guarantee "full employment and full use of Italian factories."

The French state, which owns 12.2% of PSA Group, is following the discussions with "close attention and an open mind," a finance ministry official said Wednesday.

"These discussions consecrate the turnaround of PSA, which was supported by the state," the official said.

The French government would be vigilant in maintaining the industrial footprint and governance of the combined group, the official said, as well as the company's participation in a European project to develop the next generation of car batteries.

The Italian government is following the talks, said Industry Minister Stefano Patuanelli. It doesn't have a stake in Fiat Chrysler, but it has often played a role in shaping the company's strategic moves.

Fiat Chrysler and France's Peugeot had already discussed a potential merger earlier this year, and many of the specifics were hashed out at the time, according to people familiar with the discussions. Those talks were shelved in May when Fiat Chrysler sought a deal with Renault instead. But the deal was shelved at the 11th hour after Mr. Elkann failed to get the full backing of the French government and Renault's alliance partner Nissan Motor Co.

Peugeot and Mr. Elkann's family holding company Exor NV, which owns 29% of Fiat Chrysler, have scheduled board meetings for later Wednesday, according to people familiar with the plans. The companies haven't confirmed the meetings. Fiat Chrysler will also hold a board meeting later Wednesday if the Peugeot board gives a green light for the negotiations to proceed, according to a person familiar with the situation.

Mr. Elkann hired Mr. Marchionne as Fiat's CEO in 2004 when the company was losing close to EUR1 million ($1.1 million) a day and shedding market share as its small cars fell out of favor. Mr. Marchionne nursed Fiat back to health, in part by engineering a takeover of bankrupt Chrysler in 2009. He focused on expanding the appeal of Jeep sport-utility vehicles and Ram trucks, which now account for the majority of Fiat Chrysler's profit, helping to offset the struggling Fiat brand.

Until Mr. Marchionne's death, Mr. Elkann was largely in the shadow of his larger-than-life CEO. Mr. Marchionne was the toast of the car industry thanks to his frankness on a host of topics, including the need for industry consolidation. In 2015, Mr. Marchionne pursued a deal with General Motors Co. After several advances were rebuffed, he went public with a presentation that set out his detailed arguments for why the industry needed to consolidate, including the high costs of developing technology for electric vehicles and autonomous driving.

Mr. Elkann preferred to concentrate on diversifying Exor's holdings away from the car sector, in a plan that was long in the making with input from Mr. Marchionne, who was an Exor board member. Mr. Elkann's biggest move came in 2015 when he bought reinsurance company PartnerRe. He was often directly involved in the contentious negotiations with PartnerRe that culminated in a hostile takeover of the company by Exor.

The collapse of the Renault deal in June could prove costly for Mr. Elkann and his family. Since those failed talks, Peugeot's stock has risen sharply, and the French company has surpassed Fiat Chrysler in market value.

To ensure an eventual deal between Peugeot and Fiat Chrysler is structured as a merger of equals, a cash component might be included as part of the share exchange to compensate for the difference in the two companies' market values, according to a person familiar with the matter.

Before news of the latest talks leaked, Fiat Chrysler had a market capitalization of about EUR18.5 billion and Peugeot EUR22.5 billion. Early Wednesday, Fiat Chrysler's shares were up 9.7% and Peugeot's 5.7%. Renault stock was down 3.4%.

Potentially complicating merger negotiations, Fiat Chrysler is in the middle of contract talks with the North American labor union United Automobile Workers. However, Peugeot has no presence in the U.S. so the merger plan is unlikely to threaten jobs there.

Mr. Elkann had long favored the Renault deal and continued to hold out hope for that merger to be revived. But some analysts argue that Peugeot is actually the better match. The two companies are complementary in most markets and already have several joint ventures, including one to produce commercial vehicles. While Fiat Chrysler has a large business in Brazil, the French company has concentrated its South American strategy on Argentina.

Together, the car makers would have a market share of about 23% in Europe, just behind Volkswagen AG.

--Nick Kostov and Ben Dummett contributed to this article

Write to Eric Sylvers at eric.sylvers@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
EXOR N.V. -1.29% 68.8 End-of-day quote.45.58%
FIAT CHRYSLER AUTOMOBILES -0.85% 13.254 End-of-day quote.4.51%
GENERAL MOTORS COMPANY -1.37% 35.31 Delayed Quote.5.56%
PEUGEOT 0.61% 21.36 Real-time Quote.13.92%
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Financials (EUR)
Sales 2019 108 B
EBIT 2019 6 339 M
Net income 2019 3 667 M
Finance 2019 4 528 M
Yield 2019 4,67%
P/E ratio 2019 6,05x
P/E ratio 2020 4,82x
EV / Sales2019 0,15x
EV / Sales2020 0,15x
Capitalization 20 776 M
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Average target price 15,48  €
Last Close Price 13,25  €
Spread / Highest target 111%
Spread / Average Target 16,8%
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Michael Mark Manley President, Chief Executive Officer & Director
John Jacob Philip Elkann Chairman
Richard Keith Palmer Chief Financial Officer & Executive Director
Harald J. Wester Chief Technology Officer
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