By Ilya Korzinkin, Mihir Gupta and Hugo Tay (UCL) - Date: 17/11/2019
Overview of the Deal
Acquirer: Groupe PSA (Peugeot SA, EPA: UG)
Target: Fiat Chrysler Automobile (MTA: FCA, NYSE: FCAU)
Estimated value: $44bn
Announcement date: 31/10/2019
Acquirer Advisors: Perella Weinberg, Messier Maris & Associés
Target Advisors: Lazard, Goldman Sachs, d'Angelin & Co.
After enhanced discussions, the path opened up for a new group with global scale and resources to be established whereby the ownership will be a 50-50 split between Groupe PSA and FCA. This merger is anticipated to create the 4th largest global OEM (original equipment manufacturer) in terms of annual unit sales which is projected at an approximate of 8.7 million vehicles.
This merger is targeted at uniting the two groups’ respective brand strengths across Luxury, Premium, Mainstream Passenger Car, SUV and Trucks & Light Commercial using extensive and growing capabilities in the technologies to shape a new era of sustainable mobility. Some of the aspects that the merger aims at specialising in are electrified powertrain manufacturing, autonomous driving and digital connectivity.
It has also been decided that prior to the completion of the transaction, FCA would distribute to its shareholders a special dividend of $6.13 billion, as well as its shareholding in Comau. In addition, prior to completion, Peugeot would distribute to its shareholders its 46% stake in Faurecia. The NewCo’s shares will be traded in Milan, Paris and New York, with FCA’s John Elkann, who heads Italy’s Agnelli family controlling Fiat-Chrysler, becoming the chairman and Peugeot’s Carlos Tavares becoming the CEO.
“This convergence brings significant value to all the stakeholders and opens a bright future for the combined entity. I’m pleased with the work already done with Mike and will be very happy to work with him to build a great company together.”
– PSA Groupe CEO Carlos Tavares
Company Details (Fiat Chrysler)
Fiat Chrysler Automobiles (FCA) headquartered Amsterdam, Netherlands is a global automaker that designs, engineers, manufactures and sells vehicles in a portfolio of exciting brands, including Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram and Maserati. It also sells parts and services under the Mopar name and operates in the components and production systems sectors under the Comau and Teksid brands.
- Founded in: 2014
- CEO: Mike Manley
- Number of Employees: 198,545
- Market Capitalization: $ 31,840 Million - EV: $30,487 Mil
- TTM Revenue: $121,500 Mil - TTM EBITDA: $10,790 Mil
- TTM EV/Revenue: 0.25x - TTM EV/EBITDA: 2.83x
Company Details (PSA Group)
Groupe PSA headquartered in Rueil-Malmaison designs unique automotive experiences and delivers mobility solutions to meet all customer expectations. The Group has five car brands, Peugeot, Citroën, DS, Opel and Vauxhall and provides a wide array of mobility and smart services under the Free2Move brand.
- Founded in: 1976
- CEO: Carlos Tavares
- Number of Employees: 211,000
- Market Capitalization: $23,300 M - EV: $14,512 M
- Revenue: $85,364 M - EBITDA: $9,828 M
- EV/Revenue: 0.17x - EV/EBITDA: 1.47x
Projections and Assumptions
Short Term Consequences
Given the worldwide slowdown for the automobile industry, it is of popular opinion that mergers and acquisition with firms of similar scale and geographical diversity is the way to go ahead. In the light of this as well as the failed efforts between FCA and Renault to find common ground for a merger, this move has come as a real chance for both the stakeholders to pool resources and innovate in the short run by aiming to develop electric and autonomous vehicles.
The significant value accretion resulting from the transaction is estimated to be approximately $4.12 billion in annual run-rate synergies derived principally from more efficient allocation resources. It must be noted that the synergy estimates are not based on any plant closures, and 80% of the synergies are estimated to be achieved within a span of 4 years. With the initial estimates in, the deal is meant to create a company with revenues of approximately $188.25bn, recurring operating profits of more than $12.2bn and combined vehicle sales of S8.7m, putting it ahead of General Motors and Hyundai-Kia in terms of sales. Furthermore, it is estimated that the company’s sales in Europe even outpace Volkswagen, which has historically dominated the region’s industry. Technological synergies are projected to yield €3-6.6 bn in the long term run-rate synergies, representing 25-55% of pro- forma, combined projected 2020 earnings.
Technology-wise, the NewCo will be well- poised to use both companies increasing technological capabilities in self- driving, and digital connectivity segments. FCA’s experience with already delivering Chrysler Pacifica’s to Waymo, along with PSA’s considerable investments in electrification, such as the delivery of the Peugeot e-208, DS3, and Opel/ Vauxhall Corsa-e, would allow for the unification of some of their research efforts, yielding considerable synergies in R&D. Both companies will also be able to introduce Opel’s (PSA’s) drive- train technology at a much lower cost than what was previously used by FCA, the tech bought from General Motors along with Opel in 2017.
To conclude, this merger is also being looked upon an opportunity for FCA to reset its rocky ties with the United Auto Workers (UAW) and its employees which has suffered largely because of a potential corruption scandal.
Long Term Consequences
With new emission targets being set up in China and Europe, car manufacturing companies are finding it hard to invest in electric and hybrid technologies vehicles which would be almost necessary to meet these strict targets. As a result, this alliance comes as a move that would allow both FCA and PSA to pave a path in the long term that would be dedicated to improving their operational efficiency. Moreover, this deal is also being looked upon as a solution for FCA to deal with the most pressing issue of fuel inefficiency in its vehicle fleet as PSA has shown that it has the capacity to solve this issue at Opel Vauxhall, eliminating both Adam and Karl models from production.
It has also been established that there will be a seven-year standstill, which means they must maintain their level of shareholding, for the group’s largest investors: Exor, BPI, Dongfeng and the Peugeot family. There will also be a three-year lock-up for Exor, BPI and the Peugeot family, which means they cannot sell shares bar allowing the Peugeot family to increase its 12.2 per cent stake by up to 2.5 per cent by buying shares from BPI or Dongfeng.
Lastly, it is being speculated that in the long-term, PSA (using the shared resources at their disposal due to this deal) could choose to bring its vehicle brands to the Canadian market, which might lead to more of the company's vehicles being built in Canada. Given that Peugeot (which in fact is PSA Group’s best brand has no presence in Canada) and the group, in general, doesn’t have a strong foothold in the North American market at the moment, this merger is being looked upon as a vital means to achieve that end goal.
Risks and Uncertainty
Political uncertainty caused due to Brexit couple with its economic repercussions has raised concerns at Vauxhall, which employs approximately 200 employees in the UK and might be vulnerable to any restructuring of this sort. Given that one of the main aims of this deal is to achieve a certain degree of cost-cutting, analysts and financial experts are determined to believe that such levels of cost-cutting would not be possible without plant closures and significant job-cuts. The EU market share monopoly rules complemented by the constricted rules for cutting workforces may pose a serious threat to both the companies. The NewCo will have a hard time persuading Unions and governments, that synergetic job- cutting to eliminate inefficiencies and overlaps, will yield benefits, with NewCo’s plants in Paris, Turin and Ruesselsheim being particularly vulnerable in this instance. Furthermore, to add to the political loopholes- PSA Group’s leading shareholders include a China state-owned company, (with a 12.2% equity stake and 19.5% voting stake belonging to Dongfeng Motors) and the French government. As a result, given both – the complexity and the diversity of interests involved, analysts and investors fear that the decision making may be adversely impacted by macro-political headwinds very quickly.
In the light of this merger – competitors for both the companies, namely Volkswagen and Ford are working together to develop electric and self-driving vehicles, BMW and Daimler are establishing a joint venture to develop driverless technology, and Honda has invested in General Motors self-driving car unit. The NewCo’s integration of their R&D departments has to be seamless in order not to yield too much workflow disruption, as to not lose footing to rapidly progressing competitors in the space.
Newly introduced 2021 and 2025 emission standards set in Europe pose a particular challenge. With engines not moving to have to be fitted with complex catalytic converters, raising the prices for small cars, therefore potentially adversely impacting the NewCo’s market positioning. Furthermore, this presents added pressure on FCA to adopt PSA’s more efficient engines, therefore putting in question their technological capabilities to do so, in factories in Poland and Italy.
Moreover, with respect to expanding their joint operations in the North American markets, analysts are of the view that there may be the possibility of a material risk being posed to FCA as American consumers may shift to alternatives – namely Ford and GM products due to the brand name for FCA no longer having an ‘American identity’ alongside the potential political implications of the deal within the region. The NewCo’s brand strength may also struggle in China, as both PSA and FCA has previously faced competitive pressures from Japanese automakers, which have edged out market share due to Japanese automakers’ line- ups better suited to Chinese customer tastes, design, and price-point wise, with European manufacturer’s cars very home market-centric, failing to globalise their brand image. Scale, alone may not be enough to ensure growth and expansion in the Chinese market.
"I'm delighted by the opportunity to work with Carlos and his team on this potentially industry-changing combination. We have a long history of successful cooperation with Groupe PSA, and I am convinced that together with our great people, we can create a world-class global mobility company."
- FCA CEO Mike Manley
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